Urban co-operative Banks and their credit dispensation

The Reserve bank of India (RBI), being Central bank of India has stipulated various norms and guidelines for credit dispensation by primary urban co-operative bank (UCB’s). The loan policy of UCB should be in line with risk appetite and duly approved by their board of directors.  Borrowers other than micro enterprises requiring fund base working capital up to Rs.one Crore and micro and small enterprise requiring fund base working capital limits upto 5 crores may be sanctioned on the basis of projected annual turnover. Projected turnover may be interpreted as gross sales including excise duty. Working capital may be sanctioned as 25% of projected turnover with margin of borrower (self-contribution) as 5%.

The post sanctions norms like submission of monthly stock statements, calculation of DP and physical verification of stock must be strictly adhered to. The borrowers enjoying credit limit of Rs.10 crore and above component of loan and cash credit has been stipulated as 80% and 20% respectively. The guidelines say that adhoc facility may be sanctioned to borrower only after limited has been fully utilised. When borrower unit is under consortium, the quantum of individual bank share in cash credit and term loan shall be governed by single/group credit exposure. UCBS have been given liberty to charge separate Rate of interest on Cash credit and term Loan facility. UCBS have also been given liberty to decide period of both i.e. cash credit and term loan. As like inland credit facilities, UCBS have been given free hand in respect of sanction of export credit and bill limits depending upon their individual credit appetites which should be in line with their board approvals.

UCBS have been also empowered to decide rate of interest on various types of facilities taking into consideration their cost of fund, tenure of facility etc. However, It is mandatory for UCBS to be transparent in case of rate of interest for which confirmation of borrowers have been made compulsory. The repayment capacity of the borrowers is of utmost guiding factor to decide EMI. UCBS have been restricted to allow financing to borrowers already enjoying credit facility with another bank without obtaining NOC of existing bankers. To ensure this it is stipulated to obtain declaration from borrower regarding credit facility enjoyed with other bank at the time of opening current a Cash Credit amount itself.

UCBS have been allowed to open current of prospective customer in case no responses received from existing banker within 15 days. It has been made mandatory for borrowers enjoying credit facilities that they should pay provident funds payments and other statutory dues regularly. In order to ensure quick sanctions and disbursals of credit facilities, board of directors should entrust sufficient loaning powers to field functionaries like branch managers, regional managers, zonal managers and even to Chairman and Managing Director.

To ensure that loaning powers of various field functionaries are used judiciously, internal inspection and control department should be effective. Unhealthy practice of conveying sanctions orally or on telephone should be strictly avoided. In order to avoid deterioration in asset classification, post sanctioned monitoring like end use of funds, verification of stocks, periodical insurance and valuations of assets should be monitored effectively and with deviation.

Urban Cooperative banks are backbone of urban credit being instrumental in economic development in urban areas they must be given liberty for credit disbursals of course keeping in mind strict pre-sanctioned and post sanctioned guidelines.