Author: Zinniia Manna, Maharashtra National Law University, Mumbai
To the Point
In January 2026, the Reserve Bank of India (RBI) released a discussion paper proposing the resumption of licensing of Urban Co-operative Banks (UCBs) a practice that had been suspended for over two decades. If implemented, this move could reshape the cooperative banking landscape and strengthen financial inclusion in urban areas. The proposal suggests strict eligibility criteria, including minimum capital requirements and governance standards, to ensure better financial soundness and prevent past failures.
Abstract
Urban Co-operative Banks have historically served local communities, providing banking services to urban and semi-urban populations. However, between the 1990s and early 2000s, many UCBs became financially weak or failed, leading the RBI to freeze new licences in 2004. As the sector evolved, the RBI has now opened a consultation on whether to allow new licences again under a stronger regulatory framework. This article discusses the background of the pause in licensing, the need for fresh legislation and guidelines, proposed eligibility criteria and the legal and regulatory implications for India’s banking sector.
History and Background of UCB Licensing in India
Urban Co-operative Banks are financial institutions that operate primarily in urban areas and are structured as cooperative societies. Unlike commercial banks, UCBs are community-oriented and focus on meeting the credit and deposit needs of members and small borrowers.
Despite their local importance, many UCBs licensed in the 1990s and early 2000s failed due to weak governance, low capital and poor risk management. These failures contributed to depositor losses and financial instability in the sector. To protect depositors and maintain banking system stability, the RBI halted issuing new licences to UCBs in 2004.
Why the RBI Is Reconsidering Licensing
Over the past two decades, several developments have prompted the RBI to revisit this policy:
Improved regulatory supervision: The RBI now has stronger tools to supervise and regulate cooperative banks, including prompt corrective action and enhanced governance standards.
Sector transformation: The number of UCBs has declined from over 2,100 in 2003 to around 1,457 by March 31, 2025, indicating consolidation and restructuring of the sector.
Financial inclusion concerns: UCBs remain important in providing financial services to urban customers and small businesses, especially where commercial banks are less accessible.
Stakeholder demand: Members of the cooperative movement and policymakers have expressed interest in expanding and strengthening the cooperative banking system.
Recognizing these changes, the RBI decided to release a discussion paper titled “Licensing of Urban Co-operative Banks” and invited public comments by February 13, 2026.
Key Proposals in the RBI Discussion Paper
The RBI discussion paper seeks feedback on two critical questions:
Is it the right time to resume licensing of new UCBs?
If licensing is resumed, what should be the eligibility criteria?
To address these, the paper outlines several proposals and safeguards:
1. Minimum Capital Requirement
A co-operative credit society should have a minimum capital of ₹300 crore as on the previous financial year’s March 31 to be eligible. This capital barrier is intended to filter out weak or under-capitalised entities.
2. Operational Track Record
Applicant societies should have been in active operation for at least 10 years with a strong financial record for the previous five years. This ensures that only experienced and stable entities enter the banking space.
3. Financial Soundness Indicators
The proposed conditions include:
Capital to Risk-Weighted Assets Ratio (CRAR) not less than 12 per cent.
Net Non-Performing Assets (NPA) ratio not more than 3 per cent.
These ratios are benchmarks for assessing financial stability and risk management practices and align with standards applied to other regulated banks.
4. Preference for Large or Multi-State Societies
The RBI suggests that larger cooperative credit societies, including multi-state entities, may be preferred applicants to ensure broader geographic reach and diversified customer bases.
5. Governance and Regulatory Alignment
Proposed norms indicate that governance standards for UCBs should mirror those of commercial banks, including board independence, risk oversight and professional management. This may require amendments to state cooperative laws.
Arguments For and Against Resuming Licensing
The discussion paper presents both supportive and cautionary perspectives:
Arguments in Favor
Financial inclusion: New UCBs could expand credit access in underserved urban and semi-urban areas.
Sector growth: A robust cooperative banking sector can help with MSME credit and deepen financial penetration.
Stronger supervision today: The RBI’s enhanced regulatory framework could prevent past mistakes.
Arguments Against
Risk of future failures: UCBs have a history of governance issues and financial distress, which could recur if poorly regulated.
Resource burden: Supervising a new class of banks requires more regulatory resources and monitoring.
Legal and Policy Implications
RBI’s Regulatory Authority
Under the Reserve Bank of India Act, 1934, the RBI has the power to grant and regulate banking licences in India. UCBs are regulated within a hybrid framework involving both RBI supervision and state cooperative laws. Resuming licensing will require careful alignment of central banking norms with cooperative governance structures.
State Law Considerations
Some aspects of cooperative society governance fall under State Cooperative Acts. If the RBI’s proposals require changes in board composition or governance rules for UCBs, amendments to state or multi-state cooperative laws may be needed.
Depositor Protection
Given past failures of UCBs, protecting depositors through schemes such as the Deposit Insurance and Credit Guarantee Corporation (DICGC) will remain essential. Strengthened capital norms and governance are steps toward enhanced depositor confidence.
Conclusion
The RBI’s proposal to resume the licensing of Urban Co-operative Banks marks a major policy shift after more than 20 years of suspension. While the resumption of licensing could strengthen financial inclusion and expand banking services for urban communities, it also brings challenges related to governance, risk management and legal coordination between central and state laws.
By proposing robust eligibility criteria including minimum capital, sound financial performance and strong governance the RBI aims to avoid past pitfalls. However, the success of this initiative will depend on effective implementation, legal coherence and continuous supervision. As India’s financial system evolves, reopening UCB licensing could inject fresh impetus into cooperative banking provided risks are carefully managed and depositor interests are protected.
FAQs
1. Why was UCB licensing stopped in 2004?
Licensing was paused because many licensed Urban Co-operative Banks became financially weak and failed, posing risks to depositors and financial stability.
2. What key criteria has RBI proposed for new licences?
Criteria include minimum capital of ₹300 crore, at least 10 years of operations, CRAR ≥ 12% and net NPA ≤ 3%.
3. Will everyday banking services change for customers?
If new licences are issued, well-regulated UCBs could offer improved services, but effective supervision will be key.
