More professional cooperative banks

RBI’s move to double the limit for individual housing loans from urban cooperative banks (UCBs), and allow rural cooperative banks (RCBs) to finance residential real estate products to help credit flow to the housing sector is rational. Robust governance in these banks, often under the thumb of politicians, must go hand in hand. Housing prices have been up since the limits were last revised for UCBs in 2011 and RCBs in 2009. The limits for Tier 1/ Tier 2 UCBs now stand at Rs60 lakh and Rs1.40 crore, respectively. The maximum housing loan to an individual by a cooperative bank could even be linked as a certain proportion of its Tier 1 capital for risk mitigation. The norm that RCBs — state cooperative banks and district central banks – can lend to commercial real estate projects only within the existing aggregate housing finance limit of 5% their total assets makes eminent sense.

UCBs played a vital role in spreading the reach of formal finance to the unbanked. But failures were routine, leaving many depositors at risk. Now, RBI oversees UCBs in the same way as other banks. Rightly, strengthening regulatory oversight will change the way these banks operate. At end-March 2021, there were 98,042 cooperative banks, comprising 1,534 UCBs and 96,508 RCBs. But their market share has been declining. The aggregate balance-sheet size stood at Rs 18.8 lakh crore at end-March 2020, close to 10% of the scheduled commercial bank balance sheet. And the gross non-performing assets (NPAs) ratio of all UCBs stood at 11.7% in 2020-21.

These banks must undertake proper credit appraisals to ensure they have recourse to recover loans. Having a sound risk management plan and strengthening the internal audit process is a must for them to stay in business.


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