RBI Proposes Resuming Licences For Urban Co-operative Banks After Two Decades

The Reserve Bank of India (RBI) on Tuesday proposed resuming the issuance of licences for new Urban Cooperative Banks (UCBs), after a gap of over 20 years. In this context, RBI has released a discussion paper that outlines the regulatory framework, eligibility conditions and safeguards which would apply if licensing is reintroduced.

Licensing of new UCBs has been in abeyance since 2004. The decision to put on hold news licences was taken after the regulator found that a large number of newly licensed UCBs turned financially weak within a short period of commencing operations. The central bank has since focused on strengthening the sector through tighter supervision, consolidation, and the exit of unviable entities.

Background to the Proposal

In October last year, RBI Governor Sanjay Malhotra had stated that the central bank was considering the reopening of UCB licensing in view of improvements in the sector over the past two decades and increasing demand from stakeholders. He had indicated that a discussion paper would be issued to seek public feedback.

Accordingly, the RBI has now published a discussion paper titled 'Licensing of Urban Co-operative Banks' and sought comments from stakeholders. The last date for providing comments is February 13, 2026.

Over the years, RBI has consolidated the UCB sector through the amalgamation of weaker banks with relatively stronger ones and by cancelling licences of non-viable institutions. All 57 insolvent UCBs whose banking licences were cancelled were located in Tier 1, Tier 2 and Tier 3 centres.

Current Health of the Sector

Despite consolidation efforts, stress still persists in segments of the UCB sector. Currently, 82 UCBs are classified as weak and are subjected to different supervisory restrictions. Of these, 28 very weak UCBs are under All-Inclusive Directions, which enforce severe operational restrictions. Another 32 UCBs are under the Prompt Corrective Action framework, while 22 are monitored under the Supervisory Action Framework.

As of March 31, 2025, there were 1,457 UCBs in operation within the system. On aggregate, these have held Rs 7.38 lakh crore as assets and Rs 5.84 lakh crore as deposits.

Issues Raised in the Discussion Paper

The discussion paper seeks comments on two fundamental questions. First, whether this is the right time to revive the licensing of fresh Urban Cooperative Banks. Second, what the broad eligibility criteria should be if licensing is resumed.

Arguments have been put forward by the RBI both for and against the resumption of licences. Most failures in the UCB sector were related to the banks with a small size of capital and a weak governance structure.

Focus on Larger Cooperative Credit Societies

Considering past experience, the paper states that if licensing is reopened, eligibility may be confined to only large cooperative credit societies. Such entities are expected to have a longer operational history, more established governance systems and stronger management practices.

This approach, according to RBI, can help mitigate several risks associated with new UCBs. The paper also states that commencing with a limited and well-regulated set of applicants would allow the regulator to learn from experience and make adjustments as necessary. Therefore, the RBI has proposed stringent eligibility norms.

Proposed Eligibility Criteria

One of the main proposals is related to minimum capital requirements. The paper draws recommendations from various committees, including an Internal Working Group constituted by the RBI. After adjusting for inflation and considering the intent of earlier recommendations, RBI has proposed a minimum capital threshold of Rs 300 crore.

According to the proposal, a cooperative credit society should have a minimum capital of Rs 300 crore as on March 31 of the preceding financial year to be considered eligible to apply for a banking licence.

For the operational history, RBI has suggested that the applicant entities should have been in active operation for at least 10 years with a good financial track record for at least five years.

Financial Soundness

For financial soundness, the assessed Capital to Risk-Weighted Assets Ratio (CRAR) should not be less than 12 per cent at the time of grant of licence. Besides, the net non-performing assets (NPA) ratio should not exceed 3 per cent.

Governance and Regulatory Standards

The paper also points out that governance standards applicable to banks should not vary depending on whether or not the institution is organised as a commercial bank or a cooperative bank. This implies that new UCBs, if licensed, would be expected to meet governance and compliance standards similar to those applicable to other banks.

RBI will review stakeholder feedback before taking a final view on whether and how to resume licensing of new Urban Cooperative Banks.