Reserve Bank proposes to introduce new lending standards for UCB after PMC Bank chapter

Mumbai, December 31, 2019, Tuesday

The Reserve Bank of India on Monday proposed to reduce the single and group borrower limit of urban co-operative banks (UCBs). In addition, the Reserve Bank believes that credit targets for priority sectors should increase. The central bank also holds that more than fifty percent of the total loan disbursed should not exceed Rs 1 lakh.

The RBI proposes to increase the credit limit of the priority sector through urban co-operative banks to 6% from the present credit limit. This target will increase in phase. It is planned to have fifty percent by March 1, 5 percent by March 5 and 5 percent by March 1.

It has also proposed to keep Tier 1 Capital and 1 per cent of Urban Cooperative Bank Tier 1 Capital, respectively. Currently, UCBs are allowed to provide 5 percent and 5 percent of their capital funds, respectively.

A draft issued by the Reserve Bank states that the same standards as those prescribed for Small Finance Banks have been prepared for UCB. If these standards are to be converted into rules, the development of the cooperative sector will stop, say the informants.

The Reserve Bank's proposal is an attempt to move UCB to small finance banks. However, the proposal of the Reserve Bank has also been acknowledged in the wake of the Chapter of the Punjab Maharashtra Co-operative Bank (PMC).

An official of the Maharashtra Urban Cooperative Banks Federation said that the Reserve Bank's proposal would reduce the risk and strengthen the cooperation sector.

UCB loan portfolios should have at least 5% loan in which no more than Rs 1 lakh loan is disbursed per borrower or party. The Reserve Bank has called for the draft by January 1.

The RBI is claiming that these standards will reduce risks to UCB and increase financial inclusion.

The revised limit of exposure will apply to new loans only.