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Cooperative banks told not to give large loans to PSUs

LiveMint logoLiveMint 28-05-2014 Dinesh Unnikrishnan

Mumbai: The Reserve Bank of India (RBI) on Wednesday asked urban cooperative banks (UCBs) to stop sanctioning large loans to state-run companies, saying such lending went against their original mandate of funding small borrowers.

“It has been observed that a few UCBs have been sanctioning high value loans to public sector undertakings (PSUs) by admitting them as nominal members or otherwise,” RBI said in a notification posted on its website.

“UCBs are advised, as a matter of principle, generally not to grant large value loans to public sector/government undertakings,” said RBI.

Co-operative banks have faced criticism in the past for their alleged nexus with local politicians. In recent years, RBI has taken a tough stance towards cooperative banks, asking them to cut bad loans, improve governance practices and build up a minimum capital base.

RBI has also cancelled the licences of several cooperative banks for breach of norms.

The primary function of cooperative banks is to help meet the credit needs of society by providing loans and advances to small borrowers, agriculture and small businesses, RBI said. This meant that granting high value loans to PSUs diluted the cooperative character of UCBs.

“This is an act of caution from the central bank to safeguard the interest of the depositors,” said Jayanta Sinha, an independent banking consultant and a former chief general manager at State Bank of India.

“The cooperative banks have a mandate to lend to small borrowers. RBI may not be comfortable with them moving away from that original mandate,” said Sinha. Also, the pile of stressed assets in the books of some cooperative banks and possible concentration risk on their books following lending to specific entities too might have caused worry to the regulator, Sinha said.

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