Adherence of Exposure Norms L.V.S. Mohan DGM/MOF CAB, RBI, Pune

Coverage of topic 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 bye- laws 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/ 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 lakh per beneficiary of a dwelling unit. Tier II UCB may extend housing loans up to a maximum of Rs 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 CriteriaUCBs with DTL with Rs 10 crore DTL above 10 crore and up to Rs 50 crore UCBs with DTL of 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 lakhRs 2.00 lakhRs 3.00 lakhRs 5.00 lakh UCBs having CRAR less than 9% Rs 0.25 lakhRs 0.50 lakhRs 1.00 lakhRs 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 Without the prior approval of RBI UCB cannot remit in whole or in part any debt due to it by  Any of its present or past directors  Any firm or company in which its directors is interested as director, managing agent, guarantor  Any individual, if any of its directors is his partner  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) 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 a dvances granted to their directors and their relatives for each quarter en ding 31 March, 30 th June, 30 th September, and 31 st 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 BanksCeiling 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 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 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 hire- purchase / 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 NBFCMaximum 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

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