What changed
RBI issued the Reserve Bank of India (Urban Co-operative Banks – Interest Rates on Advances) Directions, 2025, replacing previous guidelines. Key changes include mandatory monthly rests for interest charging on all advances except agricultural loans, which follow crop-season-linked practices. The directions also emphasize board-approved transparent pricing and risk-based interest rates for small value loans.
What it means for you
UCBs must now charge interest on advances at monthly intervals, aligning with standard banking practice, but agricultural advances retain seasonal flexibility. Banks need board-approved policies to set lending rates transparently, avoiding usurious levels. For small loans, risk premium and borrower cash flow must be considered, impacting pricing and credit assessment processes.
What you must do
- Update board-approved lending rate policy to ensure transparency and avoid usurious rates.
- Implement monthly interest rests for all non-agricultural advances immediately.
- For agricultural advances, continue existing practices linked to crop seasons and long-duration crops.
- Establish prior-approval processes for small value loans, considering borrower cash flows and risk ratings.
- Display minimum and maximum interest rates at all branches.
Who it affects
Urban Co-operative Banks (UCBs), Borrowers of UCBs, especially small value loan and agricultural loan customers, Board members and credit policy teams of UCBs
Do these directions apply to all UCBs?
Yes, the directions apply to all Urban Co-operative Banks as defined under Section 5(ccv) read with Section 56 of the Banking Regulation Act, 1949.
Are agricultural advances exempt from monthly interest rests?
Yes, agricultural advances are exempt. For long duration crops, interest must be charged annually; for short duration crops and allied activities, banks can align with due dates based on harvesting seasons.
What should UCBs do for small value loans?
UCBs must have a prior-approval process for such loans, consider borrower cash flows, and set interest rates based on risk premium and security value, ensuring total cost to borrower is reasonable.