SDG 8: Decent Work and Economic Growth | SDG 10: Reduced Inequalities
Reserve Bank of India (RBI) | Ministry of Cooperation
The Reserve Bank of India (RBI) has released a discussion paper on the potential resumption of licensing for Urban Co-operative Banks (UCBs), a process that has been largely paused since 2004 due to the financial instability of newly licensed entities. Recognizing the sector’s positive transformation and the enhanced regulatory powers granted by the Banking Regulation (Amendment) Act, 2020, the RBI is now seeking stakeholder feedback on a new, stringent framework for licensing. As of March 31, 2025, the UCB sector comprises 1,457 banks, with a total deposit base of ₹5.84 lakh crore and a significantly improved average Capital to Risk-weighted Assets Ratio (CRAR) of 18.0%.
Proposed Eligibility and Entry Norms
Minimum Capital Requirement: To ensure financial resilience against inflation and operational costs, the RBI proposes a minimum capital of ₹300 crore for credit societies seeking a banking license.
Operational Track Record: Applicants must have a minimum of 10 years of active operations, including a verifiable positive financial trend over the most recent 5 years.
Financial Health Benchmarks: Eligible societies must demonstrate an assessed CRAR of at least 12% and a Net NPA ratio of not more than 3% at the time of the license grant.
Geographical Footprint: Preference will be given to multi-state co-operative credit societies to ensure risk diversification and a wider customer base, enhancing long-term viability against commercial competitors.
Strategic Safeguards and Governance
Umbrella Organisation (UO): The operationalization of the National Urban Co-operative Finance and Development Corporation (NUCFDC) since February 2024 provides critical technology and liquidity support to the sector.
Governance Guardrails: The RBI emphasizes that governance standards for UCBs should align with those of commercial banks, potentially requiring statutory amendments to State and Multi-State Co-operative Acts regarding Board composition.
What are Urban Co-operative Banks (UCBs)? Urban Co-operative Banks are primary co-operative societies that have been granted a banking license by the Reserve Bank of India (RBI) to conduct banking business. Regulated under the Banking Regulation Act, 1949, these institutions primarily serve the financial needs of customers in urban and semi-urban areas. Unlike commercial banks, UCBs are founded on co-operative principles, where members have democratic control through a "one member, one vote" system, regardless of their individual shareholding. They play a critical role in financial inclusion by providing credit to small-scale borrowers and MSMEs in remote towns. As of 2025, the sector is segmented into a four-tiered regulatory framework based on deposit size, ranging from Tier 1 (deposits under ₹100 crore) to Tier 4 (deposits above ₹10,000 crore).
What is the ‘Umbrella Organisation (UO)’ in the UCB ecosystem? It is a specialized institutional mechanism, represented by the NUCFDC, designed to provide shared services and stability to the urban co-operative banking sector. The UO addresses critical technology gaps—such as cybersecurity and core banking solutions—that often plague smaller UCBs, while also offering investment, liquidity, and capital support. By acting as a stabilizing arrangement, the UO is intended to mitigate the governance and operational risks that led to the two-decade-long pause in new UCB licensing.
Policy Relevance
Resuming UCB licensing is a strategic move to deepen financial inclusion in remote and unbanked urban centers while maintaining a high bar for systemic stability.
Strategic Impact for India:
Deepening Financial Inclusion: New UCBs can serve as vital last-mile conduits for credit, particularly for MSMEs and small-scale borrowers in Tier 2 and Tier 3 towns.
Promoting Professionalized Governance: The requirement for professional and independent directors aims to prevent the “management fraud” and “governance failure” observed in previously cancelled licenses.
Systemic Risk Mitigation: By licensing only large societies with a 10-year track record, the RBI intends to filter out non-viable entities before they enter the banking system.
Cooperative Federalism: The call for amendments to State Co-operative Acts encourages a unified regulatory approach toward strengthening the cooperative credit structure across India.
Follow the full report here: Licensing of Urban Co-operative Banks (UCBs): A DISCUSSION PAPER