Explained: What RBI’s revised prudential norms mean for urban co-operative banks

The Reserve Bank of India (RBI) has revised certain rules and guidelines for urban co-operative banks (UCBs)—or financial institutions operating in urban and semi-urban areas—in a bid to grant more operational flexilibty to such lenders. UCBs offer banking services to small borrowers, micro-businesses and lower-income groups. Among major changes, the RBI has enhanced the definition of small-ticket loans and hiked real exposure limits for such lenders.

The action on UCBs comes weeks after the banking regulator superseded New India Co-opearting Bank’s board while restricting it from issuing withdrawals to its customers. The RBI recently allowed the co-operative bank from withdrawals of up to Rs 25,000 per depositor.

Add Zee Business as a Preferred Source

What RBI’s revised prudential norms mean for UCBs

The RBI aims to enhance such banks’ financial health while granting them greater freedom in lending.

Small-value loans redefined

As per the RBI guidelines, urban co-operative lenders will have to ensure at least 50 per cent small loans in their total assets. Until now, the RBI recognised loans worth up to Rs 25 lakh or up to 0.2 per cent of a lender’s Tier 1 capital to a maximum of Rs 1 crore per customer, whichever is greater, as small loans under certain conditions.

Now, the RBI has changed this threshold to 0.4 per cent of the bank’s total capital and up to RS 3 crore per customer.

These banks will have to meet this requirement by March 31, 2026.

All other existing rules will continue to apply normally. Such banks’ boards will be required to review these loans periodically and consider lowering the loan limit, if needed.

Real estate

Such banks can only lend up to 10 per cent of their cash for disbursing loans in the real estate and commercial real estate segments. In priority areas, a higher threshold of 15 per cent is applicable.

The RBI has permitted urban co-operative banks to finance a maximum of 25 per cent of their advances for residential mortgages in non-priority sectors. Barring the retail residential loans, such lenders can only dedicate up to 5 per cent of their total loan portfolio to the real estate industry.

Retail Home Loan Maximum Limit

According to the RBI, UCBs will be allowed to disburse residential housing loans to retail customers with the following thresolds:

When will RBI’s new rules be effective?

The new norms took effect from February 25.