Summary of this article
RBI sets 20 per cent ceiling on unsecured UCB loans.
Tier-based home loan norms, flexible moratorium, risk policies.
Lending to nominal members allowed, with stricter disclosures.
The Reserve Bank of India (RBI) has proposed major changes in lending norms for Urban cooperative banks (UCBs). These relate to ceiling on unsecured loans, regulations on tier-based housing loans, and lending to nominal members and increased transparency in financial statements. The norms are suggested to be effective from October 1, 2026, or sooner if adopted in its entirety by a UCB.
The three draft directions are interrelated and must be adopted together if a UCB chooses early implementation. They are currently open to public comments before being finalised.
Aggregate Cap On Unsecured Loans
One of the most important proposals in these directions is the revision of aggregate ceiling on unsecured loans. Unsecured advances granted by a UCB to its members must not exceed 20 per cent of its total loans and advances, based on the audited balance sheet as on March 31 of the previous financial year.
Unsecured advances are defined as loans which are not covered by the realisable value of security, either primary or collateral. The draft clarifies that the realisable value must be assessed on a realistic basis.
Certain facilities will be counted as unsecured advances. These include clean overdrafts, loans only supported by personal guarantees, clean bills purchased or discounted, cheques purchased and withdrawals allowed against cheques sent for collection. At the same time, advances against inland D/A bills with usance up to 90 days will not pass as unsecured. Advances against receivables will also not be classified as unsecured so long as the receivables are not more than 30 days overdue.
The draft allows more unsecured lending beyond the 20 per cent ceiling only in case of priority sector eligible loans with a monetary cap of Rs 50,000 per borrower.
Individual unsecured loans limits are also specified based on the tier of the UCB. Tier 1 UCBs are allowed to give unsecured advances up to Rs 5 lakh per borrower. Tier 2 UCBs can lend up to Rs 7.50 lakh and Tier 3 and 4 UCBs can lend up to Rs 10 lakh per borrower. These limits work within the total 20 per cent aggregate limit.
Tier-Based Changes In Home Loan Norms
For Tier 1 and Tier 2 UCBs, the tenure of housing loans would continue to be capped for a period of 20 years, including the moratorium period. For Tier 3 and Tier 4 UCBs, the same, including moratorium, may be fixed as per the policies of the board on a case-by-case basis.
The draft recommendations also suggest that the credit policy of each UCB must define risk management and pricing policies for home loans in consideration of, among other factors, the life expectancies of borrowers and the relative longer duration of housing exposures.
The draft has also changed moratorium norms. Moratorium may be permitted in case of housing loans extended for construction of houses. It will, however, not be allowed for loans taken to purchase already-built houses.
For Tier 1 and Tier 2 UCB, the moratorium period, cannot not exceed 18 months from the date of first disbursement or from the date of obtaining the completion or occupancy certificate whichever is later. Tier 3 and Tier 4 UCBs can choose moratorium periods in the whole loan tenure, as per their board approved policies.
Lending To Nominal Members And Disclosure Requirements
The amendments also proposed changes to rules relating to lending to nominal members. A UCB can make loans to nominal members only under its by-laws which have an enabling provision so as to comply with the state co-operative laws.
Loans for purchase of consumer durables are allowed to the nominal members up to Rs 2.50 lakh per borrower. Loans against fixed deposit receipts, gold and silver ornaments, life insurance policies and government securities may also be extended within limits dictated by the bank's policy which is passed by the board.
In addition, the draft provides specific disclosure requirements in financial statements. UCBs will have to disclose the aggregate value of unsecured advances sanctioned during the year, and outstanding as on March 31. They are required to report unsecured advances of ticket sizes up to Rs 50,000 qualifying as priority sector loans.
The percentage of unsecured advances, excluding these small priority sector loans, in relation to the total loans and advances must be disclosed. UCBs will also need to report unsecured advances, which are considered special mention accounts and non-performing assets, and the provisions held against them.
