Mumbai: The RBI on Tuesday proposed resumption of issuance of licences for Urban Cooperative Banks (BKS) after more than two decades, subject to various regulatory requirements, including a minimum capital threshold of Rs 300 crore. Since 2004, licensing for Urban Co-operative Banks (UCBs) has been paused by the Reserve Bank of India (RBI) as it found that a large number of the newly licensed ones became financially unsound within a short period.
In October last year, Reserve Bank Governor Sanjay Malhotra had announced that considering the positive developments in the sector during the last two decades and in response to the growing demand from the stakeholders, RBI would publish a discussion paper on licensing of new UCBs.
On Tuesday, the RBI issued a discussion paper on 'Licensing of Urban Co-operative Banks (UCBs)' and has invited comments on it from stakeholders by February 13, 2026. Over the years, Reserve Bank consolidated the UCBs, through amalgamation and closure of non-viable entities. All the 57 insolvent UCBs whose banking licence were cancelled were in Tier 1-3.
At present, there are 82 weak UCBs under supervisory restrictions; while 28 very weak UCBs have been placed under the All-Inclusive Directions (AID), 32 UCBs are under Prompt Corrective Action (PCA) and 22 UCBs are under Supervisory Action Framework (SAF). The paper said over the years, several high-level committees formed by RBI have visited the matter of re-opening of UCB licences and come out with various recommendations.
The discussion paper has primarily sought comments on two questions: Question 1: Is it the right time to resume licensing of new Urban Cooperative Banks? Question 2: What should be the broad eligibility criteria, if new UCB licensing is to be resumed now? It has provided arguments, both in favour and against resuming licensing. The paper further said that considering the fact that most of the failures of UCBs have been of smaller banks, if licensing is resumed for UCBs, it may be prudent to license only large co-operative credit societies.
A large co-operative credit society will have a longer track record and would have established its governance and put in place sound management practices. "As a result, many of the risks cited in the arguments given above against resuming licensing, will be mitigated. Moreover, it may be advisable to make a beginning, learn from experience and take corrective steps, as necessary.
"From this aspect also, it will be desirable to stipulate stringent eligibility criteria," it said. It also argued that ideally, the governance standards applicable to a bank should be agnostic to the incorporated structure of the bank whether commercial or co-operative. The paper cites recommendations of various panels, including that of an Internal Working Group (IWG). Considering the adjustment for inflation and the intent of the IWG recommendations, the minimum capital requirement needs to be set higher.
"Therefore, minimum capital requirement for a co-operative credit society should be Rs 300 crore as on the March 31 of the previous financial year to be eligible to apply," it said. On track record, the paper suggested active operations for at least 10 years and a good financial track record of at least 5 years are desirable from a co-operative credit society to apply. To analyse the financials, assessed CRAR should not be less than 12 per cent and the Net NPA ratio should not be more than 3 per cent at the time of grant of licence to the eligible applicant. As on March 31, 2025, there were 1,457 UCBs with total aggregate assets of Rs 7.38 lakh crore, and total deposits of Rs 5.84 lakh crore.
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