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October 22, 2001
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RBI may tighten non-SLR norms for co-op sector

BS Banking Bureau

The Reserve Bank of India is expected to tighten the non-statutory liquidity ratio investment norms for the co-operative banking sector as it has been receiving complaints regarding delay and defaults by states and state bodies regarding their obligations for payment of interest/maturity proceeds.

The RBI may do this in its review of the Monetary and Credit Policy in view of the danger these bonds and loans, which more often than not are privately placed, augur in turning into non-performing assets thus aggravating the already precarious financial health of the sector.

Right now the non-SLR investment cap is pegged at 10 per cent of total lendable resources in case of both district central co-operative banks and urban co-operative banks while in case of state co-operative banks this cap stands at 5 per cent.

These caps are expected to be lowered as many co-operative banks have exceeded their limits, lured by the guarantee state governments extend to the bond issues of state government undertakings.

"Majority of the co-operative banks aggressively invest in the bond issues of state-government enterprises, attracted by the government guarantee and sometimes under political pressure. Moreover, the banks do not have an exit route once they subscribe to these issues as most of these instruments are not listed and hence run the danger of being saddled with non-performing assets," sources said.

The small co-operative banks are not equipped to assess the danger posed by government guaranteed bond issues, they said and added that the banks deem the bonds as safe.

The RBI has already expressed concern at the growing size and non-tradability of some components of the privately placed debt issues and the inadequate attention to end-use of funds, including funds raised by public enterprises, often guaranteed by central/ state governments.

The central bank could also introduce a penalty clause for banks exceeding the exposure limits set for individuals/ sectors. For example, in Maharashtra, co-operative banks have a high exposure to the sugar co-operatives and the state cotton and onion procurement schemes. Industry watchers pointed out that the excess cane crushing capacity in the state could hit the sugar mills in turn affecting the fortune of the banks.

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