Post New India Co-op Bank restrictions, RBI revises some lending norms for urban cooperative banks

Weeks after it superseded the board of and imposed restrictions on New India Co-operative Bank, the central bank has revised some lending norms for urban co-operative banks (UCBs), including expanding the definition of small-value loans, hiking real estate exposure limits and provisioning requirements for investment in Security Receipts (SRs).

The norms have been revised with the aim of rationalisation, “thereby allowing greater operational flexibility to UCBs without diluting the regulatory objectives,” the regulator said in a release. The revised regulations will come into effect immediately.

Earlier this month, on 14 February, RBI superseded the board of Maharashtra-based New India Co-operative Bank for 12 months, one day after imposing several restrictions, due to poor governance standards, irregularities in its lending business, material supervisory concerns and misappropriation of funds. RBI has appointed an administrator to manage the bank’s affairs and a ‘Committee of Advisors’ to assist the Administrator in discharging his duties.

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Meanwhile, RBI, which had earlier barred account holders and depositors from withdrawing money from the bank for six months, today allowed withdrawals of up to ₹25,000 from 27 February 2025 after “reviewing the bank’s liquidity position”. With this relaxation, more than 50% of depositors are estimated to be able to withdraw their entire balance.

Small-value loans

RBI has revised the definition of small-value loans as loans of less than ₹25 lakh or 0.4% of the bank’s Tier-I capital, whichever is higher, subject to a ceiling of ₹3 crore per borrower.

Small-value loans are not more than ₹25 lakh or 0.2% of Tier-I capital, subject to a maximum of ₹1 crore. As per the regulatory glide path, urban cooperative banks are required for small-value loans to comprise 50% of their aggregate advances by 31 March 2026.

“Boards of UCBs, however, shall periodically review the portfolio behaviour and quality under different loan-size categories and, where necessary, may consider fixing lower ceilings,” the release said.

Real estate exposure norms

At present, a UCB’s aggregate exposure to housing, real estate, and commercial real estate loans is capped at 10% of total assets. This ceiling can be exceeded by an additional 5% for housing loans to individuals under the priority sector classification. The ceilings for individual housing loans are prescribed at ₹60 lakh per individual borrower for Tier-I UCBs and ₹1.4 crore for all other UCBs.

RBI has now said that a UCB’s aggregate exposure to residential mortgages (housing loans to individuals), other than the priority sector, will be capped at 25% of total loans and advances. Further, aggregate exposure to the real estate sector, excluding individual housing loans, will be capped at 5%.

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Within housing loans to individuals, the loan limit for Tier-I UBCs has been set at ₹60 lakh per dwelling unit, for Tier-II UCBs at ₹1.4 crore, for Tier-III banks at ₹2 crore and tier-4 banks at ₹3 crore, subject to extant single borrower exposure limits.

Provisioning for investment in security receipts 

RBI has prescribed that UCBs must make provisions for the valuation differential on the security receipts (SRs) held against the assets transferred or sold to asset reconstruction companies (ARCs). ARCs typically buy loans in exchange for a 20% cash component, and the remaining is held as security receipts by the banks.

These prescriptions are as per the five-year glide path defined by the RBI for urban cooperative banks until FY26. The central bank has now extended the above glide path for another two years until FY28.

“However, any provisions already made for the specified SRs shall continue to be maintained,” it said.