New Delhi: The Reserve Bank of India (RBI) is considering reopening the licensing window for urban co-operative banks (UCBs) after more than two decade. While the move has been welcomed in principle, industry stakeholders warn that the eligibility norms—especially the steep minimum capital requirement of Rs 300 crores—could leave most co-operative credit societies out of consideration.
“The current criterion that has been announced, leaves hardly two to three societies who would be eligible, so it basically defeats that purpose of bringing most depositors and customers under a regulated framework,” Prabhat Chaturvedi, the CEO of the National Urban Co-operative Finance and Development Corporation (NUCFDC), told ThePrint.
The government set up the NUCFDC in March 2024 as an umbrella organisation to support governance reforms, digital upgrades and financial assistance for UCBs.
The licensing window has remained frozen since 2004, following widespread failures among newly licensed cooperative banks. In the discussion paper published on 13 January 2026, the RBI sought stakeholder feedback on fresh licensing guidelines for UCBs until 13 February.
The paper outlines eligibility criteria centred on capital strength, financial performance, governance standards and geographic spread, aimed at allowing only financially resilient co-operative societies into the regulated banking space.
Under the proposed framework, co-operative credit societies must have a minimum capital of Rs 300 crores as of 31 March of the preceding financial year. While a minimum track record of five years has been prescribed, the RBI said 10 years of active operations and consistently strong performance over the past five years would be desirable.
“The society must demonstrate a positive and progressive trend in operating and financial parameters in the previous five years,” the RBI discussion paper stated.
Applicants must also meet financial norms at the time of licensing, including a capital to risk-weighted assets ratio (CRAR) of at least 12 percent and a net non-performing assets (NNPA) ratio not exceeding 3 percent.
NNPA measures net bad loans, while CRAR measures capital adequacy against risk-weighted assets, indicating financial stability and resilience overall.
The RBI has also indicated a preference for multi-state co-operative credit societies, while allowing select single-state societies to apply if they meet scale and compliance requirements.
While most financial criteria are reasonable, the capital requirement remains a major concern, Chaturvedi said, adding that NUCFDC will share its feedback to the RBI after internal deliberations.
Another limitation, he said, is that the proposal allows only conversion of existing co-operative credit societies into UCBs, not the creation of new ones.
For him, the larger issue is that high entry barriers could leave many customers and depositors outside the RBI regulation, as co-operative credit societies are not directly overseen by the central bank.
Former chief executive of the National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB), D. Krishna, sees a deeper policy tension.
Krishna said that while the Ministry of Cooperation has spoken of expanding UCB presence across towns, the RBI’s approach clearly favours consolidation, given the high thresholds.
“My contention is that perhaps RBI is still feeling that it’s not time for new licences,” he told ThePrint. “While the government wants it to be spread out, perhaps the RBI wants consolidation, given the proposals that they have issued for licensing.”
NAFCUB is the apex-level promotional body of urban cooperative banks and credit societies in the country.
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Why was licensing stopped
The RBI stopped issuing fresh UCB licences in 2004 after a spate of failures exposed weaknesses in governance and risk management. Between December 2003 and March 2025, the number of UCBs fell from 2,104 to 1,457, largely due to consolidation and closures, the discussion paper noted.
Krishna said many licences in the 1990s were issued to individuals with little cooperative banking experience.
“Some few hundreds of licences were issued to a lot of people with no cooperative background, fly by night kind of people and they all came to the bandwagon. And then, after five, six years, all these banks started collapsing, so they got scared and stopped giving license,” Krishna told ThePrint.
Over the past decade, however, regulation has tightened significantly. The Banking Regulation (Amendment) Act, 2020 brought UCBs closer to commercial banks in terms of oversight and governance.
The NUCFDC was also set up to support technology adoption, liquidity management and capital-raising, addressing structural gaps in the sector.
Arguments against licensing
The RBI paper also notes that UCBs account for only 3.1 percent of deposits and 3.8 percent of advances in India’s banking system.
Krishna argued this reflects regulatory constraints rather than weak demand. “UCBs were hardly allowed to open new branches and banks, so naturally the growth rate of urban banks will be lower than the growth rate of commercial banks,” he said.
Another concern is the difficulty UCBs face in raising capital. The “one member, one vote” principle limits investor incentives, as larger shareholding does not translate into greater control. This constrains the sector’s ability to attract fresh funds or rescue weak institutions.
The RBI has also highlighted governance challenges in co-operative credit societies, including gaps in domain knowledge and professional management.
However, both Chaturvedi and Krishna said the discussion paper only sets minimum eligibility conditions. Detailed scrutiny of the management and boards of directors would happen at later stages of the licensing process.
Case for reopening licences
Supporters argue that the sector’s financial health has improved after consolidation and the exit of weaker banks.
According to the RBI paper, net NPAs declined to 0.7 percent as of 31 March 2025, from 2.7 percent in 2015. Average CRAR stood at 18 percent, with 92 percent of UCBs maintaining capital above the regulatory minimum.
Chaturvedi said UCBs play a crucial role in financial inclusion by serving customers at the bottom of the pyramid.
“While many microfinance institutions charge their customers interest of between 18-24 percent, UCBs are charging interest rate of around 10 to 11 percent per annum, which is less than 1 percent a month,” he said.
Janak Raj, a senior fellow at policy think-tank Centre of Social and Economic Progress, said UCBs serve specific sections of society and therefore have an important role to play.
“It is a good idea to allow licensing of UCBs, which was discontinued in 2004. A long time has passed and conditions have changed. Moreover, it is not a good idea to ban any category of banks permanently,” Raj told ThePrint.
Ideal scenario
Sector experts argue that a more calibrated approach could result in more licensing of UCBs. Krishna suggests a tiered capital framework—Rs 25 crore for district-level societies, Rs 50 crore for state-level societies, and Rs 100 crore for multi-state entities.
“This way, there will be at least two, three hundred or four hundred credit societies to be eligible to apply for licenses,” he said.
He added that leaving large co-operative institutions outside the RBI oversight is not ideal.
“The depositor’s money is not insured by Deposit Insurance and Credit Guarantee Corporation, so it will be good if some of the medium-sized societies are brought into the fold of regulation,” Krishan said.
Whether the RBI softens its stance or sticks to a consolidation-first approach will become clearer after stakeholder feedback. For now, the door is open—but only narrowly.
(Edited by Ajeet Tiwari)
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