Explained: RBI's Revised Prudential Norms for Urban Co-operative Banks
The Reserve Bank of India (RBI) has introduced new guidelines to enhance the operational flexibility and financial health of urban co-operative banks (UCBs). These changes include redefining small-value loans and increasing real estate lending limits.
RbiUcbsSmallvalue LoansReal EstateFinancial HealthReal EstateFeb 27, 2025
These changes aim to provide more operational flexibility while ensuring better financial health for these lenders.
UCBs serve small borrowers, micro-businesses, and lower-income groups, and the new norms are designed to support their growth and stability.
The action on UCBs follows recent regulatory measures taken by the RBI.
Notably, the banking regulator recently superseded the board of New India Co-operative Bank and restricted withdrawals by its customers.
The RBI has since allowed withdrawals of up to Rs 25,000 per depositor.
### What RBI’s Revised Prudential Norms Mean for UCBs
The RBI's revised prudential norms are designed to enhance the financial health of UCBs while granting them greater freedom in lending.
Key changes include redefining small-value loans and increasing real exposure limits.
### Small-Value Loans Redefined
According to the new guidelines, urban co-operative lenders must ensure that at least 50% of their total assets are in the form of small loans.
Previously, the RBI recognized loans worth up to Rs 25 lakh or up to 0.2% of a lender’s Tier 1 capital, whichever was greater, as small loans under certain conditions.
The new threshold is now set at 0.4% of the bank’s total capital, with a maximum of Rs 3 crore per customer.
UCBs must meet this requirement by March 31, 2026.
All other existing rules will continue to apply, and the banks’ boards will be required to review these loans periodically and consider lowering the loan limit if necessary.
### Real Estate Lending Limits
UCBs are now allowed to lend up to 10% of their cash for disbursing loans in the real estate and commercial real estate segments.
In priority areas, a higher threshold of 15% is applicable.
The RBI has also permitted UCBs to finance a maximum of 25% of their advances for residential mortgages in non-priority sectors.
However, barring retail residential loans, such lenders can only dedicate up to 5% of their total loan portfolio to the real estate industry.
### Retail Home Loan Maximum Limits
The RBI has also specified the maximum retail home loan amounts UCBs can disburse to their customers.
The thresholds are as follows
- Tier 1 Rs 60 lakh
- Tier 2 Rs 1.4 crore
- Tier 3 Rs 2 crore
- Tier 4 Rs 3 crore
### When Will RBI’s New Rules Be Effective?
The new norms took effect from February 25.
These changes are expected to bring greater stability and operational flexibility to UCBs, ultimately benefiting their customers and the broader financial ecosystem.
Frequently Asked Questions
What are urban co-operative banks (UCBs)?
Urban co-operative banks (UCBs) are financial institutions that operate in urban and semi-urban areas. They primarily serve small borrowers, micro-businesses, and lower-income groups, offering various banking services and credit facilities.
Why did the RBI revise the prudential norms for UCBs?
The RBI revised the prudential norms for UCBs to enhance their financial health and operational flexibility. These changes aim to support the growth and stability of UCBs and the communities they serve.
What is the new threshold for small-value loans?
The new threshold for small-value loans is 0.4% of the bank’s total capital, with a maximum of Rs 3 crore per customer. UCBs must ensure that at least 50% of their total assets are in the form of small loans by March 31, 2026.
What are the real estate lending limits for UCBs?
UCBs can lend up to 10% of their cash for real estate and commercial real estate loans. In priority areas, this limit is 15%. For residential mortgages in non-priority sectors, the limit is 25% of their advances. Barring retail residential loans, UCBs can allocate up to 5% of their total loan portfolio to the real estate industry.
When did the new norms take effect?
The new norms for UCBs took effect from February 25, 2023.
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