The Reserve Bank of India (RBI) has asked urban co-operative banks (UCBs) to refrain from lending to public sector undertakings (PSUs) as it "dilutes the cooperative character of UCBs."

The banking regulator has instead directed UCBs to focus on small ticket lending to low and middle income groups (retail borrowers), farmers and small businesses. However, the RBI has not defined what a large value loan is.

"UCBs are advised, as a matter of principle, generally not to grant large value loans to public sector or government undertakings," RBI said in a letter to UCBs.

Further, in a notification released on Wednesday, the apex bank said, "As you are aware, UCBs are meant primarily to meet the credit needs of the society by providing loans and advances to low/middle income groups (small borrowers), agriculture and small businesses for furthering the cause of cooperation. Grant of high-value loans to PSUs is not consistent with the co-operative principles and dilutes the cooperative character of UCBs."

The move is aimed at keeping in check the lending activities of UCBs which, the RBI observed, have been sanctioning large ticket loans to state-run firms by admitting them as nominal members.