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October 22, 2001
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RBI lifts ban on UCB lendings to individuals against shares

The Reserve Bank of India has withdrawn its earlier ban on urban co-operative banks in respect of lending funds to individuals against security of shares.

As the central bank introduced its off-site monitoring system for the scheduled UCBs, it has now proposed to allow these banks to grant loans to individuals against security of shares, subject to certain norms, which include a limitation of loans up to Rs 500, 000 if the security is in physical form and up to Rs 1 million, if the security is in demat form.

Aggregate of all such loans should be within the overall ceiling of 20 per cent of the owned funds of the banks and margin of 40 per cent should be maintained in all cases of such loans. UCBs should also put in place a risk management system before accepting shares as security.

The management and audit committee should ensure that all loans against shares are made only to those individuals who are not in any way connected with any stock broking activity or firms.

Also, UCBs should be refrained from making any direct investments in either primary or secondary market under any circumstances.

Considering problems faced by small UCBs in adhering to the time schedule in achieving the prescribed levels of statutory liquidity ratios holding, the RBI has modified the time frame for both scheduled and non-scheduled UCBs

For scheduled UCBs, the time frame to achieve 20 per cent SLR holding from the current level of 15 per cent has been extended from the earlier proposal of March 31, 2002, to September 30, 2002.

However, RBI asked these banks not to bring down their present level of SLR holding in government and other approved securities as a proportion of their net demand and time liabilities.


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