Review and Rationalization of Prudential Norms for UCBs
The Reserve Bank of India (RBI) has periodically introduced prudential norms for Urban Co-operative Banks (UCBs) to enhance their financial stability and resilience. These norms help reduce credit concentration risks, manage exposure to sensitive sectors, and strengthen provisioning requirements for riskier assets. Key aspects of these norms include small value loans, housing and real estate exposure ceilings, and provisioning requirements for investments in Security Receipts (SRs).
To provide greater operational flexibility to UCBs while maintaining regulatory objectives, RBI has reviewed and rationalized these norms, as outlined below:
- Small Value Loans
As per the March 13, 2020 circular (updated on July 25, 2024), UCBs must ensure that at least 50% of their total loans fall under small value loans by March 31, 2026. Earlier, such loans were defined as those not exceeding ₹25 lakh or 0.2% of Tier I capital (whichever is higher), with a maximum cap of ₹1 crore per borrower.
Now, this definition has been revised to ₹25 lakh or 0.4% of Tier I capital (whichever is higher), with a maximum cap of ₹3 crore per borrower. However, UCBs’ Boards must regularly review loan portfolio quality and may set lower ceilings if required.
- Real Estate Exposure Norms
Previously, UCBs’ aggregate exposure to housing, real estate, and commercial real estate was capped at 10% of total assets, with an additional 5% allowance for priority sector housing loans. The new limits are as follows:
Housing loans to individuals (non-priority sector): Cannot exceed 25% of total loans and advances.
Other real estate sector exposure: Capped at 5% of total loans and advances.
The maximum loan amount per borrower has also been revised:
UCB Tier Loan Limit (₹)
Tier 1 ₹60 lakh
Tier 2 ₹1.40 crore
Tier 3 ₹2 crore
Tier 4 ₹3 crore
- Provisioning for Security Receipts (SRs)
UCBs must provision for valuation differentials on SRs held against assets transferred to Asset Reconstruction Companies (ARCs). A five-year glide path for these provisions, originally set to end in FY2025-26, has been extended to FY2027-28. However, existing provisions must be maintained.
- Repeal and Implementation
These revised norms supersede existing regulations, effective immediately. Circulars consolidated in the Annex are repealed.
