RBI overhauls concentration risk framework for Urban Co-operative Banks

The Reserve Bank of India has significantly refined the prudential framework applicable to Urban Co-operative Banks (UCBs) through the Urban Co-operative Banks – Concentration Risk Management Directions, 2025, and subsequent Amendment Directions dated 10th February 2026. These measures are intended to align UCB lending practices with their capital base, reduce concentration of exposures, and introduce a more risk-sensitive definition of unsecured advances.

The 2025 Directions lay down caps on exposures to single borrowers and groups, mandate a minimum share of small-ticket loans in the advance book, and tighten norms relating to real estate, housing and unsecured advances. The 10th February 2026 amendments further recalibrate the regime by:

  • Recasting the definition of “unsecured advances” based on realisable value of security
  • Clarifying the treatment of clean overdrafts, bills, receivables and salary-linked advances
  • Modifying the overall ceiling on unsecured loans and advances
  • Introducing a stricter outer limit on the period for which “nominal members” can borrow
  • Aligning salary earners’ UCB lending limits with a separate set of RBI Directions

These changes collectively seek to enhance risk discipline in UCBs while still supporting financial inclusion, especially through calibrated relaxations for small-value and priority sector exposures.

Core framework under the 2025 Concentration Risk Management Directions

Purpose and scope of the Directions

The Urban Co-operative Banks Concentration Risk Management Directions, 2025 were issued to consolidate and strengthen the prudential norms applicable to UCBs in relation to concentration risk arising from:

  • High exposure to individual borrowers
  • Large exposures to connected groups
  • Skewed lending portfolios, including excessive exposures to specific sectors such as real estate and housing
  • Disproportionate reliance on unsecured lending

The Directions are applicable to UCBs and require them to put in place robust, Board-approved policies for managing and monitoring concentration risks across their credit and investment portfolios.

Exposure ceilings linked to Tier-I capital

To prevent excessive risk build-up in a few relationships, the Directions impose quantitative caps on exposures, calibrated with reference to Tier-I capital. In particular, UCBs must:

  • Limit exposure to a single borrower to 15% of Tier-I capital
  • Restrict exposure to a group of connected borrowers to 25% of Tier-I capital

These limits apply not only to regular credit exposures but also to non-SLR investments, ensuring that both loan and investment books are prudently diversified. UCBs must frame and implement policies for assessing connected borrower groups and monitoring compliance with these ceilings on an ongoing basis.

Portfolio granularity and small-value advances

To reduce concentration in a small number of large accounts, the Directions emphasise granularity in the advances portfolio. UCBs are required to ensure that:

  • At least 50% of their total advances consist of small-value loans

This thrust ensures that UCBs remain focused on retail and small business segments, which are more aligned with their traditional co-operative character and local development role. It also mitigates the risk of large-ticket defaults destabilising the balance sheet.

Sectoral restrictions: real estate, housing and unsecured advances

The Directions also introduce tighter exposure limits for certain sensitive segments, particularly:

  • Real estate financing
  • Housing-related exposures
  • Unsecured advances

While the Directions recognise the need for financial inclusion and support for housing, they simultaneously call for stricter prudential control in these riskier categories.