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.


  • 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?