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The Reserve Bank of India (RBI) has revised the lending regulations for urban cooperative banks (UCBs) to provide them with greater flexibility while maintaining regulatory oversight. The definition of small-value loans has now been modified, with the maximum limit per borrower raised to INR 3 crore. Additionally, UCBs can exceed the 10% ceiling on aggregate exposure to real estate by an additional 5% for housing loans to individuals under priority sector classification. The RBI has also revised prudential limits on housing loans for different UCB tiers, with lending limits ranging from INR 60 lakh to INR 3 crore per dwelling unit. UCBs are required to ensure that at least 50% of their total loans comprise small-value loans by March 2026. These guidelines have been implemented with immediate effect.
To provide urban cooperative banks (UCBs) greater operational flexibility without compromising on regulatory goals, the Reserve Bank of India (RBI) has increased the limit on small-value loans per borrower and raised the allowable aggregate exposure of UCBs to the real estate segment. Advertisement
According to RBI directions, UCBs are required to have a minimum of 50% of their aggregate advances and loans to consist of small-value loans as of March 2026. Earlier, the definition of small loans was for loans not above INR 25 lakh or 0.2% of a UCB's Tier-I capital, whichever is greater, with a capping of INR 1 crore per account holder. The new definition thus categorizes small-value loans as those that do not exceed INR 25 lakh or 0.4% of a UCB's Tier-I capital, whichever is greater, with a ceiling of INR 3 crore per borrower.
The RBI has informed that boards of UCBs are required to review from time to time the loan portfolio behavior and quality in various categories of loan sizes and, if needed, establish lower ceilings.
In addition, the RBI permitted UCBs to exceed the 10% limit on overall exposure to housing, real estate, and commercial real estate loans by a further 5% of total assets, that is, for housing loans to priority sector classification eligible individuals.
The prudential caps on home loans of UCBs have also been updated. Tier-I UCBs can now provide loans of up to INR 60 lakh per residential unit, Tier-II UCBs of up to INR 1.40 crore, Tier-III UCBs of up to INR 2 crore, and Tier-IV UCBs of up to INR 3 crore.
Further, RBI has also clarified that the combined exposure of a UCB to housing loans, excluding those covered under priority sector classification, must not be more than 25% of total loans and advances. Likewise, combined exposure to the real estate sector, except housing loans extended to individuals, is limited to 5% of total loans and advances.
The RBI has said that the guidelines will be applicable with immediate effect.
The RBI has also prolonged the glide path for provisioning obligations under investment in security receipts (SRs) by two years to the financial year 2027-28. But any provision already made on specified SRs should still be maintained. The RBI had already prolonged the timeline to meet the minimum proportion of small-value loans in total loans and advances by two years, with the new target date set as March 2026.
The new RBI guidelines are intended to balance operational freedom for UCBs with the necessity of prudent regulatory supervision. The regulatory reforms are likely to have a major influence on lending behavior in the urban cooperative banking sector, promoting growth while ensuring risk management.
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