Context: After a hiatus of more than 22 years, the Reserve Bank of India (RBI) has proposed reopening the licensing window for Urban Co-operative Banks (UCBs). Licensing was halted in 2004 after several newly licensed UCBs became financially weak, prompting the R. Gandhi Committee to recommend that licences be granted only to financially sound and well-governed co-operative credit societies.
Understanding Urban Co-operative Banks (UCBs)
UCBs are member-owned financial institutions that primarily serve urban and semi-urban areas, catering to small borrowers, traders, and micro-enterprises.
Legal and Regulatory Framework
- Registration: Under the State Co-operative Societies Act or the Multi-State Co-operative Societies Act.
- Dual Regulation:
- RBI: Banking functions such as licensing, capital adequacy, asset quality, and risk norms.
- Registrar of Co-operative Societies (RCS): Registration, governance, audits, and liquidation.
This dual control has historically posed supervisory challenges, making prudential strength a key concern.
Current Status of the UCB Sector
India has 1,457 UCBs, classified into four tiers based on deposit size:
- Tier 1: 838 banks (57.52%)
- Tier 2: 535 banks
- Tier 3: 78 banks
- Tier 4: 6 banks
The sector shows high concentration:
- 7% of UCBs (with deposits above ₹1,000 crore) hold 62.5% of total deposits.
- 52% of UCBs, with deposits below ₹100 crore, account for only 5.6% of deposits.
Despite consolidation, balance sheets have strengthened:
- Assets: ₹7.38 lakh crore (2025), up from ₹4.35 lakh crore (2015).
- Deposits: ₹5.84 lakh crore (2025), up from ₹3.55 lakh crore (2015).
- Capital Adequacy Ratio (CAR): Average 18%, with 92% of UCBs above 12% CAR.
- Asset Quality (FY25): GNPA 6.2%, NNPA 0.7%, and Provision Coverage Ratio (PCR) 90.1%.
Key Proposals by the RBI
- Restart of Licensing
A fresh licensing window is proposed, but with stringent entry norms, reflecting lessons from past failures. - Preference to Strong Credit Societies
Licences will primarily be granted to large co-operative credit societies with long operating histories, robust governance, and financial maturity. - Wider Geographic Footprint
New UCBs must demonstrate the ability to compete with Small Finance Banks (SFBs), commercial banks, and NBFCs, implying scale and diversification. - Multi-State Bias
Preference will be given to multi-state co-operative societies, though select single-state societies may qualify if they meet footprint criteria. - Consultative Approach
Public feedback has been invited until 13 February 2026, after which detailed draft licensing guidelines may be issued.
Eligibility Filters for New Licences
- Minimum Capital: ₹300 crore as on 31 March of the previous financial year.
- Track Record: At least 10 years of operations and 5 years of sound financial performance.
- Performance Trend: Positive and progressive financial and operational indicators over the last 5 years.
- Capital Adequacy: Minimum 12% CAR at the time of licence grant.
- Asset Quality: NNPA not exceeding 3%.
Credit Societies vs Urban Co-operative Banks
| Aspect | Co-operative Credit Societies | Urban Co-operative Banks |
|---|---|---|
| Regulator | Registrar of Co-operative Societies | Reserve Bank of India |
| Deposits | From members only | From general public (as per norms) |
| Lending | To members only | To members and public |
Significance of the Move
The proposal seeks to balance financial inclusion with systemic stability. Stronger UCBs can deepen last-mile credit delivery while avoiding the governance and solvency issues that plagued earlier entrants.
By favouring scale, capital strength, and track record, RBI aims to ensure that new UCBs are resilient, competitive, and well-supervised.
Conclusion
Reopening UCB licensing marks a cautious yet forward-looking shift in RBI’s approach. If implemented with strict oversight and governance reforms, the move can revitalise the co-operative banking space without repeating past mistakes.