RBI has done right by co-operative banks in raising their home loan limits but it needs to monitor them closely
Reserve Bank of India’s decision to double the exposure limit for individual housing loans by urban co-operative banks (UCBs) and rural co-operative banks (RCBs) and to allow RCBs to lend to developers for residential housing projects, is to be welcomed though it comes with risks. Upbeat housing and construction sectors are critical for the economy to recoup ground lost during Covid. With both home loan rates and construction costs rising steeply, the individual exposure limits last set in 2009 and 2011 were also overdue for revision. Co-operative banks, with their last-mile reach into the hinterland, are better-placed to cater to lower income home-buyers than mainstream banks. RBI’s tighter regulation of Housing Finance Companies (HFCs) after the DHFL debacle has also caused a shakeout among HFCs, making banks the primary funding source for home loans. With 2022 supposed to the final year for the achievement of the “Housing for All” targets set under the PM Awas Yojana, policymakers must also be keen to ensure that the credit flow to the housing sector particularly affordable homes, doesn’t slow. RBI’s latest data showed that while overall bank credit to housing grew 13.7 per cent in May 2022 compared to the previous year, credit to the affordable segment grew by only 4.6 per cent.
But opening up new avenues for co-operative banks to expand their real estate presence does carry its risks and RBI may need to exercise added vigilance to protect depositor interests. For one, there’s the question of whether these banks will put in sufficient due diligence on the repayment capacity or end-use of funds while underwriting new borrowers. Though RBI has listed out both eligible categories of borrowers and types of projects eligible for UCB/RCB loans, monitoring end-use may prove to be tough. This is particularly true of co-operative banks lending to developers for residential real estate. Two, though RBI has set limits at 5 per cent of total assets for developer loans, 15 per cent of capital for individual borrowers and 40 per cent for a group, enforcing these limits on the smaller, loosely governed co-operative banks may prove tough, as related party lending is commonplace. PMC Bank’s troubles originated from nearly half of its loan book being concentrated with a single related-party developer HDIL. Though the bank clearly violated RBI’s prudential limits, it was able to conceal this through the creation of fictitious borrower accounts.
RBI may believe that risk of such malpractices is lower after the significant tightening of its regulatory framework for co-operative banks. In the past year, the Banking Regulation Act has been amended to give RBI complete regulatory control over co-operative banks, in place of dual regulation. RBI now has powers to approve top management appointments in co-operative banks, has tightened their technology, risk management and audit functions and called for more frequent financial filings. But given the sheer number of UCBs and RCBs (estimated to be over 1,500 and 97,000 respectively in 2020) now falling under its ambit, maintaining vigil over them may strain RBI’s regulatory capacity. It may need to significantly augment both its manpower and technological capabilities to enforce its writ on co-operative banks.
Published on June 12, 2022