RBI Proposes Reopening Urban Co-operative Bank Licenses After 20-Year Freeze
The Reserve Bank of India has made a significant proposal. It wants to reopen the licensing window for urban co-operative banks. This move comes after a two-decade-long freeze on new UCB licenses.
Focus on Large Credit Societies
The central bank favors granting licenses only to large co-operative credit societies. It believes these entities have longer track records and better governance. Most UCB failures in the past involved smaller banks. Licensing larger societies could reduce this risk.
Credit societies currently operate under different rules. They are regulated by the Registrar of Co-operative Societies, not the RBI. These societies can only accept deposits from members and lend to members. They cannot issue cheques to the public or offer full banking services like online fund transfers.
Strict Eligibility Criteria
The RBI has outlined specific criteria for potential applicants. A co-operative credit society must have at least ten years of active operations. It needs a good financial track record for five years. The capital to risk-weighted assets ratio should not fall below 12 percent. The net non-performing assets ratio must stay under 3 percent at the time of license grant.
These requirements stem from past experiences. A high-powered committee led by R Gandhi previously recommended licenses only for financially sound societies. The RBI now emphasizes that five years may be too short to judge performance properly.
Governance Challenges Remain
Despite the proposal, the RBI acknowledges several governance risks. Capital raising remains a persistent problem for UCBs. The unique characteristics of UCB shares add volatility and undermine capital's role as a loss absorber.
The principle of one member one vote, regardless of shareholding, deters growth capital. It also complicates the resolution of weak banks. The entry and exit of shareholders at face value makes UCB shares unattractive to investors.
Legal challenges have slowed governance improvements. Multiple court cases against amendments to the Banking Regulation Act, 1949, and related RBI circulars have created obstacles. Analysis of UCBs that lost licenses between 2020 and 2025 reveals many instances of governance failure or management fraud, particularly in small UCBs.
Directors and senior management often lack adequate domain knowledge. Many UCBs face penalties for prohibited director-related lending.
Current UCB Landscape
As of March 31, 2025, India had 1,457 urban co-operative banks. These included 838 tier 1 banks, 535 tier 2 banks, 78 tier 3 banks, and six tier 4 banks. Tier 1 UCBs constituted 57.52 percent of the total number but held only 11.3 percent of sector deposits.
Deposit distribution shows concentration among larger banks. Fifty-two percent of UCBs held deposits below Rs 100 crore, accounting for just 5.6 percent of total deposits. Meanwhile, 7 percent of UCBs held deposits above Rs 1,000 crore, representing 62.5 percent of all deposits.
The sector has grown substantially over the past decade. Total aggregate assets reached Rs 7.38 lakh crore by March 2025, up from Rs 4.35 lakh crore in 2015. Deposits increased to Rs 5.84 lakh crore from Rs 3.55 lakh crore during the same period.
Asset quality shows improvement. The gross non-performing assets ratio stood at 6.2 percent as of March 2025. Net NPAs were at 0.7 percent, with a provisioning coverage ratio of 90.1 percent. In 2015, these figures were 6.02 percent, 2.66 percent, and 57.7 percent respectively.
The RBI's discussion paper marks a potential turning point for India's co-operative banking sector. It balances the need for expansion with lessons learned from past failures. The proposal now awaits feedback from stakeholders before any final decision.
