RBI/2004/53
Ref. UBD. No. BPD.PCB.Cir. 34 /13.05.00/2003-04.
The Chief Executive Officers of all
Primary (Urban) Co-operative Banks
Dear Sir/Madam,
Maximum Limit on advances – Limits on credit Exposure to Individual/group of
borrowers - Computation of capital funds.
Please refer to para 2(ii) of circular UBD No. DS 4/13.05.00/2000-01
dated August 25, 2000 read with circular UBD No. DS.PCB.Cir.25/13.05.00/2000-01
dated January 18, 2001. Also please refer to para (b) 2.1 of Circular UBD No.
POT. PCB. Cir. No. 45/09.116.00/2000-01 dated April 25, 2001 in connection with
Capital Adequacy Norms to Urban (Primary) Co-operative Banks.
2. A number of banks have sought clarification in regard to
the reserves/funds, which should be included for arriving at the Capital Funds/Free
Reserves/Tier I capital. We have examined such references and advise that for
a fund to be included in the Capital Fund, the fund/reserve should satisfy the
under noted two criteria,
- The reserve/fund should be created as an appropriation of profit and
- It is a free reserve i. e. not a specific reserve.
For example, if the contingency fund has been created out of
the appropriation of profit and not a earmarked/specific fund, it will be eligible
for inclusion in Capital Fund. However if the same has been created not by appropriation
of profit, but by a charge on the profit, then this fund is in effect a provision
and hence will be eligible for being reckoned only as Tier II capital subject
to a limit of 1.25% of risk weighted assets, provided it is not attributed
to any identified potential loss or diminution in value of
an asset or a known
liability. In view of the above, it is clarified that the funds
like Centenary Celebration Fund, Dividend Equalisation Fund and Members uplift
Fund; etc may not be included in the Capital Fund as they are earmarked for
specific purpose.
3. Please acknowledge receipt of this circular to our Regional
Office.
Yours faithfully,
(S. Karuppasamy)