Co-operative Now the New Destination for Home Loan

By: addi vardhaman
Co-operative banks will recently join the queue of providing housing finance. Soon, they will provide loans for small portion of the property value. The apex bank of Indian banking system Reserve Bank of India (RBI) has linked the risk weight on housing finance provided by co-operative banks to the loan-to-value ratio of the advance extended.

For housing finance up to Rs 30 lakh and below 75% of the value of the property the cooperative banks will need to set aside only 50% of the capital they are required to maintain earlier. If the loan amount is more than Rs 30 lakh in absolute terms but still less than 75% of the property value, the capital requirement will be 75% of the financial requirement. But in case of banks providing loans for more than 75% of LTV, there is no relief in capital adequacy requirement.

For all banks, the amount of capital they are required to set aside for each home loan is decided by the minimum capital adequacy ratio(MCAR) prescribed by the apex bank (RBI). Capital adequacy ratio is the ratio between the bank's net worth and its risk-weighted credit exposure. The net worth is the money in circulation and the risk weightage is the ratio that determines the credit risk involved in a particular loan asset.

Although capital adequacy ratio is fixed at a flat rate of 10% for all banks, RBI reduces the capital requirement by increasing or reducing the risk weightage for home loans. For example, for home loans up to Rs 30 lakhs will have the risk weightage of 50%.This signifies that banks will need to set aside only 50% of the capital they keep aside for loan disbursement with a 100% risk weightage. Now, RBI increases or reduces the risk weightage depending on its perception of risk involved in the sector of lending. If there is higher risk weightage, the loss of reduced value in the event of a default. It also discourages lending to that sector, as pouring more money will make it capital intensive.

This step of RBI will cater to the needs of the rural mass to a great extent. In the absence of public sector and private sector banks, these folk will now easily access the home loan. The central bank has also relaxed branch and ATM licensing for co-operative banks if they maintain a minimum CRAR of 10% on a continuous basis. The co-operative banks also need to have net non performing assets of less than 10% and should have made a profit in the previous year.

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