Adherence of Exposure Norms
L.V.S. Mohan
DGM/MOF
CAB, RBI, Pune
Coverage of topic
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What is exposure
What are exposure norms
Who fixes the norms
What are capital funds
What is periodicity for computing the norms
What is a group
Statutory and regulatory restrictions
Real estate exposure
Unsecured advances
Advances to nominal members
Advances against shares, debentures and bonds
Coverage of topic
• Financing of NBFCs
• Financing of agriculture
• Financing of SHG/JLG
What is exposure
• The amount which would be lost in default given the worst
possible assumption about recovery in the liquidation or
bankruptcy of an obligor.
• For a loan this is full facility amount plus accrued interest .
For a partly used facility the prevailing practice is to still say
the full facility amount is exposed. This is because the
worst assumption is that the borrower draws the full
amount and then immediately default.
Why exposure limits
• Is aimed at better risk management and avoidance of concentration
of credit risk.
• Limits to be fixed on an UCB’s exposure to
 to individual borrowers and group borrowers : (individual,
proprietor, corporate, partnership)
 to specific sectors: (commercial real estate , steel, cement, housing
etc)
 towards unsecured advances : (clean ODs, loans without securities)
 and unsecured guarantees.
Exposure ceiling to individual/group
borrowers
• The exposure limits in relation to UCBs capital funds are fixed with
the approval of Board of Directors.
• The exposure for the purpose shall comprise both credit exposure
and investment exposure (Non SLR)
• The exposure to an individual borrower does not exceed 15% of
capital funds
• The exposure to a group of borrowers does not exceed 40% of
capital funds.
Periodicity of computation
• To be computed every year after finalization and
audit of balance sheet of the bank.
• Banks can fix a fresh exposure limit taking into
account the amount of share capital available on
30th September.
• No excess exposures to be taken in anticipation of
infusion of capital on a future date.
Capital Funds
• Capital funds comprise both Tier I and Tier II Capital
• Elements of Tier I Capital
 Paid up share capital collected from regular members having voting rights
Less : intangible assets and losses
Contributions received from associate / nominal members where the byelaws permit allotment of shares to them and provided there are
restrictions on withdrawal of such shares as applicable to regular
members
Contribution / non refundable admission fees collected from the nominal and
associate members which is separately held as ‘reserves "under a separate
head of account as these are not refundable.
Perpetual Non – cumulative preference shares
Tier I capital
Net paid up capital
 Reserves and surplus
(i) Statutory reserves
(ii) Capital reserves
(iii) Other reserves
(iv) Surplus in Profit and Loss Account
Elements of Tier II Capital
• Undisclosed reserves (accumulation of post tax profits)
• Revaluation reserves (at 55% discount)
• General provisions and loss reserves
• Investment fluctuation reserves/funds
• Hybrid debt capital instruments (characteristics of debt/equity)
• Subordinated debts (fully paid up, unsecured,free of restrictive
clauses, no redemption without bank’s consent)
CREDIT EXPOSURE
•
Credit exposure includes:
 Funded (CC, TL, WCDL, Cheque discounting, ODs,- all possible forms where the
bank has parted funds to the borrower.)
 Non-funded credit limits and underwriting and similar commitments (LC, BGs,
commitments, underwriting, any other financial commitment which may devolve
on the bank)
 Facilities extended by way of equipment leasing and hire purchase financing and
 Ad- hoc limits sanctioned to the borrowers to meet the contingencies
It does not include loans and advances granted against the security of bank’s own
term deposits
CREDIT EXPOSURE (contd)
• The sanctioned limit or outstanding whichever is higher shall be
reckoned for arriving at the credit limit
• Term Loan: Balance outstanding if fully drawn (no scope for any
further drawings or no further disbursements due)
• In case of non- funded limit 100% of such limit or outstanding
which is higher is to be reckoned for the purpose.
• In case of consortium /multiple banking the level of individual
bank’s share shall be governed by single borrower/group exposure.
Group
• Banks have to decide whether a borrowing unit
belongs to a group or not based on information
available with them.
• The
guiding
principle
in
this
regard
is
commonality of management and effective
control
Real Estate Sector Exposure Limit
• The UCBs should ensure that bank credit is used for construction activity
and not for activity connected with speculation activity in real estate
• Exposure to housing, real estate and commercial real estate loans limited
to 10% of total assets wef Nov 15, 2010 instead of 15% deposits
• 10% can be exceeded by an additional limit of 5% of total assets for the
purpose of grant of housing loans to individuals for dwelling units costing
Rs 25 lakh. (UBD.BPD. (PCB) 31/13/05.000/2011-12 dated April 26, 2012)
• Total assets to be reckoned based on the audited balance sheet as on
March 31 of the preceding financial year.
Exposure to real estate
• Working capital loans given against hypothecation of
construction materials provided to the contractors who
undertake comparatively small construction on their own
without receiving advance payments is exempted from the
prescribed limit.
• With effect from May 11, 2011 UCBS cannot exceed the
prescribed exposure limit even if funds are obtained from
the higher financing agencies or from NHB
Maximum Loan Amount
• Subject to exposure norms a Tier I UCB may
grant housing loans up to a maximum amount of
Rs 30.00 lakh per beneficiary of a dwelling unit.
Tier II UCB may extend housing loans up to a
maximum of Rs 70.00 lakhs per beneficiary of a
dwelling unit.
(ref cir 7 dated 31/10/2011)
Precautions to be taken by Banks
• Verification of original documents: original documents, salary certificates,
higher estimates,
• Banks not to sanction loans for unauthorized construction or for misuse of
properties, encroachment of public land
• An architect appointed by the bank must also certify before disbursement
of the loan that the built up property is as per sanctioned plan
• No loan should be sanctioned for properties meant for residential use but
applicant intends to use for commercial purpose
Ceiling on unsecured advances (with
surety and without surety) revised
from November 15, 2010
Criteria
UCBs with DTL
with Rs 10
crore
DTL above 10 UCBs with DTL
crore and up to of Rs 50 crore
Rs 50 crore
and up to Rs
100 crore
UCBs with DTL
above Rs 100
crore
UCBs having
CRAR equal to
or more than
9%
Rs 1.00 lakh
Rs 2.00 lakh
Rs 3.00 lakh
Rs 5.00 lakh
UCBs having
CRAR less than
9%
Rs 0.25 lakh
Rs 0.50 lakh
Rs 1.00 lakh
Rs 2.00 lakh
Aggregate ceiling on Unsecured
advance
• The total unsecured loans and advances granted by a UCB to its
members should not exceed 10% of its total assets as per audited
balance sheet as on March 31 of the preceding year.
• Salary earner banks may allow unsecured advances in excess of the
limits prescribed for other UCBs subject to the following conditions:
• Coop societies Act of the state concerned contains an obligatory
provision for deduction of periodical loan installments by the
employer out of employees salaries /wages to meet the bank’s
claims
Salary earners bank(contd)
• The bank has taken advantage of each of such advance
• 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
• In case of other UCBs the loans granted to all salaried borrowers
will be reckoned as secured only for the purpose of computing total
unsecured advances. The advances sanctioned should not exceed
maximum limit prescribed.
Computation of Unsecured Advances exclusions
• It includes clean overdrafts, loans against personal security, clean
bills, cheques purchased and drawals allowed against cheques sent
for collection
• It excludes:
 Advances backed by guarantee of state and central govts, public
sector financial institutions, banks, DICGC
 Advances against supply bills drawn on the state or central govts or
psus accompanied duly authorised inspection notes or receipted
challans.
Unsecured advances (exclusions)
 Advance against trust receipts
 Advances granted to salaried employees against personal security
 Advances against book debts which are not outstanding for more
than 90 days
 Cheques issued by governments, public corporation, and local self
governing institutions
 Advances in form of packing credit for exports
 DDs purchased
Statutory Restrictions
•
Advances against Bank’s own shares:
•
In terms of section 20 (1) (a) of the B.R.Act (AACS) a UCB cannot grant loans and advances on the
security of its own shares
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Without the prior approval of RBI UCB cannot remit in whole or in part any debt due to it by
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Any of its present or past directors
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Any firm or company in which its directors is interested as director, managing agent, guarantor
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Any individual, if any of its directors is his partner
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In terms of section 20-A (2) of the said Act any remission made in contravention of Sec 20(1) (a)
shall be void and of no effect.
Regulatory restrictions (Loans to
Directors)
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With effect from October 1, 2003 UCBs have been prohibited to make. Provide or renew either
secured or unsecured loans and advances to its directors or their relatives and the firms /
companies / concerns in which they are interested.
•
Exemptions:
Loans to staff directors on the board of UCBs
Normal loans as applicable to directors of salary earners coop banks
Normal employee related loans to MDs of multi state coop banks
Loans to directors and their relatives against FDs and LIC policies standing in their own names.
UCBs to furnish information pertaining to loans and advances granted to their directors and
their relatives for each quarter ending 31 March, 30th June, 30th September, and 31st
December
Relative of a director
• A person shall be deemed to be a relative of another if and only if:
• (a) they are members of a HUF or
• (b) they are husband and wife
• (c) the one is related to another in the manner indicated below:
Father, mother (including step- mother), son (including step -son) son’s
wife, daughter (including step- daughter), daughter’s husband,
brother (including step- brother) brother’s wife sister (including
step – sister) sister’s husband
Maximum ceiling on advances to
nominal members
Banks
Ceiling on the loan amount
With deposits upto Rs 50
crores
Rs 50000/- per borrower
With deposits above Rs 50
crore
Rs 1,00,000 per borrower
Regulatory restrictions
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BRIDGE LOANS: UCBs cannot sanction bridge loans or interim finance pending
against raising of long term funds from the market by way of capital deposits etc to
all categories of NBFCs
•
LOANS TO STOCK BROKERS: Banks are prohibited from extending any fund based
or non fund based credit facilities to stock brokers
•
Banks are not permitted to extend facility to commodity brokers
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Advances against units of mutual funds and primary / collateral security of shares
and debentures can be extended to only individuals
•
Loan should be limited to Rs 5.00 lakh if the security is in physical form and upto
Rs 10 lakh if the security is held in demat form.
Regulatory restrictions (loans to share
brokers)
• A margin of 50% should be maintained on loans extended against
security of shares
• Aggregate of all loans against security of shares should be within
overall ceiling of 20% of owned funds of the banks
• Banks are required to report to the respective regional offices on
quarterly basis.
• Banks should not invest in preference shares and long term
deposits and should not grant loans against such instruments
Bank finance to NBFCs
• Banks should not finance NBFC other than those engaged in hirepurchase / leasing.
( not to finance investment and financial
companies as well as other persons engaged in business competing
with or conflicting with the business of the bank)
• Admission of NBFCs which are not engaged exclusively in leasing
and hire purchase business can be admitted with the prior approval
of the RCS of the state concerned.
• UCBs with working capital funds of Rs 25 crores and above may
finance the equipment leasing / hire purchase companies
Asset Finance companies
Type of NBFC
Maximum limit on bank finance
Equipment leasing and hire purchase
companies having not less than 75% of
their assets in equipment and hire
purchase and 75% of their income from
these two types of activities as per the
last audited balance sheet of the
companies
3 times the net owned funds of the NBFC
Other equipment and hire purchase
companies
2 times of the net owned funds of the
NBFC
Financing of NBFCs by Scheduled UCBs
• Scheduled urban coop banks may rediscount bills discounted by
NBFCs arising from sale of commercial vehicles subject to the
following:
 the bills should have been drawn by the manufacturers on dealers
only
 The bills should represent genuine sale transactions as may be
ascertained from the chassis/engine numbers
 The bonafides and track record of NBFCs should be to the
satisfaction of the UCBs
Financing of NBFCs by Scheduled UCBs
• Banks may provide finance to NBFCs eligible for bank
finance for the purpose of on-lending to Small Road
and Water Transport Operators
• Scheduled UCBs may finance NBFCs for on-lending to
individual farmers and for hire purchase of agricultural
machinery and implements which can be reckoned for
priority sector lending
Financing of Agricultural Activities
• Banks to provide direct finance only to members
(no nominal members) and not thro PACS
• Credit should be extended after obtaining no due
certificate from the existing credit agencies in the
area.
• Banks should follow scales of finance and obtain
security as per guidelines of RBI
Loans to SHG/JLGs
• UCBs can extend loans to SHG/JLG as per the policy
approved by the Board
• It should directly lend to SHG/JLG
• The extant limits i.e 10% of total assets on grant of
unsecured loans and advances will not apply to SHGs.
• Loans granted to SHG/JLG will be governed by
individual exposure limits
•
Thank you