In a major regulatory relief for Urban Co-operative Banks (UCBs), the Reserve Bank of India (RBI) has revised its large exposure framework by exempting specific contributions made towards priority sector lending (PSL) shortfalls from prudential exposure limits.
The move is expected to provide greater operational flexibility to UCBs while ensuring smoother compliance with PSL targets.
As per the latest circular issued by the RBI on June 9, 2025, contributions made by UCBs to eligible funds maintained with institutions such as NABARD, NHB, SIDBI, and MUDRA Ltd., on account of non-achievement of PSL targets, will not be counted towards the prescribed exposure limits for a single borrower (15% of Tier-I capital) or a group of borrowers (25% of Tier-I capital).
Earlier, such deposits were included while computing these limits, often restricting the banks’ ability to meet PSL obligations without breaching exposure norms.
While the exemption eases exposure compliance, the RBI has clarified that such contributions will attract a 100 percent risk weight for the purpose of capital adequacy. These exposures will fall under the category of ‘all other assets’ in line with the RBI’s existing guidelines issued on April 25, 2001, for the application of capital adequacy norms to UCBs.
The revised norms are effective immediately and aim to balance regulatory discipline with operational convenience for UCBs. This relaxation will help UCBs meet their PSL requirements without being constrained by exposure ceilings, thereby supporting credit flow to priority sectors.
Banking analysts believe this step will not only ease stress on the cooperative banking sector but also ensure that banks continue contributing to developmental sectors like agriculture and small industries without compromising on regulatory compliance.
The RBI’s move reflects its intent to make the cooperative banking sector more resilient and adaptive to the changing credit environment, say experts.