RBI Initiates Public Consultation on Resuming Fresh Licenses for Urban Co-operative Banks After Two-Decade Hiatus

Introduction

The Reserve Bank of India has published a comprehensive discussion paper concerning the issuance of fresh licenses to Urban Co-operative Banks (UCBs), marking a significant policy reconsideration after more than twenty years. The central bank has opened the floor for public and stakeholder feedback, with submissions accepted until February 13, 2026. This initiative follows the announcement made in the Governor's Statement delivered on October 01, 2025.

The moratorium on granting new licenses commenced in 2004, primarily due to alarming patterns of financial instability witnessed among recently authorized banking entities. Approximately 31 percent of freshly licensed UCBs demonstrated financial unsoundness within brief operational periods, compelling regulatory authorities to pause the licensing mechanism.

Historical Context and Regulatory Evolution

Bringing UCBs Under RBI's Regulatory Umbrella

The regulatory journey of urban co-operative banks began in 1966 when these institutions were brought under the Reserve Bank of India's supervisory framework through amendments to the Banking Regulation Act, 1949 (BR Act). Any co-operative society, whether incorporated under State Co-operative Societies Act or the Multi-State Co-operative Societies Act, must secure a license under Section 22, read with Section 56 of the Banking Regulation Act, 1949, from RBI to conduct banking operations. These licensed primary co-operative banks are commonly termed as UCBs.

The Liberalization Phase and Subsequent Challenges

Between May 1993 and June 2001, following the liberalization of licensing requirements, the Reserve Bank issued 823 licenses to urban co-operative banks. However, this expansionary phase revealed significant vulnerabilities within the sector. A screening committee constituted by RBI in June 2001 recommended mandatory graduation for all prospective UCBs from existing co-operative credit societies, contingent upon demonstrable and verifiable operational track records.

Given the accumulated experience and prevailing financial conditions within the sector, the RBI decided in June 2004 to suspend fresh license issuance until comprehensive policy frameworks—encompassing appropriate legal and regulatory architecture—could be established. Additionally, policy measures aimed at improving the financial health of the urban co-operative banking sector needed formulation.

Legislative Strengthening Through 2020 Amendment

The Banking Regulation (Amendment) Act, 2020 represented a watershed moment, empowering the RBI with enhanced supervisory and regulatory authority comparable to that exercised over commercial banks. These amplified powers specifically targeted governance deficiencies that had plagued the sector.

Following these legislative amendments, the Reserve Bank introduced a revised tiered regulatory framework for UCBs on December 01, 2022, subsequently incorporated into the Reserve Bank of India (Urban Co-operative Banks – Licensing, Scheduling and Regulatory Classification) Guidelines, 2025 dated December 4, 2025. This framework categorizes UCBs into four distinct tiers based on deposit magnitude:

  • Tier 1: Deposit size below ₹100 crore
  • Tier 2: Deposits ranging from ₹100 crore to less than ₹1,000 crore
  • Tier 3: Deposits between ₹1,000 crore and less than ₹10,000 crore
  • Tier 4: Deposits of ₹10,000 crore and above

Establishment of Umbrella Organisation

The concept of an Umbrella Organisation (UO), initially proposed during 2004-05, materialized with the formation of the National Urban Co-operative Finance and Development Corporation (NUCFDC). Operational since February 2024, the UO aims to bridge technology gaps through shared service delivery models while assisting smaller UCBs with investment management, liquidity support, and operational guidance.

Consolidation Through Amalgamation and Closure

Over successive years, the Reserve Bank pursued sector consolidation by facilitating amalgamations and closing non-viable entities. Based on disaggregated information available since 2020-21, all 57 insolvent UCBs whose banking licenses were revoked belonged to Tiers 1-3. Currently, 82 weak UCBs operate under supervisory restrictions: 28 very weak institutions are placed under All-Inclusive Directions (AID), 32 UCBs function under Prompt Corrective Action (PCA), and 22 UCBs are subject to Supervisory Action Framework (SAF)—all situated within Tiers 1 to 3.

Recommendations from High-Level Committees

Several expert committees constituted by the Reserve Bank have examined the matter of reopening UCB licensing and provided diverse recommendations.

Expert Committee on Licensing of New Urban Co-operative Banks (YH Malegam – 2011)

This committee proposed differentiated minimum capital requirements for new UCBs ranging from ₹0.5 crore to ₹5 crore, predicated on a baseline scenario of ₹10 crore deposits. While preferring existing societies with demonstrated financial performance for banking licenses, the committee did not categorically restrict licensing for newly established societies, particularly in underbanked or unbanked geographic areas.

High Powered Committee on Urban Co-operative Banks (R Gandhi – 2015)

This committee recommended confining UCB licenses to financially robust and professionally managed co-operative credit societies possessing at least five years of operational track record. The entry point capital requirement was suggested at ₹25 crore to ₹100 crore for various categories of UCBs.

Expert Committee on Urban Co-operative Banks (NS Vishwanathan – 2021)

This committee suggested that given the existence of over 1,500 UCBs, existing institutions should be permitted to expand their operational footprint rather than proliferating the number of UCBs. The committee recommended considering fresh licenses only after the Umbrella Organisation satisfactorily establishes itself as a stabilizing mechanism.

Current Landscape of the UCB Sector

Structural Composition

As of March 31, 2025, the total number of UCBs stood at 1,457, comprising 838 Tier 1 banks (57.52%), 535 Tier 2 banks, 78 Tier 3 banks, and six Tier 4 banks. In terms of deposit distribution, Tier 1, Tier 2, Tier 3, and Tier 4 UCBs accounted for 11.3%, 30.6%, 34.4%, and 23.8% respectively of total sector deposits.

Notably, 52 percent of UCBs maintained deposits below ₹100 crore, representing merely 5.6 percent of total deposits, while 7 percent of UCBs held deposits exceeding ₹1,000 crore, constituting 62.5 percent of deposits. Comparatively, as of March 31, 2015, 64.7 percent of UCBs held deposits below ₹100 crore (representing 9.9 percent of deposits), while 3.6 percent held deposits above ₹1,000 crore (constituting 52.1 percent of deposits).

Asset and Deposit Growth

The aggregate assets of UCBs reached ₹7.38 lakh crore, with total deposits at ₹5.84 lakh crore as of March 31, 2025, compared to ₹4.35 lakh crore and ₹3.55 lakh crore respectively in 2015.

Capital Adequacy

The average Capital to Risk-weighted Asset Ratio (CRAR) for UCBs stood at 18.0 percent. Currently, 92 percent of UCBs maintain CRAR above 12 percent (the regulatory minimum for Tier 2-4 UCBs), compared to 83 percent in 2015.