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? Read the following passage and answer the next 4 questions (Q11-Q14) Urban Co-operative Banks (UCBs), vital players in the urban and semi-urban financial ecosystem, must adhere to strict exposure norms recently outlined in the Master Circular on Exposure Norms and Statutory / Other Restrictions – UCBs issued by the Reserve Bank of India (RBI). The circular highlights the importance of risk management to mitigate over-concentration of credit risk and secure the financial health of UCBs. According to the circular, UCBs are required to limit their exposure to individual and group borrowers based on their Tier-I capital. Additionally, specific sectoral limits, such as exposure to the real estate and commercial real estate sectors, are enforced to prevent excessive risk-taking. The circular also emphasizes statutory and regulatory restrictions related to unsecured advances and lending practices, thereby aligning UCBs' operations with robust risk management principles. UCBs are expected to comply with these guidelines to ensure stability and prevent the adverse impact of concentrated exposures on their financial position. Failure to adhere to these limits can result in regulatory action and penalties, underlining the importance of these measures.Solution
Under the exposure norms for UCBs, the maximum exposure to an individual borrower cannot exceed 15% of the bank’s 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 doesn’t over-concentrate its exposure to one entity, thereby managing its credit risk effectively.
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