RBI Resumes Urban Cooperative Bank Licensing After Two Decades

Background

• RBI to resume 'on-tap' licensing of Urban Cooperative Banks (UCBs) after a gap of over two decades
• New UCB licences were paused in 2004 following the 1993–2001 liberalised licensing policy that led to rapid expansion, governance lapses, and financial instability
• Draft guidelines released during August 2026 Monetary Policy Committee (MPC) meeting for stakeholder consultation

Key Requirements for New UCB Licensing

Operational Requirements

• Minimum Experience: Credit cooperative societies must have at least 10 years of active operations
• Geographical Priority: RBI will initially prioritize societies registered under the Multi-State Co-operative Societies Act, 2002
• Entities with operations spread across multiple states will be favored for financial viability and risk diversification

Capital Requirements

• Minimum Deposit Base: Rs 10,000 crore
• Minimum Net Worth: Rs 300 crore
• Both based on audited financial statements as of March 31 of the previous financial year

Financial Health Criteria

• CRAR: Not less than 12%
• Net NPA Ratio: Not more than 3% at the time of licence grant

Interest Rate Framework Reforms

RBI proposed to rationalise interest rate framework for all Regulated Entities (REs) by reviewing:

• MCLR (Marginal Cost of Funds Based Lending Rate)
• EBLR (External Benchmark Lending Rate)

Objectives:

• Standardise interest calculation and benchmark reset practices
• Ensure uniform loan pricing
• Greater transparency
• Stronger monetary policy transmission
• Better consumer protection

About Urban Cooperative Banks (UCBs)

Definition

UCBs are cooperative banks operating in urban and semi-urban areas, providing banking services to:

• Small borrowers
• MSMEs (Micro, Small and Medium Enterprises)
• Retail customers

Regulatory Framework

• Primary Regulation: RBI under the Banking Regulation Act, 1949
• Managerial Oversight: Registrar of Cooperative Societies (RCS)/Central Registrar of Cooperative Societies (CRCS)
• Key Amendment: Banking Regulation (Amendment) Act, 2020 strengthened RBI's regulatory and supervisory powers

Capital Raising

UCBs in India can issue equity shares and preference shares to raise capital, subject to prior approval and regulatory guidelines of the RBI.

Statistics

• Total UCBs in India: 1,457 (according to RBI and NABARD)

Four-Tier Classification of UCBs (Since 2022)

Significance

• Strengthens the cooperative banking sector
• Enhances regulatory oversight through tiered framework
• Improves financial resilience of UCBs
• Ensures better governance and risk management
• Facilitates smoother monetary policy transmission