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New rules of a slew of notifications by Reserve Bank of India
November, 22nd 2010

Urban cooperative banks (UCBs) have been allowed to lend more freely now, especially with regard to home loans and advances to the realty sector. The new rules were part of a slew of notifications by Reserve Bank of India easing the norms last week. This is a sequel to the announcements made in the second quarter review of the monetary policy.

As per the new rules, the limit for extending housing loans as well as advances to other real estate sectors has now been linked to the total assets of a UCB. The limit has been set at 10% of the total assets, as against the earlier limit of 15% of the total deposits. An additional limit of 5% of assets has been granted for home loans up to Rs 10 lakh.

"Linking the limit to total assets will increase the available funds as these are much higher than deposits. Total assets include advances made by the bank, fixed assets, reserves as well as investments. The move is expected to boost the realty sector," said chartered accountant BC Bhartia. For banks, deposits are a liability as they have to be paid back to the depositor, while loans being a source of earning are classified as assets.

The apex bank has also doubled the limit for granting unsecured loans by UCBs. Now, borrowers will no longer have to subscribe to the shares of financially stronger UCBs before getting a loan. Earlier it was mandatory in every cooperative for a borrower to subscribe to the shares. The RBI has also relaxed norms for opening new branches and extension of area of operations for UCBs.

For banks having a capital to risk weighted assets ration (CRAR) of 9%, the limit of granting unsecured loans to a single borrower has been doubled to Rs 1 lakh to Rs 5 lakh depending on the deposit base. For banks having a CRAR below 9% the limits have been set at Rs 25,000 to Rs 2 lakh as per the deposit base. Earlier, the limit for weaker banks, which included those having a low CRAR, was kept at Rs 25,000 for those with deposits up to Rs 10 crore and Rs 50,000 for over Rs 10 crore.

Similarly, borrowers approaching a UCB having a CRAR of over 12% need not compulsorily buy its shares any more. It was mandatory for borrowers to buy shares up to 2.5 to 5% of their loans so as to provide capital to the banks. Now, banks with a higher CRAR of 12% need not go for such loan-linked capitalisation, says the RBI notification. CRAR is a benchmark of buffer capital lying with a bank as against the loans granted.

Well-managed UCBs having net worth of Rs 50 crore have also been allowed to extend their area of operations beyond the state of registration. For this, the banks should also have CRAR not less than 10%, net NPA within 5% and continuous profit for last three years.

Good banks can now also open extension counters without sending a proposal for approval, and the RBI has also asked such institutions to submit proposals to open new branches.

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