PMC Bank case fallout: RBI asks urban cooperative banks to make higher provisions for inter-bank exposures

The Reserve Bank on Friday issued fresh provisioning norms for urban cooperative banks' inter-bank exposure as well as valuation of their perpetual non-cumulative preference shares and equity warrants, directing them to continue making provisions to the tune of 20 per cent for such exposures.

The banking regulator came up with these rules in the wake of the bankruptcy of the corruption-ridden Punjab & Maharashtra Cooperative Bank (PMC) in September 2019 and the subsequent merger of the cooperative bank with Unity Small Finance Bank, which came into effect from January 25, 2022.

Earlier, similar directions were issued after the board of the largest cooperative bank was superseded by the RBI and the subsequent circulars on these matters issued on April 20, 2020 and on January 25, 2022.

"UCBs shall continue to make provisions on inter-bank exposures arising from outstanding uninsured deposits, as under the April 20, 2020 circular until the actual allotment of PNCPS (Perpetual Non-Cumulative Preference Shares)/equity warrants," the RBI said on Friday.

It also said the new norms are applicable for all Urban Cooperative Banks (UCBs) and are in force with immediate effect.

The RBI said the new circular has been warranted by the fact that UCBs have met the conditions already laid out.

The PMC Bank amalgamation scheme and the resultant caps on conversion of PNCPS and equity warrants and other inter-bank exposures had provided for conversion of outstanding uninsured deposits, including interest accrued till March 31, 2021 to the credit of the institutional depositors, into PNPCS and equity warrants of Unity Small Finance Bank as on appointed date.

"However, it is observed that the actual receipt of PNCPS and equity warrants in the account of institutional depositors is yet to take place. Therefore, it is clarified that UCBs shall continue to make provisions on inter-bank exposures arising from outstanding uninsured deposits, as under the April 20, 2020 circular until the actual allotment of PNCPS/equity warrants," the central bank said.

The regulator further said after the allotment of PNCPS/equity warrants, provisions made on exposures arising from deposits will be reversed only if such provisions are in excess of the loss, if any, due to treatment of PNCPS and equity warrants.

Equity warrants shall be valued at a price of Re 1 per warrant, it said, adding, as and when they are converted into equity shares, the valuation will be based on market prices.

Thus, at present, no provisions need to be made on investment in equity warrants.

Earlier RBI had asked all UCBs to fully provide for their investments in PNCPS and also allowed them to spread their provisions for investments in PNCPS, net of extant provisions made on exposures arising from outstanding uninsured deposits, equally over two financial years such that the entire loss is fully provided for by March 31, 2024.

Further, these PNCPS and equity warrants shall be classified as non-SLR investments and shall be exempt from any other limits as mentioned in the master circular on investments by UCBs which was issued on April 1, 2022, the regulator said.

In the April 2020 direction, the RBI had capped the exposure at 20 per cent for the next five years for UCBs for deposits placed by them under an all-inclusive directions and their non-performing exposures arising from discounted bills drawn under letter of credit issued by a UCB.

Further, if UCBs choose to convert such deposits into long-term perpetual debt instruments, which may be recognised as capital instrument under a scheme of restructuring/revival of a UCB, provision on the portion of deposits converted into such instruments shall not be required.

With PTI Inputs