More Professional Cooperative Banks for Push to Housing Sector : Daily Current Affairs

Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilisation of Resources, Growth, Development and Employment; Inclusive Growth and issues arising from it.

Key Phrases: UCBs and RCBs, increase credit availability; housing for all; Lack of sufficient due diligence; related lending; Lack of sufficient due diligence;

Why in News?

Recently RBI has taken following decisions:
- Doubled the exposure limit for individual housing loans by Urban Co-operative Banks (UCBs) and Rural Co-operative Banks (RCBs).
- Allowed RCBs to lend to developers for residential housing projects.
This move is welcomed but, it comes with risks.

Key Highlights

Reasons for the Decisions of RBI

To increase credit availability for housing and construction sectors.
- These sectors are critical for the economy, especially to recoup ground lost during Covid.
To reduce the cost of construction of houses and to encourage it to adjust to current times.
- Home loan rates and construction costs have risen steeply.
- The individual exposure limits last set in 2009 (for Home loans) and 2011 (construction) and hence required a change.
For more accessible credit services to these sectors.
- Due to Cooperative Banks’ last-mile reach into the hinterland, they are better placed to cater to lower-income home-buyers than mainstream banks.
For more credit options to these sectors.
- Housing Finance Companies (HFCs) are more regulated by RBI after the DHFL debacle.
- This makes banks the primary funding source for home loans.
To achieve the targets of PMAY within the stipulated time.
- 2022 is supposed to be the final year to achieve the “Housing for All” targets set under the PM Awas Yojana (PMAY, launched in 2015).
- Policymakers are keen to ensure that the credit flow to the housing sector, particularly affordable homes, doesn’t slow.
- As per RBI’s latest data, while overall bank credit to housing grew 13.7% in May 2022 (y-o-y), credit to the affordable segment grew by only 4.6%.

Do you know?

A co-operative bank is a small-sized, financial entity, where its members are the owners and customers of the Bank.
The Co-operative Banks in India are governed as per
- the Banking Regulations Act 1949 and
- Banking Laws (Co-operative Societies) Act, 1955.
These Banks have been opened with the motto of ‘no-profit-no-loss’ and thus, do not seek for profitable ventures and customers only. As the name suggests, the main objective of Co-operative Banks is mutual help.
They are regulated by the Reserve Bank of India (RBI) and are registered under the States Cooperative Societies Act.
Till the year 1996 UCBs were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
Of the total number of Cooperative Banks in India, they can be divided into two types, which can further be subdivided:
- Urban Co-operative Banks
  - Non-Scheduled UCBs
  - Scheduled UCBs
- Rural Co-operative Banks
  - State Cooperative Banks
  - District Central Cooperative Banks
  - Primary Agricultural Credit Societies
Single-State UCBs are regulated by State Registrars of Co-operative Societies (RCS) and multi-State UCBs are governed by Central Registrar of Co-operative Societies (CRCS).
By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India Act, 1934 is considered a scheduled bank.

Challenges/ Risks Involved

Lack of sufficient due diligence
- It can be speculated that these banks will not put in sufficient due diligence on the repayment capacity or end-use of funds while underwriting new borrowers.
- Monitoring end-user will prove to be tough.
  - This is particularly true of cooperative banks lending to developers for residential real estate.
Enforcing the cooperative banks' limits will prove tough due to related-party lending.
- RBI has set limits at
  - 5% of total assets for developer loans,
  - 15% of capital for individual borrowers and
  - 40% for a group
- Cooperative banks are smaller and loosely governed.
Maintaining vigil over cooperative banks may strain RBI’s regulatory capacity
- The sheer number of UCBs and RCBs (at end-March 2021, there were 98,042 cooperative banks, comprising 1,534 UCBs and 96,508 RCBs) are now falling under its ambit.

Case Study : PMC Bank

Its troubles originated from nearly half of its loan book being concentrated with a single related-party developer HDIL.
With the help of fictitious borrower accounts, it was able to conceal its violation of RBI’s prudential limits.

Steps Taken to Improve the Cooperative Banking Ecosystem

The Banking Regulation Act has been amended to give RBI complete regulatory control over co-operative banks, in place of dual regulation.
- RBI can restructure poor-performing cooperative banks. This has increased the accountability of cooperative banks.
RBI now has
- power to approve top management appointments in co-operative banks;
- tightened cooperative banks’ technology, risk management and audit functions and
- call for more frequent financial filings.

Conclusion

RBI may need to significantly augment both its manpower and technological capabilities to enforce its writ on co-operative banks. A resurgent India will require the right to adequate shelter for all, along with, ease of living for all, and hence, the recent move becomes important.

Source: The Hindu BL

Mains Question:

Q. Discuss the changes proposed by RBI vis-a-vis Home loans by Cooperative Banks and the challenges associated with it?