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