Nafcub President Jyotindra Mehta had reacted strongly to RBI’s recent Circular on limits on exposure to single and group borrowers and called it a set of disruptive guidelines. Mehta is believed to have held a series of extensive meetings with the stake-holders and have come up with his feedback/suggestion. We reproduce the same verbatim- Editor
The Chief General Manager
Department of Regulation
Reserve Bank of India
Limits on exposure to single and group borrowers /parties and large exposures and Revision in the target for priority sector lending -UCBS
We refer to the draft circular on the above subject which was notified by the RBI for comments and suggestions through a press release dated December 30, 2019.
2. We have had meetings with your member banks across India, in tum, all of them have expressed the view that the proposed guidelines are disruptive and, if implemented, will be highly detrimental for their smooth functioning and financial health. Based on feedback received your comments/suggestions with respect to the aforesaid proposed measures are as follows
2.1 Modification of Prudential Exposure Limits
2.1.1 The exposure limits for a single borrower/party and group of connected borrowers parties are proposed to be reduced from 15% and 40 % of capital funds respectively to 10% and 25 % of Tier I capital respectively.
2.1.2 The pegging of the exposure of bank to its Tier I capital instead of Capital Funds (Tier I +Tier II) at present and that too at a reduced percentage is bound to hit the banks adversely. It will reduce its scope for lending and deployment of funds and also affect profitability. Further, it will cause great inconvenience to borrowers affected by the curtailment of exposure to meet their genuine finance requirements and they will be forced to migrate to other banks. This may also give rise to unhealthy competition among the players. Reduction in limits could also result in legal disputes being raised by borrowers. The said proposal, if implemented, will place UCBs at an unfair disadvantage vis a vis other banks whose exposure limits are not only higher but also linked to capital funds (Tier I & Tier 2 capital)
2.1.3 Under the circumstances, we request RBI to reconsider the proposal and maintain the present exposure norms which are considered reasonable. What is more important is that the present norms should be strictly observed and monitored by the banks’ management, auditors and the regulator We are therefore not in favour of the present exposure norms being revised at this stage. Also different exposure norms for UCBs and commercial banks, including SFBs, are hardly warranted.
2.2At least 50% of their loan portfolio shall comprise loans not more than Rs.25 lakh per borrower/party.
2.2.This is ceiling prescribed for Small Finance Banks (SFB) which have been licensed primarily to operate in area limited to a district and its neighbourhood and catering to persons of small means and micro and small enterprises. The proposed guidelines requiring all UCBs across the board to have at least 50% of their loan portfolio to not more than Rs. 25 lakh per borrower for UCBs is not reasonable at all. As RBI is aware, the UCB sector is heterogenous comprising banks of different sizes with many having operations in multiple districts and states/union territories. A “one size fits all’ approach may not be appropriate. Moreover, UCBS have universal banking licences which do not stipulate the licensing conditions stipulated for SFBS. If at all, RBI wishes to stipulate the limit it may apply only to Tier I UCBs as Tier II banks, especially the larger ones will find it extremely difficult and damaging adjust to the proposed stipulation, notwithstanding the glidepath indicated in the draft guidelines.
2.2.2 As we understand from the draft guidelines, the measure is being proposed for promoting financial inclusion. We would like to underscore the fact that the niche clientele being served UCBS has traditionally comprised weaker sections of society. persons of small means, salaried class, traders and MSME sector, Successive RBI Reports on Trends and Progress in Banking have recognised and appreciated the role played by the UCB sector in this regard. UCBs are also known to render better customer service which remains their USP.
2.2.3 As per the extant regulations, under CGTMSE a credit limit of Rs. 2 crore has been stipulated for guarantee free advances by banks for MSME sector. In this light also, the stipulation of Rs. 25 lakh needs to be reviewed since it is antithetical for lending to the MSME sector
2.3 Target for loans and advances to priority sector for UCBs shall stand increased to 75% of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher, by March 31, 2023.
2.3.1 While we agree thatgreater thrust should be given to Priority Sector Lending (PSL), the proposed steep hike in the target from 40 % to 75 %is not rational since UCBs mostly have presence in the urban and semi-urban areas and there is not much scope for lending to agriculture / rural sector. SFBs have been prescribed this target as they were originally MFIs and had 100 % loans under PSL However, if the PSL target has to be raised, it may be lowered from the proposed 75% to 50 % with a suitable glide path.
3. Incidentally, we may mention that we had called data from various UCBs to study the impact of proposed draft guidelines on exposure norms. Accordingly, we could collect data from 59 UCBs of various sizes. It is revealed from the analysis of data that reduction in exposure limit works out to between 33% and 66 % across all the UCBS. Further, for UCBs having deposit size of more than Rs 500 crores it is very difficult to maintain 50% of its loan portfolio with ticket size of Rs 25 lakh per borrowers(out of 10 CBse only two have achieved) Similarly to achieve the target of 75% of Priority Sector Lending is also difficult due to restrictions on ticket size of loan and reduction in exposure limits (out of 59 UCBs only 23 have achieved).
4. There is a strong feeling in the minds of the cooperative workers all over the nation that the RBI does not want cooperative Banking sector in the Indian Banking industry. That’s why the regulators have been introducing the amendments to eliminate the cooperative sector or to compel them to convert it into private sector
We do hope the RBI will view the above comments and suggestions positively. The UCB sector has generally been faring well, and at this juncture subjecting it to the proposed guidelines would greatly disturb the good momentum gathered over the past 15 years or so towards improving the health of the sector. We would like to inform you that the proposed unsettling and discriminatory guidelines have caused considerable discomfort and concern for their future among our member banks. It is ill-timed in the context of the upcoming Umbrella Organisation whose momentum can be affected if the proposed guidelines are taken forward and sway banks away from participating in it