RBI Plans to Reopen Urban Co operative Bank Licences After 20 Years, With Tighter Safety Rules
After a pause of more than two decades, the Reserve Bank of India (RBI) has taken the first formal step toward allowing new urban co-operative banks (UCBs) to be set up again. In a discussion paper released for public feedback, the central bank said the sector has matured enough since 2004 to justify reopening licensing — but only with much stricter conditions aimed at reducing past risks.
The proposal is significant for India’s financial system because UCBs play a crucial role in serving small businesses, traders, salaried workers and local communities in cities and semi-urban areas where large commercial banks are often less present. At the same time, the RBI has made it clear that it wants fewer but stronger new banks, not a repeat of the weak institutions that caused trouble in the past.
Why UCB Licensing Was Frozen in 2004
The RBI stopped granting new UCB licences in 2004 after many newly created co-operative banks collapsed within a short period. These failures exposed deep problems in governance, capital adequacy, and management quality.
Several UCBs were found to have poor lending practices, weak internal controls and, in some cases, fraud involving directors and senior managers. Depositors suffered losses and the sector’s reputation was badly damaged.
Since then, the RBI and the government have worked to strengthen regulation, including amendments to the Banking Regulation Act. However, legal challenges and structural weaknesses in the co-operative model slowed reforms. Now, after reviewing two decades of changes, the RBI believes conditions are “more supportive” for restarting licensing — if done carefully.
What the RBI Is Proposing Now
Under the new framework outlined in the discussion paper, the RBI wants to allow large, well-run co-operative credit societies to convert into UCBs. These societies are already operating in many states but can only deal with their members and do not have full banking powers.
To qualify, a co-operative credit society must meet several strict criteria:
- Minimum operating history: At least 10 years of active operations
- Financial track record: At least five years of stable and sound performance
- Minimum capital: ₹300 crore as of March 31 of the previous financial year
- Capital strength: Capital to Risk-Weighted Assets Ratio (CRAR) of at least 12%
- Asset quality: Net Non-Performing Assets (NPA) of not more than 3%
- Trend: A positive and improving financial and operational performance over the past five years
The RBI said larger societies are more likely to have established governance systems, professional management and internal controls — all areas where small UCBs have historically failed.
Why the RBI Is Focusing on Large Co-operatives
The central bank’s analysis shows that most UCB failures between 2020 and 2025 happened in smaller banks, often due to governance breakdowns or fraud.
Although more than half of India’s UCBs are small, the bulk of deposits are held by a much smaller group of large banks. As of March 31, 2025, just 7% of UCBs held over ₹1,000 crore in deposits, but they controlled more than 62% of the sector’s total deposits. In contrast, over half of UCBs had deposits below ₹100 crore, together accounting for only 5.6% of deposits.
This concentration has convinced the RBI that bigger institutions are generally more stable and better equipped to handle shocks.
The Size and Health of the UCB Sector Today
Despite past problems, UCBs remain a significant part of India’s banking system.
As of March 31, 2025:
- Number of UCBs: 1,457
- Total assets: ₹7.38 lakh crore
- Total deposits: ₹5.84 lakh crore
The sector has also improved its balance-sheet strength. The net NPA ratio has fallen sharply from 2.66% in 2015 to 0.7% in 2025, and banks now hold a much higher provisioning coverage of over 90%, meaning they have better buffers against bad loans.
These improvements are one reason the RBI feels more confident about reopening licensing.
Governance and Capital Still Remain a Concern
Even with these gains, the RBI has warned that co-operative banks face structural limits.
One major issue is capital raising. UCBs follow the principle of “one member, one vote”, regardless of how much money a member invests. Shares are also redeemable at face value. While this supports democratic control, it makes it difficult to attract outside investors or raise large amounts of permanent capital.
The RBI also highlighted problems such as:
- Directors lacking banking and financial expertise
- Lending to people connected with board members, which is prohibited
- Legal disputes that delay regulatory enforcement
To fix this, the RBI has suggested that state co-operative laws and the Multi-State Co-operative Societies Act may need amendments to require professional and independent directors, stricter board rules and tighter limits on shareholding.
What Happens Next
The RBI has invited public comments on the discussion paper until February 13, 2026. After reviewing feedback, it is expected to publish final licensing guidelines.
If approved, India could see a new generation of urban co-operative banks — larger, better governed and more financially sound than many of their predecessors.
Conclusion
The RBI’s move to revive UCB licensing marks an important shift in India’s banking policy. By opening the door only to strong and well-capitalised co-operatives, the central bank is trying to balance two goals: expanding financial inclusion in urban and semi-urban areas while protecting depositors and the wider financial system from past mistakes. The final rules, expected after public consultation, will determine how successfully this balance is achieved.
