RBI Proposes Reopening Urban Co-Operative Banks’ Licenses; Favours Large Credit Societies

The Reserve Bank of India has just opened the licensing window for urban co-operative banks after two decades and has prioritised large co-operative credit societies with a good financial track record.

The central bank, in a discussion paper released Tuesday, sketched a possible road map toward new banking licenses-one that has been frozen since 2004. The regulator indicated that if the sector is opened, preference should be accorded to entities that already have demonstrated stability and sound governance. The proposal clearly advocates large co-operative credit societies over new greenfield ventures, as the failure rate has always been higher among small and newly licensed banks.

Strict Eligibility Criteria

The discussion paper sets strict financial and operational criteria for applicants. A co-operative credit society needs at least ₹300 crore as capital as of March 31 of the previous financial year to be qualified for conversion into a UCB. This limit is significantly higher than earlier norms, indicating the regulator's intention for deep capital buffers from day one.

Besides capital, the RBI stresses longevity and performance. The applicants are required to have active operations for at least a decade. In fact, they would have an immaculate financial record for the last five years. Technical parameters relating to financial health are no less formidable; the regulator has suggested that the evaluated Capital to Risk (Weighted) Assets Ratio (CRAR) should not be less than 12 per cent. Besides, the Net NPA ratio should not exceed 3 per cent at the grant of licence stage.

These parameters try to address the risk factors that prompted the freeze in licensing 22 years ago. The sudden spate of new licences issued between 1993 and 2004 was followed by the collapse of a large number of financially unsound institutions within a few years of commencement of business. The stand taken by the RBI now relies in good measure on the recommendations of the High-Powered Committee on Urban Co-operative Banks, which held that five years is very often too short a time to assess the true strength of a financial institution.

Addressing Structural Vulnerabilities

The regulator's preference for large corporations identifies particular structural weaknesses within the co-operative banking model. The discussion paper derives that UCBs uniquely have a volatile capital structure. In contrast to commercial banks, where share capital is perpetual, shares in UCBs are often borrowing-related and repayable, which means that capital is less

In addition, the facility for entry and exit based on face value, without any incentives, makes co-operative bank shares an unappealing means for capital creation. However, by stipulating a heavy entry capital of ₹300 crores, it can be made sure that only those societies, which have a strong and solid capital base, can enter into banking activities.

Regulatory Framework 

The process of renewing the licensing process goes alongside the formation of the National Urban Co-operative Finance and Development Corporation (NUCFDC), which is an umbrella organisation that would aim at increasing liquidity within the sector. The stakeholders are given until the 13th of February 2026 to respond to the discussion paper particularly on the issue.