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RBI’s easing of Cooperative Banks’ Lending to Housing

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June 17, 2022

Why in news?

RBI has decided to increased the existing limits on individual housing loans provided by cooperative banks.

What is the RBI’s move about?

  • The RBI has revised upward the limits for individual housing loan extended by Urban Co-operative Banks (UCBs).
  • Along with this, the Rural Co-operative Banks (RCBs) will now be allowed to extend finance upto 5% of their total assets to commercial real estate or residential housing projects.
  • Revised limits- The limits for tier 1/tier 2 urban cooperative banks (UCBs) stood revised from ₹30 lakh/ ₹70 lakh to ₹60 lakh/ ₹140 lakh.
  • For rural cooperative banks (RCBs), the limits have been increased from ₹20 lakh to ₹50 lakh for RCBs with assessed net worth less than ₹100 crore and from ₹30 lakh to ₹75 lakh for the rest.

What is the status of Cooperative banks in India?

  • Co-operative banks are financial entities established on a co-operative basis and belonging to their members (the customers of a co-operative bank are also its owners).
  • Broadly, co-operative banks in India are divided into two categories - urban and rural.
  • Rural cooperative banks (RCBs)-  RCBs could either be short-term or long-term in nature.
  • Short-term cooperative credit institutions are further sub-divided into
    • State Co-operative Banks
    • District Central Co-operative Banks
    • Primary Agricultural Credit Societies
  • Long-term institutions are
    • State Cooperative Agriculture and Rural Development Banks (SCARDBs)
    • Primary Cooperative Agriculture and Rural Development Banks (PCARDBs)
  • Urban Co-operative Banks (UCBs)- UCBs are either scheduled or non-scheduled.
  • Scheduled and non-scheduled UCBs are again of two kinds
    • Multi-state UCBs
    • UCBs operating in single state
  • Regulation- In India, co-operative banks are registered under the States Cooperative Societies Act.
  • They also come under the regulatory ambit of the RBI under two laws
    • The Banking Regulations Act, 1949
    • The Banking Laws (Co-operative Societies) Act, 1955

The aggregate balance sheet size of these banks amounts for the 10% of the size of scheduled commercial banks. The asset size of CBs is largely dominated by RCBs with 67% of total assets.

What are the issues hampering the co-operative banks?

  • Advance to deposit ratio- The advance to deposit ratio for UCBs is around 60% at aggregate level much below scheduled commercial banks.
  • The possible reason for the lower credit base of these banks can be attributed to the
    • skewed presence of UCBs in leading states only
    • duality issues related to the regulation
    • credit ceilings into potential sector like housing
    • rising NPAs with compulsion to primary sector lending
    • expansion of banks through banking correspondents and adoption of FinTech
  • The RCBs are largely dependent on borrowings (27 % of total liabilities compared to 1% of UCBs).

As of March 2021, UCBs have net NPA ratio of 4.6 % and gross NPA ratio of 11.7 % as against the 2.8% and 8.2% for banks.

How is RBI’s move aim to be beneficial?

  • UCBs have credit exposure of about ₹3.25 billion including one-third to the MSMEs and about 8% towards the housing sector.
  • The RBI’s move to boost credit to housing sector will
    • ease credit flow
    • safeguard banks against rising NPAs through the space for secured loans
  • However, UCBs and RCBs need to improve their assets base by improving access through banking correspondents and capitalise the current opportunity of credit flow to household sector.

 

References

  1. https://www.thehindubusinessline.com/opinion/rbis-easing-of-coop-banks-lending-to-housing-is-welcome/article65534129.ece
  2. https://www.moneycontrol.com/news/business/rbi-to-roll-out-digital-lending-norms-soon-says-governor-shaktikanta-das-8699971.html

 

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