RBI Proposes New Framework for Licensing Urban Co-operative Banks After Over 20 Years

Reserve Bank of India on Tuesday released a discussion paper proposing the resumption of licensing for Urban Co-operative Banks (UCBs), marking a potential policy shift after a pause of more than 20 years, as per PTI reports. The central bank has sought stakeholder feedback by February 13, 2026. 

Regulator revisits UCB licensing framework 

Licensing of new UCBs was halted in 2004 after the regulator observed that several newly licensed entities became financially unviable within a short period.  

Since then, the RBI has focused on consolidation through mergers, closures, and supervisory actions against weak institutions. All 57 insolvent UCBs whose licences were cancelled belonged to the smaller Tier 1-3 category. 

As of now, 82 UCBs remain under supervisory restrictions. Of these, 28 are under All-Inclusive Directions (AID), 32 are governed by the Prompt Corrective Action (PCA) framework, and 22 fall under the Supervisory Action Framework (SAF). 

High entry thresholds proposed for new applicants 

The discussion paper proposes allowing only large co-operative credit societies to apply if licensing resumes.  

According to the RBI, such entities typically have longer operating histories, established governance structures and better risk management systems, reducing the likelihood of failure. 

Taking into account inflation and earlier recommendations of an Internal Working Group (IWG), the RBI has proposed a minimum capital requirement of ₹300 crore as of March 31 of the preceding financial year. In addition, applicant entities should have at least 10 years of active operations and a sound financial track record for a minimum of five years. 

At the time of licence approval, the assessed Capital to Risk-Weighted Assets Ratio (CRAR) should be at least 12%, while the net non-performing assets ratio should not exceed 3%. 

Sector backdrop and policy debate 

The paper places the proposal in the context of broader improvements in the UCB sector over the past 2 decades, including tighter supervision and governance reforms. It also raises 2 core questions for consultation: whether this is the appropriate time to resume licensing, and what eligibility norms should govern new entrants. 

Reserve Bank Governor Sanjay Malhotra had indicated in October last year that the regulator would revisit the licensing framework in light of stakeholder demand and improved sectoral stability. 

As of March 31, 2025, India had 1,457 UCBs with aggregate assets of ₹7.38 lakh crore and total deposits of ₹5.84 lakh crore. 

Read More: India Will Continue to Attract Overseas Investments Due to Strong Growth: RBI Governor! 

Conclusion 

The RBI’s proposal signals a cautious reopening of the UCB licensing window, with a clear emphasis on scale, governance and financial resilience to avoid repeating past failures. 

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