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In a move aimed at enhancing the financial soundness and resilience of Urban Co-operative Banks (UCBs), the Reserve Bank of India (RBI) has announced key revisions to existing prudential norms. The revised guidelines provide greater operational flexibility while maintaining regulatory discipline across small-value loans, real estate exposure, and provisioning requirements for Security Receipts (SRs).
The amendments made by the RBI reflect the balanced approach to strengthening financial soundness while enabling UCBs to play a more significant role in credit distribution. Let's delve into the revised norms for the following as mentioned above:
Small-Value loans
Previously, UCBs were required to ensure that at least 50% of their loan portfolio consisted of small-value loans, defined as loans of up to Rs 25 lakh or 0.2% of Tier I capital (whichever is higher), capped at Rs 1 crore per borrower. Under the revised norms, this limit has been expanded to 0.4% of Tier I capital, with the maximum per-borrower cap raised to Rs 3 crore. However, UCBs' boards are expected to periodically assess loan portfolios and introduce lower ceilings if necessary.
Real Estate exposure limits
The RBI has eased exposure norms for real estate lending, allowing UCBs greater flexibility in granting housing loans:
"In terms of extant instructions, aggregate exposure of a UCB to housing, real estate and commercial real estate loans is capped at 10% of its total assets. The ceiling of 10% can be exceeded by an additional 5% of total assets for the purpose of granting housing loans to individuals as per the eligibility limits for priority sector classification. Further, subject to the above aggregate caps, the ceilings for individual housing loans are prescribed at Rs 60 lakh per individual borrower for Tier-1 UCBs, and Rs 140 lakh per individual borrower for all other UCBs," stated RBI in a circular issued on 24 February 2024.
Aggregate exposure to residential mortgages (excluding priority sector loans) is now capped at 25% of total loans and advances.
Real estate loans (excluding individual housing loans) are restricted to 5% of total loans and advances. The maximum permissible individual housing loan amounts have also been revised. Housing loans to individuals shall be subject to the following ceilings.
These changes will help enhance credit availability for homebuyers while mitigating concentration risks in the real estate sector.
Security Receipts (SRs)
Recognising the ongoing challenges faced by UCBs in provisioning for SRs, the RBI has extended the glide path for valuation differential provisioning by an additional two years, until FY 2027-28. This extension offers UCBs more time to comply with provisioning norms while ensuring stability in their asset recovery mechanisms.
"UCBs need to provide for the valuation differential on the SRs held against the assets transferred by them to ARCs. In this regard, a five-year glide path (till FY2025-26) was provided in respect of such SRs outstanding as of the date of issuance of MD-TLE, i.e. September 24, 2021 (‘specified SRs’)," stated RBI circular.
The revised guidelines are applicable henceforth, superseding previous instructions. The RBI has repealed certain circulars, consolidating all updates into a comprehensive regulatory framework.
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