- Executive Summary The Reserve Bank of India’s Master Circular for Urban Co-operative Banks (UCBs) consolidates prudential norms to manage credit risk and ensure financial stability.
- It mandates strict exposure ceilings for individual (15%) and group borrowers (25%) relative to Tier-I capital and sets specific limits for high-risk sectors like real estate and capital markets.
- The circular enforces a “Small Value Loans” target, requiring 50% of advances to be small-ticket loans by March 2026.
- Furthermore, it imposes statutory restrictions on lending to directors, their relatives, and against the bank’s own shares, while defining aggregate ceilings for unsecured advances based on the bank’s capital adequacy and size.
- General Principle and Definitions To avoid credit concentration and manage risk effectively, UCBs must fix limits on exposures to individual/group borrowers, specific sectors, and unsecured advances.
Executive Summary
The Reserve Bank of India’s Master Circular for Urban Co-operative Banks (UCBs) consolidates prudential norms to manage credit risk and ensure financial stability. It mandates strict exposure ceilings for individual (15%) and group borrowers (25%) relative to Tier-I capital and sets specific limits for high-risk sectors like real estate and capital markets. The circular enforces a “Small Value Loans” target, requiring 50% of advances to be small-ticket loans by March 2026. Furthermore, it imposes statutory restrictions on lending to directors, their relatives, and against the bank’s own shares, while defining aggregate ceilings for unsecured advances based on the bank’s capital adequacy and size.
1. General Principle and Definitions
To avoid credit concentration and manage risk effectively, UCBs must fix limits on exposures to individual/group borrowers, specific sectors, and unsecured advances.
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Tier-I Capital: Reckoned as on March 31 of the preceding financial year.
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Exposure: Includes both Credit Exposure (loans/advances) and Investment Exposure (Non-SLR securities).
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Unsecured Advances: Includes clean overdrafts, loans against personal security, and clean bills, but excludes advances backed by government guarantees or specific supply bills.
2. Exposure Norms
A. Individual and Group Borrowers
UCBs must set exposure ceilings based on their Tier-I Capital:
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Individual Borrowers: Maximum 15% of Tier-I Capital.
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Group Borrowers: Maximum 25% of Tier-I Capital.
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Note: Borrowers must bring down excess exposures (taken after March 13, 2020) to these limits. Existing term loans exceeding these limits can run to maturity, but no fresh exposure is permitted.
B. Small Value Loans (SVL)
To promote financial inclusion, UCBs must ensure a significant portion of their portfolio consists of small value loans (loans ≤ ₹25 lakh or 0.4% of Tier-I capital, max ₹3 crore).
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Target: Minimum 50% of aggregate loans must be SVLs by March 31, 2026.
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Interim Target: 40% by March 31, 2025.
C. Real Estate Exposure
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Aggregate Limits:
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Residential Mortgages (Individual): Max 25% of total loans and advances.
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Commercial/Other Real Estate: Max 5% of total loans and advances.
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Individual Housing Loan Ceilings:
Limits are tiered based on the UCB’s classification:
| UCB Tier | Maximum Loan Amount per Dwelling Unit |
|---|---|
| Tier 1 | ₹60 Lakh |
| Tier 2 | ₹1.40 Crore |
| Tier 3 | ₹2.00 Crore |
| Tier 4 | ₹3.00 Crore |
A. Individual/Group Limits
The maximum amount of unsecured advances a UCB can grant to a single borrower/group depends on the bank’s Demand & Time Liabilities (DTL) and Capital Adequacy Ratio (CRAR).
| UCB Category (by DTL) | Limit (if CRAR ≥ 9%) | Limit (if CRAR < 9%) |
|---|---|---|
| DTL up to ₹10 Crore | ₹1.00 Lakh | ₹0.25 Lakh |
| DTL > ₹10 Cr – ₹50 Cr | ₹2.00 Lakh | ₹0.50 Lakh |
| DTL > ₹50 Cr – ₹100 Cr | ₹3.00 Lakh | ₹1.00 Lakh |
| DTL > ₹100 Crore | ₹5.00 Lakh | ₹2.00 Lakh |
B. Aggregate Ceiling
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General Rule: Total unsecured advances should not exceed 10% of total assets.
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Exception for Financial Inclusion: UCBs with ≥90% of gross loans in Priority Sector may grant unsecured advances up to 35% of total assets, provided they meet specific CRAR (≥9%) and NPA (≤7%) criteria.
4. Statutory Restrictions
A. Advances to Directors and Relatives
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Strict Prohibition: UCBs are prohibited from granting loans and advances to their Directors, their relatives, or firms/companies in which they are interested.
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Exemptions:
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Regular employee loans to Staff Directors.
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Loans to Directors of Salary Earners’ Banks.
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Loans against Government Securities, Fixed Deposits, and Life Insurance Policies standing in the director’s own name.
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B. Advances against Bank’s Own Shares
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Prohibited under Section 20(1)(a) of the Banking Regulation Act, 1949.
C. Remission of Debts
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UCBs cannot remit debts due from directors or their interested parties without prior RBI approval (Section 20A).
5. Other Regulatory Restrictions
A. Loans against Shares/Debentures
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Stockbrokers: UCBs are prohibited from financing stockbrokers or commodity brokers.
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Individuals: Permitted for personal needs (not for speculation).
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Physical Shares: Max ₹5 Lakh.
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Demat Shares: Max ₹10 Lakh.
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Margin: Minimum 50%.
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Aggregate Cap: Total loans against shares must not exceed 20% of Tier-I Capital.
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B. Nominal Members
Loans to nominal members are restricted to short-term/consumer durable needs.
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Deposits up to ₹50 Cr: Max ₹50,000 per borrower.
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Deposits > ₹50 Cr: Max ₹1,00,000 per borrower.
C. Financing NBFCs
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General financing to NBFCs is restricted.
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Exception: UCBs with working capital ≥₹25 crore may finance NBFC-ICCs (Investment and Credit Companies) engaged in hire-purchase/leasing, subject to limits:
| Type of NBFC-ICC | Maximum Bank Finance Limit |
|---|---|
| ≥75% assets/income from leasing/hire purchase | 3 times Net Owned Funds (NOF) |
| Other leasing/hire purchase NBFCs | 2 times Net Owned Funds (NOF) |
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Bridge Loans: Strictly prohibited.
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Other Bank FDs: No advances allowed against Fixed Deposits of other banks.
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Defaulters of Statutory Dues: Banks must ensure borrowers have no arrears in Provident Fund or other statutory dues.
We have made the summary of the circular for the convenience of readers. We have taken all due care to get the list of the notification but to get the exact text for the notification and it’s implication we recommend readers to visit the RBI website https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=12828