The Reserve Bank of India (RBI) has been progressively refining and adapting regulatory measures for Urban Co-operative Banks (UCBs) to enhance their financial health and resilience. In its latest move, the RBI has reviewed and rationalized certain prudential norms that were put in place to ensure stability, manage risks, and improve operational flexibility for UCBs. These adjustments come with an eye on optimizing financial management without compromising the regulatory objectives.
Small Value Loans: A Shift Towards Greater Flexibility
A significant update is in the revised definition of small value loans. Originally, UCBs were required to ensure that at least 50% of their aggregate loans were small-value loans (with a cap of ₹25 lakh per borrower or 0.2% of their Tier I capital, whichever was higher). This requirement is now updated to reflect more significant flexibility, with small-value loans now defined as those with a value not exceeding ₹25 lakh or 0.4% of their Tier I capital, with a cap of ₹3 crore per borrower.
This change benefits UCBs by allowing them to increase their lending capacity for small loans while maintaining prudent risk management. The RBI continues to emphasize that UCBs should monitor the quality of their loan portfolios periodically, ensuring that they do not expose themselves to excessive risk. Although the upper limits have been raised, UCB boards can adjust their individual loan limits based on their specific portfolio behavior.
Real Estate Exposure Norms: Tightening for Financial Stability
Real estate has long been a sensitive sector for banks and co-operative banks, and the RBI has revised the prudential norms surrounding this. Under the updated guidelines, the total exposure of UCBs to housing, real estate, and commercial real estate loans is capped at 10% of their total assets, with an additional 5% allowed for housing loans to individuals that qualify under the priority sector.
Further updates specify that housing loans for individuals will be subject to a tiered cap based on the UCB’s classification, with Tier 1 UCBs restricted to ₹60 lakh per borrower, Tier 2 to ₹1.4 crore, and so on, up to ₹3 crore for Tier 4 UCBs. Importantly, housing loans to individuals not eligible for priority sector classification will be limited to 25% of total loans, while exposure to the broader real estate sector (excluding housing loans to individuals) will not exceed 5% of total loans.
These changes are designed to safeguard UCBs from overexposure to the volatile real estate market, while still enabling them to provide loans to individuals and commercial entities in this sector.
Provisioning for Security Receipts (SRs): Extended Glide Path
Another key revision is related to UCBs’ investments in security receipts (SRs) held against assets transferred to Asset Reconstruction Companies (ARCs). The RBI has extended the glide path for provisioning against these SRs by two additional years, now extending to FY2027-28. This extension provides UCBs with more time to manage their provisions without disrupting their financial health. However, any provisions that have already been made will remain intact, ensuring consistency in financial management.
