Corrective Powers: RBI revises supervisory action framework for Urban Co-operative Banks

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Published: January 7, 2020 2:52:36 AM

On December 30, RBI proposed reduction in loan amount an urban co-operative bank can lend to a single entity and a group of borrowers to 10% and 25%, respectively, with an aim to prevent PMC Bank-like scams, caused by large exposure to one group.

RBI, supervisory action framework, Urban Co-operative Bank, Reserve Bank of India, NPA, economy  news

In a bid to keep a check on urban co-operative banks (UCBs), Reserve Bank of India (RBI) has revised supervisory action framework (SAF) for urban co-operative banks. A UCB may be placed under supervisory action framework when its net non-performing assets (NPAs) exceed 6% of its net advances. As soon as this threshold is breached, the regulator may initiate multiple actions, depending on severity of stress.

The central bank can ask UCB to submit a board-approved action plan for reducing its net NPAs below 6%. RBI can also order curtailment of sanction or renewal of credit facilities to sectors having high proportion of defaults after threshold is breached. RBI can also put restrictions on declaration or payment of dividend without prior approval. The regulator also has option of putting restriction on fresh loans and advances carrying risk-weights more than 100% after net NPAs of UCB cross 6%.

The supervisory action framework seeks an expeditious resolution of UCBs experiencing financial stress. Earlier on December 31, the regulator released final guidelines for setting up a board of management (BoM) for UCBs.

According to the guidelines, UCBs, with deposits of Rs 100 crore and above, will constitute the BoM, which will be a mandatory requirement for opening new branches. The main functions of the Board of Management (BoM) include recommending action for recovery of NPAs, One Time Settlement and assisting the board in monitoring the same.

On December 30, RBI proposed reduction in loan amount an urban co-operative bank can lend to a single entity and a group of borrowers to 10% and 25%, respectively, with an aim to prevent PMC Bank-like scams, caused by large exposure to one group.

Punjab and Maharashtra Co-operative (PMC) Bank collapsed due to its huge exposure to Housing Development and Infrastructure Group companies, totaling Rs 6,226.01 crore. The central bank had earlier found irregularities in PMC Bank, including major financial violations, failure of internal controls and systems, wrongdoing and under-reporting of its lending exposure.

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