RBI/2009-10/94
UBD.PCB.MC.No.1/13.05.000 / 2009-10

July 1, 2009

The Chief Executive Officers of
All Primary (Urban) Co-operative Banks

Dear Sir/Madam,

Master Circular on Exposure Norms and Statutory/Other Restrictions - UCBs

Please refer to our Master Circular UBD.BPD(PCB).MC.No.1 / 13.05.000 / 2008-09 dated July 1, 2008 on exposure norms and statutory/other restrictions on loans & advances (available at RBI website www.rbi.org.in ).The enclosed Master Circular consolidates and updates all the instructions issued by the department on the subject till 30 June 2009.

Yours faithfully,

(A.K Khound)
Chief General Manager-in-Charge

Encl: As above

Master Circular
Exposure Norms and Statutory/
Other Restrictions

Contents

Master Circular
Exposure Norms and Statutory/
Other Restrictions

1. General

1.1 As a prudential measure aimed at better risk management and avoidance of concentration of credit risk, the primary (urban) co-operative banks have been advised to fix limits on their exposure –

• to individual borrowers and group borrowers,
• to specific sectors, and
• towards unsecured advances and unsecured guarantees

1.2 In addition, these banks are also required to observe certain statutory and regulatory restrictions in respect of :

(i) advances against shares, debentures and bonds

(ii) investments in shares, debentures and bonds

1.3 Currently operative instructions on all these aspects are detailed in the following paragraphs.

2. Exposure Norms

2.1 Exposure Ceiling  to Individual/Group Borrowers

2.1.1. Primary (urban) co-operative banks are required to fix, with the approval of their Board of Directors, exposure ceiling in relation to bank's capital funds. The exposure for the purpose shall comprise both credit exposure (loans and advances and investment exposure (Non SLR) as detailed at para 2.2.2(B) so that –

(i) the exposure to an individual borrower does not exceed 15 per cent of capital funds, and
(ii) the exposure to a group of borrowers does not exceed 40 per cent of capital funds.

2.1.2 The exercise of computing the exposure ceilings may be conducted every year after the finalisation and audit of balance sheet of the bank and the exposure ceilings may be advised to the loan sanctioning authorities and the investment department in the bank.

In view of the linking of shareholding to lending, accretion to or reduction in the share capital after the balance sheet date, may be taken into account for determining exposure ceiling at half- yearly intervals, with the approval of their Board of Directors. Accordingly banks may, if they so desire, fix a fresh exposure limit taking into account the amount of share capital available as on 30th September. However, accretion to capital funds other than to share capital, such as half-yearly profit etc., will not be eligible for reckoning the exposure ceiling. Banks should also ensure that they do not take exposures in excess of ceiling prescribed in anticipation of infusion of capital on a future date.

2.2 Definitions

2.2.1 Capital Funds

The "Capital Funds" for the purpose of exposure norm would comprise both Tier I and Tier II Capital as defined in our Master Circular on Capital Adequacy.

2.2.2. The  Exposure shall include both credit exposure  (Loans and Advances)and investment exposure (non–SLR)  as indicated below:

2.2.2.1 Credit Exposure:

(i) Credit exposure shall include –

(a) funded and non-funded credit limits and underwriting and similar commitments,

(b) facilities extended by way of equipment leasing and hire purchase financing, and

(c) ad hoc limits sanctioned to the borrowers to meet the contingencies.

(ii) Credit exposure shall not include loans and advances granted against the security of bank's own term deposits

(iii) The sanctioned limit or outstanding whichever is higher shall be reckoned for arriving at credit exposure limit. Further, in case of fully drawn term loans, where there is no scope of re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding for arriving at credit exposure limit.

(iv) In respect of non-funded credit limit, 100 % of such limit or outstanding, whichever is higher, need be taken into account for the purpose.

(v) Consortium/Multiple Banking/Syndication

The level of individual bank's share shall be governed by single borrower / group exposure.

2.2.2.2 Investment Exposure (Non SLR):

Banks are allowed to invest in ‘A’ or equivalent and higher rated Commercial Papers (CPs), debentures, and bonds that are redeemable in nature. Investments in perpetual debt instruments are, however, not permitted. Banks are also allowed to invest in Units of Debt Mutual Funds and Money Market Mutual Funds.

a) Investments in non-SLR  securities should be limited to 10% of a bank’s total deposits as on March 31 of the previous year.

b) Investments in unlisted securities should not exceed 10% of the total non-SLR investments at any time. Where banks have already exceeded the said limit, no incremental investment in such securities will be permitted.

c) All investments as above will be subject to the prescribed prudential individual/ group exposure limits.

d) All fresh investments under Non-SLR category should be classified under Held for Trading (HFT) / Available for Sale (AFS) categories only and marked to market

2.2.3. Group

The decision in regard to definition of a group is left to the perception of the banks, which are generally aware of the basic constitution of their clientele. The group to which a particular borrowing unit belongs may, therefore, be decided by the banks on the basis of relevant information available with them, the guiding principle in this regard being commonality of management and effective control.

2.2.4 The total of the time and demand liabilities shall have the same meaning as defined in Section 18 read with Section 56 of the Banking Regulation Act 1949, subject to the modification that 75% of the paid-up capital and reserves of a bank may be added to its time and demand liabilities.

2.2.5 All bills of exchange not accompanied by the official receipts of the Indian Railways or Indian Airlines Corporation or Road and Water Transport Operators, as approved by the Board of Directors of the primary co-operative bank, shall be deemed to be clean bills.

2.2.6 The different firms with one or more common partners engaged in the same line of business, viz. manufacturing, processing, trading activity, etc. shall be deemed to be connected group and units coming under common ownership shall be deemed to be a single party.

2.2.7 Unsecured advances shall include clean overdrafts, loans against personal security, clean bills or Multani hundies purchased or discounted, cheques purchased and drawals allowed against cheques sent for collection but shall exclude:

(i) advances backed by guarantee of the central or state governments, public sector financial institutions, banks and Deposit Insurance & Credit Guarantee Corporation;

(ii) advances against supply bills drawn on the central or state governments or state owned undertakings which are accompanied by duly authorised inspection notes or receipted challans;

(iii) advances against trust receipts;

(iv) advances against inland D/A bills drawn under letters of credit;

(v) advances against inland D/A bills (even where such bills are not drawn under letters of credit) having a usance of not exceeding 90 days;

(vi) advances granted to salaried employees against personal security, provided that the Co-operative Societies Act of the State concerned contains an obligatory provision for deduction of periodical loan instalments by the employer out of the employee's salary/wages to meet the bank's claims and provided further that the bank has taken advantages of this provision in respect of each of such advances;

(vii) advances against supply bills drawn on private parties of repute and receipted challans of public limited companies and concerns of repute and not outstanding for more than 90 days;

(viii) advances against book debts which are not outstanding for more than 90 days;

(ix) cheques issued by governments, public corporation and local self governing institutions;

(x) advances in the form of packing credit for exports;

(xi) demand drafts purchased;

(xii) the secured portion of a partly secured advances, and

(xiii) advances against legal assignment of contract moneys due, or to become due.

2.2.8 Concerns in which a director of a primary co-operative bank or his relative is interested shall mean –

(i) proprietary concerns/ partnership firms (including Hindu Undivided Family concerns and association of persons) in which a director of the bank or his relative is interested as proprietor/ partner/ co-parcener;

(ii) private/ public limited companies, where a director of the bank is a guarantor for repayment of loans and advances granted to the company.

2.2.9 The 'relative' of a director of the bank shall mean any relative of a director of the bank as indicated hereunder:

A person shall be, deemed to be relative of another, if and only if, :

(a) they are members of a Hindu Undivided Family; or
(b) they are husband and wife; or
(c) the one is related to the other in the manner indicated below :

(i) Father
(ii) Mother(including step-mother)
(iii) Son (including step-son)
(iv) Son's wife
(v) Daughter (including step-daughter)
(vi) Daughter's husband
(vii) Brother (including step-brother)
(viii) Brother's wife
(ix) Sister (including step-sister)
(x) Sister's husband

2.2.10 The words 'any other financial accommodation' shall include funded and non-funded credit limits and under-writings and similar commitments, as under:

(i) The funded limits shall include loans and advances by way of bills purchase/discounting, pre-shipment and post-shipment credit facilities and deferred payment guarantee limits extended for any purpose including purchase of capital equipment and acceptance limits in connection therewith sanctioned to borrowers and guarantees by issue of which a bank undertakes financial obligation to enable its constituents to acquire capital assets.

(ii) The non-funded limits shall include letters of credit, guarantees and under-writings and similar commitments.

2.2.11 In view of the fact that salary earner banks grant advances to salaried employees of a particular institution/group of institutions to which their membership is restricted and deductions are made from the salaries through their employers, the salary earner banks may allow such advances in excess of the limits prescribed above subject to the following conditions:

(i) The Co-operative Societies Act of the State concerned contains an obligatory provision for deduction of periodical loan instalments by the employer out of employee's salaries/ wages to meet bank's claims.

(ii) The bank has taken advantage of this provision in respect of each of such advance.

(iii) A general limit for such advances is fixed by the bank in terms of certain multiples of the pay packet taking into account the monthly income of the employees.

2.2.12 The advances granted by primary (urban) co-operative banks, other than salary earners societies, to all salaried borrowers wherein repayment is sought to be ensured through deduction from borrower's salaries as per the provisions of the State Co-operative Societies Act, should be reckoned as secured only for the purpose of computation of total unsecured advances to the members as a whole. While granting advances to the individual salaried borrowers, the banks should ensure that these advances do not exceed the maximum limit on unsecured advances as indicated in paragraph 3.1 (a).

2.3 Real Estate Sector Exposure limit

Primary (urban) co-operative banks are advised to frame, with the approval of their Board of Directors, comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, keeping in view the Reserve Bank guidelines to ensure that bank credit is used for construction activity and not for activity connected with speculation in real estate subject to the following:

2.3.1 The total exposure to real estate including individual housing loan and commercial real estate may be limited to  15 per cent of the  total deposit resources of a bank

2.3.2 However, the above limit may be exceeded to the extent of funds obtained for the purpose from higher financing agencies and refinance from the National Housing Bank.

2.4 Inter-bank exposure limit

2.4.1 Prudential inter-bank (gross) exposure limit

The total amount of deposits placed by an UCB with other banks (inter-bank) for all purposes including call money / notice money, and deposits, if any, placed for availing clearing facility, CSGL facility, currency chest facility, remittance facility and non-fund based facilities like Bank Guarantee (BG), Letter of Credit (LC), etc shall not exceed 20% of its total deposit liabilities as on March 31 of the previous year. The balances held in deposit accounts with commercial banks and in permitted scheduled UCBs and investments in Certificate of Deposits issued by commercial banks, being inter bank exposures, will be included in this 20% limit.

2.4.2   Prudential inter-bank counter party limit

Within the prudential inter-bank (gross) exposure limit, deposits with any single bank should not exceed 5% of the depositing bank's total deposit liabilities as on March 31, of the previous year.

Exemptions from the prudential limit

As per the extant policy, non-scheduled UCBs in Tier I have been exempted from maintaining SLR in Government and other approved securities up to 15% of their NDTL provided the amount is held in interest bearing deposits with the Public Sector Banks and IDBI bank Ltd. These deposits are exempted from the prudential limit on inter-bank exposure limits [Paragraph 2.4.1 & 2.4.2].

The balances maintained by UCBs with the Central Cooperative Bank of the district concerned or with the State Cooperative Bank of the State concerned under the provisions of Section 24 of the Banking Regulation Act, 1949 (AACS) are also exempted from the prudential limit on inter-bank exposure limits [Paragraph 2.4.1 and 2.4.2].

2.4.3  Deposits placed by non-scheduled PCBs with scheduled PCBs

2.4.3.1 Non-scheduled PCBs are permitted to place deposits with  strong scheduled PCBs complying with the following norms:

(i) The bank cpmplies with the prescribed level of CRAR.
(ii) Net NPAs of the bank are less than 7%.
(iii) The bank has not defaulted in the maintenance of CRR/SLR for the last two years
(iv) The bank has declared net profits for the last three consecutive years
(v) The bank complies with prudential norms on income recognition, asset classification and provisioning, exposure ceilings and loans and advances to directors.
(vI) The amount of deposits placed by a non-scheduled UCB with any scheduled UCB should not exceed 5% of the depositing bank’s total deposit liabilities as on March 31 of the previous year.

2.4.3.2 Acceptance of deposits from non-scheduled UCBs by the scheduled  UCBs will also be subject to the following conditions:

i) The total inter-UCB deposits accepted by a scheduled UCB should not exceed 10% of its deposit liabilities as on 31st March of the previous financial year.

ii) The rate of interest offered on such deposits should be market related.

iii) Scheduled UCBs should not, however, place deposits with other scheduled/non-scheduled UCBs. 

3.Ceiling on Unsecured Advances (with surety & without surety)

3.1 Ceiling for a single party/connected group

(a) The maximum limit on unsecured advances (with sureties) to a single party/connected group of borrowers will be as under:

(b) UCBs may grant unsecured advances without surety within the under noted limits only in respect of purchase / discount / withdrawal against third party cheques for a temporary period of 30 days in emergent cases:

3.2 Aggregate ceiling on unsecured advances

The total unsecured advances (with surety and without surety ) granted  by a bank to its members should not exceed 15 % of its  demand and time liabilities (DTL) as against the earlier limit of 33.33 %. However, banks are permitted to conform to the lower limit in a gradual manner, i.e. 20 % of DTL by March 31, 2006 and further to 15 % of DTL by March 31, 2007

No bank shall finance a borrower, who is already enjoying credit facilities with another bank, without obtaining a ’NOC’ from such financing bank and where the aggregate of the credit facilities enjoyed by the borrower exceeds the ceiling stipulated in the directive for a single party,  the prior approval of Reserve bank shall be obtained.

4. STATUTORY RESTRICTIONS

4.1 Advances against Bank's Own Shares

In terms of Section 20(1) (a) of the Banking Regulation Act 1949  (As applicable to co-operative societies),a primary (urban) co-operative bank cannot grant loans and advances on the security of its own shares.

4.2 Restrictions on Power to Remit Debts

4.2.1 Section 20-A (1) of the Banking Regulation Act, 1949 (As applicable to Co-operative Societies) stipulates that a primary (urban) co-operative bank shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by –

(i) any of its past or present directors, or
(ii) any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or
(iii) any individual, if any of its directors is his partner or guarantor.

4.2.2 In terms of Section 20-A (2) of the said Act, any remission made in contravention of the provisions of sub-section (1) above shall be void and of no effect.

5. REGULATORY RESTRICTIONS

5.1 Granting Loans and Advances to Directors and their Relatives

5.1.1 With effect from 1 October 2003, primary (urban) co-operative bank have been prohibited to make, provide or renew either secured or unsecured loans and advances or any other financial accommodation to its directors or their relatives, and the firms / companies / concerns in which they are interested.The existing advances may be allowed to continue up to the date when they are due. The advances should not be renewed or extended further.

5.1.2 The following categories of director related loans are exempted from the purview of the above instructions.

(i) Regular employee-related loans to staff directors on the board of UCBs;

(ii) Normal loans as applicable to members to the directors on the boards of salary earners’ co-operative banks and

(iii) Normal employee-related  loans to managing directors of multi-state co-operative banks.

(iv) Loans to  directors and their relatives against Fixed Deposits and Life Insurance policies standing in their own name.

5.1.3 Banks are required to submit information pertaining to loans and advances granted to their directors and relatives for each quarter end (i.e. 31 March, 30 June, 30 September and 31 December) in the proforma given in Annex 1 & 2,to the concerned Regional Office of this Department within fifteen days from the close of the respective quarter.

5.1.4   In case of supersession of the Board of Directors of a bank, the concerned bank should submit the statement in respect of loans and advances availed by special officers/Administrators including their relatives.

5.2 Maximum Ceiling on Advances to Nominal Members

Banks may sanction loans to nominal members for short/temporary period and for purchase of consumer durables, subject to the following ceiling:

5.3 Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks

The banks should desist from sanctioning advances against FDRs / term deposits of other banks.

5.4 Bridge Loans/Interim Finance

The primary (urban) co-operative banks, have been prohibited from entertaining any proposal for bridge loan / interim finance including that against capital / debentures issues and/or in the form of loans of a bridging nature, pending raising of long term funds from the market   by way of capital, deposits etc. from all the categories of non-banking financial companies i.e. equipment leasing, hire-purchase, loan, investment and also residuary non-banking companies.

5.5 Bank Finance  against Shares, Debentures and Bonds

5.5.1 Bank Finance  to Stock Brokers

5.5.1.1 Banks are prohibited from extending any fund based or non fund based credit facilities, whether secured or unsecured , to stockbrokers against  shares and debentures/bonds, or  other securities, such as fixed deposits, LIC policies etc.

5.5.1.2 Banks are not permitted to extend any facility to commodity brokers.This would include issue of guarantees on their behalf.

5.5.1.3 Advances against units of mutual funds can be extended only to individuals as in the case of advances against the security of shares, debentures and bonds ( para 5.5.2 ).

5.5.1.4 Any credit facility presently in force, but not in consonance with the above instructions should be withdrawn /closed without any delay. A compliance report in this regard may be submitted to the Regional Office concerned of Reserve Bank.

5.5.2 Loans against the primary / collateral security of shares/ debentures should be limited to Rs. 5 lakh if the security is in physical form and upto Rs. 10 lakh if the security is in demat form.

5.5.3 A margin of 50 percent should be maintained on all such advances.

5.5.4 Aggregate of all loans against the security of shares and debentures should be within the overall ceiling of 20 percent of the owned funds of the bank.

5.5.5 Banks are required to report to the respective Regional Offices of the Reserve Bank of India their outstanding, to individual borrowers and other entities against shares on quarterly basis in the format given in Annex 3.

5.5.6 It is essential that before accepting shares as security, banks should put in place appropriate risk management systems. All the approved loan proposals should be placed before the Audit Committee of the Bank at least once in two months. The Management and Audit Committee should ensure that all loans against shares are made only to those individuals who are not in any way connected with any stock broking entity. Details of the loan sanctioned should be reported to the Board in its subsequent meeting.

5.6 Bank Finance against Preference Shares and Long Term Deposits

Primary (urban) Cooperative Banks should not invest in Perpetual Non cumulative Preference Shares (Tier I), other Preference shares (Tier II) such as Perpetual Cumulative Preference Shares, Redeemable Non Cumulative Preference Shares, Redeemable Cumulative Preference Shares and also in Long Term Deposits (Tier II) issued by other banks; nor should they grant advances against the security of the above instruments issued by them or other banks.

5.7 Bank Finance to Non-Banking Financial Companies (NBFCs)

5.7.1 Admission of NBFCs as Members

(i) For availing loans or advances from a primary (urban) co-operative bank, its membership is a must. However, primary (urban) co-operative banks are normally not expected to enrol non-banking financial institutions like investment and financial companies as well as other persons engaged in the business competing with or conflicting with the business of the bank, as their members since it would be in contravention of the state co-operative societies act concerned and will also not be in conformity with the provision of model by-law No. 9. Therefore, banks should not finance NBFCs, other than those engaged in hire- purchase/leasing.

(ii) Similarly, admission of non-banking financial companies which are not engaged exclusively in leasing/hire purchase business as members may be contrary to the provisions contained in the state co-operative societies act concerned and model by-law No. 9. It will, therefore, be necessary for the primary (urban) co-operative banks to obtain prior approval of the concerned registrar of co-operative societies before admitting such leasing/hire purchase companies as members.

5.7.2 Activities eligible for finance to NBFCs engaged in hire purchase/ leasing activities

Within the prescribed credit exposure norms and above stated restrictions, primary (urban) co-operative banks, with working capital funds aggregating to Rs. 25 crores and above, may finance the equipment leasing/hire purchase companies, subject to the following limits:

Note:

(i) The maximum limit on bank finance should be within the overall ceiling of borrowing by NBFCs, upto ten times of their NOF.

(ii) Bank finance to leasing concerns should be restricted only to "full payout" leases i.e. those leases where the cost of the asset is fully recovered during the primary lease period itself and further it should cover purchases of only new equipment.

(iii) As a prudent policy, lease rentals due during the period of next five years should alone be taken into account for the purpose of lending.

5.7.3 Activities not eligible for finance to NBFCs engaged in hire purchase/leasing activities

(i) The following activities undertaken by non-banking financial companies engaged in hire purchase/leasing activities are not eligible for bank credit. As such, these items should be excluded from the build-up of current assets while arriving at permissible bank finance for all categories of NBFCs:

(a) Bills discounted/rediscounted by NBFCs, except where specifically permitted;
(b) Investments made in shares, debentures etc. of a current nature, i.e., stock-in-trade;
(c) Investment in and advances to subsidiaries, group companies or other entities; and
(d) Investments in and inter-corporate loans/deposits to other companies.

(ii) In respect of items indicated at (a) and (b) above, banks should not make any adjustment in the projected net working capital (NWC). It may be added that the projected NWC represents long-term surplus available to support current operations and, therefore, does not need to be adjusted as a result of changing/pruning the level of current assets while reducing the level of maximum permissible bank finance.

5.7.4 Financing of NBFCs by Scheduled Primary (Urban) Co-operative Banks

(i) The Scheduled primary (urban) co - operative banks may rediscount bills discounted by NBFCs arising from sale of commercial vehicles, including light commercial vehicles, two wheeler and three wheeler vehicles, subject to normal lending safeguards and the following conditions:

(a) the bills should have been drawn by the manufacturers on dealers only,

(b) the bills should represent genuine sale transactions as may be ascertained from the chassis/engine numbers, and

(c) before rediscounting the bills,the scheduled primary ( urban ) co -operative banks should satisfy themselves about the bona - fides and track record of NBFCs which have discounted the bills.

(ii) The Scheduled primary (urban) co-operative banks may provide finance to NBFCs eligible for bank finance for the purpose of on-lending to Small Road and Water Transport Operators (SRWTOs) for purchase of trucks and classify such advances under priority sector, provided the ultimate borrowers (SRWTOs) satisfy the eligibility requirements for being classified under the priority sector.

(iii) Scheduled primary (urban) co-operative banks may finance NBFCs for on-lending to individual farmers and for hire purchase schemes for distribution of agricultural machinery and implements and the same may be reckoned for the purpose of priority sector lending as indirect finance to agriculture.

(iv) The Scheduled primary (urban) co-operative banks may extend finance to NBFCs or other financial intermediaries for on-lending to small and micro enterprises (manufacturing as well as service) and classify such finance under priority sector after satisfying that relevant norms at the ultimate borrowal level are complied with.

5.8   Financing equipment leasing and hire purchase financing

5.8.1 Consequent to the Government of India notification dated 12 December 1995 specifying ‘hire purchase’ and ‘equipment leasing’ as forms of business in which it is lawful for a primary cooperative bank to engage, Scheduled urban cooperative banks are allowed to undertake these activities.  Scheduled urban cooperative banks are advised to ensure that:

(i) These activities are undertaken only at select branches of Banks
(ii) These activities are to be treated at par with loans and advances and subject to extant exposure norms on individual / group borrowers.
(iii) Banks should maintain a balanced portfolio of equipment leasing, hire purchase vis-à-vis aggregate credit.  Credit exposure to each of these activities should not exceed 5% of total advances
(iv) Banks undertaking these activities should follow prudent accounting standards.Entire lease rental should not be taken to banks’ income account.Only the interest component should be taken to income account.The component representing replacement cost of the asset should be carried to the Balance Sheet in the form of a provision for depreciation
(v) As a prudent measure, full depreciation should be provided during the primary lease period of the asset.
(vi) Leasing and hire purchase financing extended by scheduled primary cooperative banks, departmentally, may be classified as priority sector advances provided the beneficiary satisfies the criteria laid down by RBI for treating such advances as advances to priority sector.

Non Scheduled banks, which also desire to undertake these activities should obtain RBI permission.

5.9 Financing for Agricultural Activities

5.9.1 The primary (urban) co-operative banks are permitted to finance agricultural activities under priority sector subject to the following conditions:

(i) Banks would provide direct finance only to members (no nominal members) and not through any agency like primary agricultural credit societies and primary land development banks etc.,

(ii) Credit should be extended only after obtaining 'no dues certificate' from the existing credit agencies in the area, and

(iii) Banks should follow the scales of finance and obtain security as per guideline issued by RBI/NABARD.

5.10 Restriction on Advances to Defaulters of Statutory Dues

5.10.1 Under the law, employees' contributions to provident fund deducted from wages of the employees/members, for a period of more than six months and not paid to the Commissioner are a first charge on the assets of the borrowers, in the case of the insolvency/winding up of the borrowing employer. In the circumstances, primary (urban) co-operative banks should safeguard their interest vis-à-vis such statutory dues.

5.10.2 Therefore, banks should satisfy themselves that there are no arrears of Provident Fund and other statutory dues of the borrowers by obtaining a declaration from them that all such dues have been duly paid. Proof in this regard may be called for only in cases where banks have reason to doubt the borrowers' declaration. Even where a proof is required, it is not necessary to insist on a certificate from the Regional Provident Fund Commissioner; production of a receipt evidencing the payment of the dues or a certificate from the auditors of the borrower or any other similar proof may be considered sufficient. In the case of sick units where there are arrears for reasons beyond the control of the borrowers, banks may continue to consider such cases on merits.