The Reserve Bank of India has issued a revised framework for provisioning norms for standard assets held by Urban Co-operative Banks (UCBs), categorized under a new four-tier system. This framework was detailed in the circular DOR.REG.No.84/07.01.000/2022-23 dated December 1, 2022, which classifies UCBs into four tiers: Tier 1, Tier 2, Tier 3, and Tier 4, for regulatory purposes.
Previously, the provisioning norms were based on a bifurcation of UCBs into just Tier I and Tier II, as specified in the circular UBD.CO.LS.Cir.No.66/07.01.000/2008-09 dated May 6, 2009. The norms set forth at that time included different provisioning rates for various categories of standard assets:
- Direct advances to agriculture and SME sectors: 0.25%
- Commercial Real Estate (CRE) sector: 1.00%
- Commercial Real Estate-Residential Housing (CRE-RH) sector: 0.75%
- All other loans and advances: ranged from 0.25% to 0.40%, depending on the tier of the UCB.
In the updated framework outlined in the Master Circular DOR.STR.REC.5/21.04.048/2022-23 dated April 1, 2022, the RBI has decided to harmonize these provisioning norms across all tiers. This decision reflects a shift towards uniformity, likely aiming to simplify the regulatory requirements and ensure a level playing field among UCBs of different sizes and capacities. Under the new guidelines, the specific provisioning rates are as follows:
- Direct advances to agriculture and SME sectors will now uniformly require a provisioning of 0.25% of the funded outstanding on a portfolio basis.
- Advances to the CRE sector will require a uniform provisioning of 1.00% of the funded outstanding.
- For CRE-RH sector advances, the provisioning requirement is set at 0.75%.
- For all other advances, a uniform general standard asset provision of a minimum of 0.40% of the funded outstanding is mandated.
These changes aim to streamline the approach towards asset quality and risk management across the diverse landscape of UCBs, aligning them more closely with broader financial regulatory standards. The adjustment in provisioning norms is part of ongoing efforts to strengthen the financial stability of the UCB sector, ensuring they remain robust and resilient against potential financial stresses while supporting various sectors of the economy through their lending practices.
