Prudential Treatment of Contributions Towards Eligible Funds for Non-Achievement of PSL Targets by UCBs
The Reserve Bank of India (RBI) has issued updated guidance regarding the prudential treatment of contributions made by Urban Co-operative Banks (UCBs) towards eligible funds in cases where they do not meet their Priority Sector Lending (PSL) targets. This clarification addresses two key aspects: exemption from exposure norms and capital adequacy treatment.
Exemption from Exposure Norms
Under the RBI circular DOR (PCB).BPD.Cir No.10/13.05.000/2019-20 dated March 13, 2020, UCBs are subject to prudential exposure limits of 15 per cent for single borrowers/parties and 25 per cent for groups of connected borrowers/parties, calculated on their Tier-I capital. These limits aim to mitigate concentration risk within a bank’s lending and investment portfolio.
However, in a recent review, the RBI has decided that contributions made by UCBs to eligible funds managed by institutions such as NABARD, NHB, SIDBI, and MUDRA Ltd. — or any other entity specified by the RBI — to cover shortfalls in their PSL targets will no longer be counted towards the calculation of aggregate exposure. This move effectively provides regulatory relief, as it ensures that such mandated contributions do not artificially inflate a UCB’s reported exposure to these counterparties, allowing banks to manage their prudential limits more flexibly.
Risk Weight for Capital Adequacy
While the exemption from exposure norms reduces the burden on banks’ exposure calculations, the RBI also provided clarity on the risk weight applicable to such contributions. Contributions towards these eligible funds, made due to PSL shortfall, will be classified under the category of “all other assets.” Accordingly, these will attract a risk weight of 100 per cent for the purposes of capital adequacy, as stipulated in Annexure 1 of the RBI circular UBD.No.POT.PCB.Cir.No.45/09.116.00/2000-01 dated April 25, 2001.
This ensures that banks continue to maintain adequate capital buffers against these exposures, thereby preserving the overall resilience of the banking sector.
Immediate Applicability
The RBI has stated that the above instructions are applicable with immediate effect. UCBs are expected to adjust their reporting, risk management, and capital adequacy calculations accordingly.
Conclusion
Through this clarification, the RBI has provided important regulatory guidance to UCBs regarding the treatment of mandated contributions for PSL shortfalls. The move supports both compliance with PSL obligations and prudent risk management, ensuring that UCBs maintain sound capital and exposure profiles while continuing to contribute to financial inclusion goals.
