UCBs advised not to lend against shares

By Our Special Correspondent

MUMBAI, APRIL 19. The Reserve Bank of India Governor, Dr. Bimal Jalan, today said the co-operative sector was vital and it had to play an important role in the economic development of the nation.

Answering a question on the recent pay-order scam involving the Ahmedabad based Madhavpaura Mercantile Co-operative Bank, Dr. Jalan said, some co-operative banks' misdeeds would not reduce the importance of the co-operative sector. ``It is a large sector, very important and serves the local purpose,'' Dr. Jalan said, adding, ``Our hope is that it should become strong, safe and protects the investors.''

In the light of the recent experience, one of the options that deserves to be seriously considered is the setting up of a new apex supervisory body which can take over the entire inspection or supervisory functions in relation to the scheduled and non- scheduled urban co-operative banks (UCBs). This apex body could be under the control of a separate high level supervisory board consisting of representatives of the Central and State governments, the RBI as well as experts and it might be given the responsibility of inspection and supervision of UCBs and ensuring their conformity with prudential, capital adequacy and risk management norms laid down by the RBI.

The UCBs are advised not to entertain any fresh proposals for lending directly or indirectly against security of shares either to individuals or any other entity. They are also advised to unwind existing lending to stockbrokers or direct investment in shares at the earliest.

Their borrowings in the call money market on a daily basis should not exceed 2 per cent of their aggregate deposits as at end-March of the previous financial year. As a safety precaution, the UCBs have been advised not to increase their term deposits with other UCBs. With effect from April 1, 2003, the scheduled UCBs will need to maintain their entire SLR assets of 25 per cent of NDTL only in government and other approved securities.

All scheduled and large UCBs are to maintain investments in government securities only in SGL accounts with the RBI or in constituent SGL accounts of public sector banks and primary dealers.

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