Fallout from PMC Bank case: RBI asks UCBs to set aside higher provisions for interbank exposures

MUMBAI: The Reserve Bank on Friday issued new provisioning standards for the interbank exposure of urban cooperative banks as well as the valuation of their non-cumulative perpetual preferred shares and equity warrants, ordering them to continue to establish provisions of up to 20% for such exposures.
The banking regulator developed these rules following the bankruptcy of the corruption-ridden Punjab & Maharashtra Cooperative Bank (PMC) in September 2019 and the cooperative bank’s subsequent merger with Unity Small Finance Bank, which went into effect. effective in January. 25, 2022.
Previously, similar instructions were issued after the replacement of the board of the largest cooperative bank by the RBI and subsequent circulars on such matters issued on April 20, 2020 and January 25, 2022.
“UCBs will continue to make provisions against interbank exposures arising from outstanding uninsured deposits, as under the circular of April 20, 2020 until the effective allocation of the PNCPS (perpetual non-cumulative preferred shares) / warrants shares,” the RBI said on Friday. .
He also said the new standards are applicable to all Urban Cooperative Banks (UCBs) and are effective with immediate effect.
The RBI said the new circular was justified on the grounds that the UCBs had fulfilled the conditions already stated.
PMC Bank’s merger plan and resulting caps for the conversion of PNCPS and equity warrants and other interbank exposures had provided for the conversion of outstanding uninsured deposits, including accrued interest up to as of March 31, 2021 to the credit of institutional depositors, in PNPCS and stock warrants of Unity Small Finance Bank on the date of appointment.
“However, it is observed that the actual receipt of PNCPS and equity warrants on the account of institutional depositors has not yet taken place. Therefore, it is specified that UCBs will continue to make provisions on the interbank risks arising from outstanding uninsured deposits, as provided for by the circular of April 20, 2020 until the effective allocation of the PNCPS/equity warrants”, indicated the central bank.
The regulator further stated that after the allocation of the PNCPS/equity warrants, the provisions made on the exposures resulting from the deposits will only be canceled if these provisions exceed the loss, if any, due to the processing of the PNCPS and stock warrants.
Equity warrants will be valued at a price of 1st per warrant, he said, adding that as they are converted into equity, valuation will be based on market prices. market.
Thus, to date, there is no need to constitute a provision on investments in share subscription warrants.
Previously, the RBI required all UCBs to fully cover their investments in PNCPS and also allowed them to split their provisions for investments in PNCPS, net of existing provisions made on exposures arising from outstanding uninsured deposits. , also over two fiscal years, so that the total loss is fully provisioned as of March 31, 2024.
In addition, these PNCPS and equity warrants will be classified as non-SLR investments and will be exempt from any other limits mentioned in the main circular on investments by UCB which was published on April 1, 2022, the regulator said.
In the April 2020 direction, the RBI had capped the exposure at 20% for the next five years for UCBs for the deposits they place under an all-inclusive direction and their non-performing exposures arising from bills discounts drawn under an issued letter of credit. by a UCB.
Furthermore, if the UCBs choose to convert these deposits into long-term perpetual debt instruments, which can be recognized as a capital instrument within the framework of a restructuring/revival plan of a UCB, no provision on the part of the deposits converted into such instruments is required.

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