The RBI through the issuance of the Master Direction - Exposure Norms and Statutory / Other Restrictions – UCBs on January 16, 2024 consolidated the instructions and guidelines on exposure norms and statutory restrictions for UCBs ("Master Circular").
The RBI directed the UCBs to fix the exposure ceiling in respect of their tier-1 capital. The exposure limit allowed to a single borrower was 15%, while the exposure limit for a group of connected borrowers/ parties could not exceed 25%. The Master Circular required the UCBs to reduce their current exposure that exceeded the revised limits and comply with the new limits by March 31, 2023. For loans related to Housing, Real Estate and Commercial Real Estate a limit of 10% of their total assets had been set. Furthermore, an additional 5% had been allocated specifically for Housing. Loans granted with or without surety to members of the UCBs have been capped at 10% of their total assets as of March 31 of the preceding financial year.
The RBI vide the Master Circular laid down the following restrictions on the UCBs:
- Statutory restriction: The RBI stated that upon amendment of the Banking Regulation Act, 1949 by the Banking Regulation (Amendment) Act, 2020, Section 20(1)(a) of the principal act has become applicable on UCBs which prohibits UCBs to provide loans and advances using their own shares as security.
- Regulatory restriction: The Master Circular
laid down the following regulatory restrictions on UCBs:
- UCBs are prohibited to advance or renew any loans or extend any financial accommodation to or on behalf of their directors or their relatives, or to the firms / companies / concerns in which the directors or their relatives are interested.
- UCBs should refrain from sanctioning advances against fixed deposit receipts / term deposits of other banks.
- UCBs are restricted from extending any fund or non-fund based credit facilities (unsecured and secured) to stockbrokers against shares and /or debentures / bonds or any other securities. Further, they shall not extent any facility to commodity brokers (including guarantees on their behalf).
- UCBs are allowed to provide financing to its members only, and non-banking financial companies ("NBFCs") can, after receiving the approval of the Registrar of Co-operative Society become the members of UCBs, provided they are engaged in the business of hire-purchasing/ leasing.
The Master Circular further lists down activities that do not quality for financing by an NBFC and allows Scheduled UCBs to rediscount bills discounted by NBFCs arising from sale of commercial vehicles, including light commercial vehicles, two wheelers and three wheelers, subject to adhering to certain conditions.
Originally published 27 March 2024
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