RBI’s Revised Lending Norms for Urban Co-operative Banks (UCBs)

Introduction

The Reserve Bank of India (“RBI”), through amendment directions issued on April 29, 2026, revised certain lending and exposure norms applicable to Urban Co-operative Banks (“UCBs”). These amendments seek to rationalise and liberalise aspects of the existing regulatory framework by, inter alia, revising the treatment of unsecured advances, enhancing limits relating to unsecured exposures, and increasing the permissible lending thresholds applicable to nominal members for specified categories of consumer financing.

The revised framework also grants greater operational flexibility to larger UCBs (Tier 3 and Tier 4) in relation to housing finance, while simultaneously strengthening prudential oversight through enhanced disclosure and risk management requirements.

These amendments have been incorporated into the broader regulatory framework governing concentration risk management, credit exposure norms, and financial disclosures applicable to UCBs.

Framework for Unsecured Exposure Limits

Under the revised framework, UCBs are permitted to maintain unsecured advances up to prescribed limits linked to the size of their loan portfolio and applicable regulatory conditions.

Importantly, qualifying priority sector loans up to ₹50,000 per borrower may be excluded from the computation of unsecured exposure ceilings. This exclusion is subject to compliance with conditions specified by the RBI, including eligibility requirements relating to business authorisation and regulatory compliance.

Borrower-Level Caps by Tier

To mitigate concentration risk, borrower-level caps on unsecured exposures have also been prescribed:

• Tier 1 UCBs — capped at ₹5 lakh
• Tier 2 UCBs — capped at ₹7.5 lakh
• Tier 3 and Tier 4 UCBs — capped at ₹10 lakh

Regulation of Credit Facilities Extended to Nominal Members

The revised norms prescribe limits on loans extended to nominal members for financing consumer durables and similar purposes.

Under the framework, such exposure is capped at ₹2.5 lakh per nominal member, subject to the provisions of the respective UCB’s registered bye-laws and internal credit policies.

The amendment seeks to promote greater uniformity in lending practices while ensuring that exposure to nominal members remains within prudentially acceptable risk parameters.

Tier-Based Approach to Housing Finance

The revised framework adopts a differentiated regulatory approach toward housing finance based on the categorisation of UCBs.

Tier 3 and Tier 4 UCBs

Tier 3 and Tier 4 UCBs have been granted greater flexibility to determine housing loan tenure, repayment structures, and moratorium periods through Board-approved policies and internal risk management frameworks.

Tier 1 and Tier 2 UCBs

In contrast, Tier 1 and Tier 2 UCBs remain subject to regulatory caps on housing loan tenure, including a maximum repayment tenure of 20 years.

Moratorium periods of up to 24 months continue to be permitted in specified cases involving under-construction residential housing projects, subject to applicable conditions.

Prudential Restrictions and Enhanced Disclosure Requirements

As a prudential safeguard, UCBs are generally restricted from sanctioning loans against fixed deposits maintained with other banking institutions. However, loans against deposits maintained with the lending UCB itself may continue to be permitted in accordance with applicable internal controls and regulatory conditions.

The revised directions also revisit the classification framework applicable to unsecured advances. Certain categories of exposure may qualify for differential treatment, including:

• Advances supported by legally enforceable salary deductions
• Advances backed by identifiable short-term receivables

Such differential treatment is subject to satisfaction of prescribed regulatory conditions.

In addition, the revised framework strengthens disclosure obligations and risk monitoring expectations applicable to UCBs, particularly in relation to unsecured exposures and concentration risks.

Way Forward

Urban Co-operative Banks should proactively align their internal credit policies, risk management frameworks, and operational procedures with the revised regulatory requirements.

Particular attention should be directed toward the following areas:

• Recalibrating unsecured exposure limits
• Implementing borrower-level concentration controls
• Revisiting lending practices applicable to nominal members
• Updating Board-approved housing finance policies, especially for Tier 3 and Tier 4 UCBs

UCBs should also strengthen internal monitoring systems, documentation standards, and data capture mechanisms to ensure compliance with the enhanced disclosure and prudential requirements introduced under the revised framework.

Timely implementation and continuous monitoring will be essential to ensuring regulatory compliance while enabling sustainable credit growth within the revised prudential architecture.