Why in news?
The Reserve Bank of India (RBI) has released a discussion paper proposing to reopen the licensing window for Urban Cooperative Banks (UCBs). Licensing of new UCBs has been paused since 2004 due to concerns over their financial health. The paper, issued on 13 January 2026, invites comments by February 2026 and suggests stringent entry criteria for new applicants.
Background on UCBs
Urban Cooperative Banks are primary cooperative societies that undertake banking business in urban and semi‑urban areas. Their origins in India date back to the 19th century when co‑operative credit societies were formed to meet consumption needs of urban communities. Unlike agricultural cooperatives, UCBs mobilise deposits from the wider public and lend mainly to wage earners, small entrepreneurs and local businesses. They have played a key role in financial inclusion by providing last‑mile credit in areas underserved by commercial banks.
Over time, concerns about non‑professional management, weak governance and rising non‑performing assets prompted tighter regulation. Since March 1966 large cooperative banks have been supervised under the Banking Regulation Act. Still, many UCBs remain small and vulnerable. As of March 2025 India had about 1,457 UCBs with assets of ₹7.38 lakh crore. Many are under corrective frameworks such as the Supervisory Action Framework or Prompt Corrective Action due to capital and asset‑quality issues.
Key proposals in the discussion paper
- Minimum capital: New UCBs should have a minimum capital of ₹300 crore as of the previous financial year. This threshold aims to ensure that only large and financially sound cooperative societies apply.
- Track record: Applicant societies must have been in operation for at least 10 years with a good financial track record for the past five years.
- Financial health: The assessed capital to risk‑weighted assets ratio (CRAR) should not be less than 12 percent, and the net non‑performing asset (NPA) ratio should not exceed 3 percent at the time of applying for a licence.
- Focus on large entities: Because many failures have involved small UCBs, the RBI suggests licensing only large cooperative credit societies. Such entities are expected to have established governance structures and professional management.
- Stakeholder consultation: The paper poses two central questions: (1) Is it the right time to resume licensing of new UCBs? (2) What should be the broad eligibility criteria? Stakeholders are invited to provide feedback.
Significance
- Reopening the licensing window could increase competition, expand financial services and improve access to credit in urban areas if accompanied by strong oversight.
- Stringent entry norms seek to prevent a repeat of past failures and protect depositors’ interests by ensuring that new UCBs are financially robust and well managed.
- The consultation process reflects the RBI’s cautious approach; a phased reopening allows regulators to learn from experience and adjust rules as needed.
- The discussion also draws attention to broader reforms needed for cooperative banks, including better governance, professional management and easier access to capital.
