The Reserve Bank of India ("RBI"), vide notification dated February 24, 2025, has reviewed, and rationalized various prudential norms for Urban Co-operative Banks ("UCBs") ("Notification") as under:
1. Increased Limit for Small Value Loans:
UCBs were previously required to ensure that at least 50% (fifty percent) of the loans sanctioned by them were 'small value loans', i.e., of a value of up to Rs. 25,00,000 (Indian Rupees twenty five lakh) or 0.2% (zero point two percent) of Tier I capital, whichever was higher, with a maximum limit of Rs. 1,00,00,000 (Indian Rupees one crore) per borrower, by March 31, 2026. The revised limits under the Notification now allow small value loans up to Rs. 25,00,000 (Indian Rupees twenty-five lakh) or 0.4% (zero-point four percent) of Tier I capital, whichever is higher, up to a maximum of Rs. 3,00,00,000 (Indian Rupees three crore) per borrower. However, the Board of UCB is required to monitor loan portfolios and it may set lower limits for certain loan categories, if necessary.
2. Revised Real Estate Exposure Norms:
The 10% (ten percent) limit of total exposure of a UCB to housing, real estate, and commercial real estate loans now stands exceeded by an additional 5% (five percent) of its total assets for housing loans granted to individuals, in line with priority sector classification eligibility as per the RBI Master Direction – Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020.
Additionally, individual housing loan limits have now been revised as follows:
|
UCB Tier |
Loan Amount (per dwelling unit) |
|
Tier 1 |
Rs. 60,00,000 |
|
Tier 2 |
Rs. 1,40,00,000 |
|
Tier 3 |
Rs. 2,00,00,000 |
|
Tier 4 |
Rs. 3,00,00,000 |
|
Note: The loan amounts are subject to the existing single borrower exposure limits. |
|
3. Aggregate Housing/ Real Estate Limits:
A UCB's total exposure to residential mortgages (excluding priority sector loans) cannot exceed 25% (twenty-five percent) of total loans and advances of such UCB. Exposure to the real estate sector (excluding housing loans to individuals) is limited to 5% (five percent) of the UCB's total loans and advances.
4. Provisioning Requirement for Investment in Security Receipts ("SRs"):
As per RBI Master Direction on Transfer of Loan Exposure dated September 24, 2021, UCBs must account for the valuation differential on SRs held against assets transferred to asset reconstruction companies. Under the Notification, the transition period for SRs outstanding as of September 24, 2021 has been extended by 2 (two) years, now lasting until FY 2027-28, provided that, UCBs must continue to maintain any provisions already made for the specified SRs.
The Notification effectively repeals the guidelines set forth in the RBI Circular – Individual Housing loans – Revised limits under four-tiered regulatory framework dated December 30, 2022 and RBI Monetary Policy Statement 2012-13 - Exposure to Housing, Real Estate and Commercial Real Estate - Primary (Urban) Co-operative Banks dated April 26, 2012.
Author's View:
The above-mentioned revisions mark a significant shift towards improving operational flexibility of UCBs. The key changes, such as the increase in the ceiling for small value loans and a revised approach to real estate exposure limits, are designed to provide UCBs with greater leeway in managing their portfolios without compromising their financial stability.
A copy of the Notification can be accessed here.
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