Greater operational freedom: RBI revises loan exposure limits for UCBs, sets 25% cap on housing loans

The Reserve Bank of India (RBI) on February 24 announced that Urban Co-operative Banks (UCBs) must ensure their total exposure to housing loans for individuals does not exceed 25% of their total loans and advances. The move is intended to provide these lenders with greater operational freedom while maintaining regulatory oversight.  

Under the existing guidelines, UCBs' total exposure to housing, real estate, and commercial real estate loans is capped at 10% of total assets, with an additional 5% allowance for housing loans to individuals. The new prudential norms aim to enhance flexibility without diluting regulatory objectives.  

"On a review, it has been decided to revise the definition of small value loans as loans of value not more than Rs 25 lakh or 0.4 per cent of their Tier I capital, whichever is higher, subject to a ceiling of Rs 3 crore per borrower," the RBI stated.  

Currently, UCBs must ensure that by March 31, 2026, at least 50% of their total loans are small-value loans — capped at Rs 25 lakh or 0.2% of their Tier I capital, whichever is higher, with a maximum limit of Rs 1 crore per borrower.  

Additionally, the RBI has mandated that UCBs' total exposure to the real estate sector, excluding individual housing loans, must not exceed 5% of their total loans and advances.  

The central bank has also classified UCBs into four tiers based on their deposit size:  

• Tier 1: Unit UCBs, salary earner’s UCBs, and those with deposits up to Rs 100 crore.  
• Tier 2: UCBs with deposits between Rs 100 crore and Rs 1,000 crore.  
• Tier 3: UCBs with deposits between Rs 1,000 crore and Rs 10,000 crore.  
• Tier 4: UCBs with deposits exceeding Rs 10,000 crore.  

The minimum Capital to Risk-Weighted Assets Ratio (CRAR) for UCBs ranges from 9% to 15%, with Tier-4 UCBs required to follow Basel III norms.