Question

Urban Co-operative Banks (UCBs) are required to fix exposure limits for individual borrowers to mitigate credit risk. If a UCB, after assessing its financial position, calculates that its Tier-I capital for the preceding financial year is ₹50 crore, what would be the maximum amount that the bank can expose to an individual borrower under the prescribed norms?

Q: Answer-Urban Co-operative Banks (UCBs) are required to fix exposure limits for individual borrowers to miti...

Under the exposure norms for UCBs, the maximum exposure to an individual borrower cannot exceed 15 of the banks Tier-I capital. In this case, 15 of 50 crore amounts to 7.5 crore. However, to comply with the 15 cap, the maximum exposure the bank can take to a single borrower is 5 crore. This ensures that the bank doesnt over-concentrate its exposure to one entity, thereby managing its credit risk effectively.