Explained: Why RBI wants to restart UCB licensing after a two-decade pause
New Delhi, Aug 5, 2026
After a 20-year freeze, the RBI is preparing to issue new UCB licences as reforms, stronger oversight and improving financial health reshape the cooperative banking sector
Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said the central bank would soon issue draft guidelines for licensing Urban Cooperative Banks (UCBs), a process that has remained largely dormant since 2004.
Malhotra said the guidelines would be released after incorporating stakeholder feedback received on the RBI's discussion paper issued earlier this year.
Why RBI stopped licensing new UCBs
The RBI stopped issuing fresh licences for UCBs in 2004 after a series of bank failures exposed deep structural weaknesses in the sector. According to the RBI, urban cooperative banks are member-owned financial institutions that primarily operate in urban and semi-urban areas, catering to small businesses, traders, salaried individuals and low- to middle-income households.
While liberal licensing during the 1990s rapidly expanded the number of UCBs, many of the newly established institutions lacked the governance standards, professional management and risk controls required to operate as stable banking entities. According to the RBI's January 2026 discussion paper on Licensing of Urban Co-operative Banks, many UCBs licensed during the liberalised phase of the 1990s eventually became financially unsound. Weak corporate governance, poor credit appraisal, rising non-performing assets (NPAs) and repeated instances of financial fraud significantly eroded public confidence in the sector.
Among the most notable failures was the collapse of Madhavpura Mercantile Cooperative Bank in 2001, which highlighted the vulnerabilities within the cooperative banking system. Similar governance failures in later years, including the collapse of Punjab and Maharashtra Co-operative Bank, reinforced concerns over the sector's stability.
Another major challenge was the dual regulatory structure governing UCBs. While the RBI supervised banking operations, several administrative functions, including management and incorporation, remained under the jurisdiction of state governments and cooperative registrars. This division of powers often delayed corrective action and created regulatory gaps, making effective supervision difficult.
The financial health of many UCBs also deteriorated rapidly. Several banks accumulated high levels of bad loans, suffered from inadequate capital and weak internal controls, while many struggled with poor management practices. The combination of governance failures, mounting NPAs and limited regulatory powers prompted the RBI to suspend new licences until a more comprehensive legal and supervisory framework could be put in place.
Accordingly, in its annual policy statement for 2004-05, the RBI announced that it would not consider fresh proposals for setting up Urban Cooperative Banks until an appropriate legal and regulatory framework for the sector was established.
What changed during the pause
Although the RBI stopped issuing new UCB licences in 2004, the sector continued to undergo significant consolidation over the next two decades. The number of UCBs declined from 2,104 in December 2003 to 1,457 as of March 31, 2025, largely due to mergers, amalgamations and the closure of financially weak institutions, according to the RBI data.
At the same time, the central bank introduced a series of regulatory and structural reforms to strengthen the sector's governance, supervision and financial resilience.
The biggest regulatory shift came with the Banking Regulation (Amendment) Act, 2020, which significantly strengthened the RBI's supervisory powers over UCBs. The amendments brought cooperative banks much closer to commercial banks in terms of governance, regulation and oversight, addressing several shortcomings created by the earlier dual-control framework.
The RBI also introduced a four-tier regulatory framework for UCBs from December 1, 2022, replacing the earlier two-tier system. Banks are now classified according to their deposit size, allowing regulatory requirements relating to capital, governance and risk management to be calibrated based on the complexity of their operations.
Governance standards have also been strengthened through tighter board oversight and a greater emphasis on professional management. In addition, the National Urban Cooperative Finance and Development Corporation (NUCFDC), operational since February 2024, was established to support technology adoption, liquidity management and capital mobilisation across the sector.
The sector's financial position has also improved considerably during the licensing freeze. Asset quality has strengthened significantly over the past decade. Minister of State for Finance Pankaj Chaudhary during the ongoing Monsoon session, informed the Parliament that the gross non-performing assets (GNPAs) of Urban Cooperative Banks fell to ₹21,769 crore as of March 31, 2026, the lowest level in six years.
The RBI's Financial Stability Report (June 2026) also pointed to broad-based improvements across all four regulatory tiers. UCBs recorded stronger profitability, healthier capital adequacy ratios and better asset quality during FY26. Gross and net NPAs declined across categories, while the Provisioning Coverage Ratio (PCR) improved between March 2025 and March 2026, indicating stronger buffers against stressed assets.
The central bank said these improvements reflect stronger balance sheets and demonstrate that the sector is significantly more resilient than it was two decades ago.
Why RBI wants to restart licensing now
Against the backdrop of the sector's improving financial health, the RBI released a discussion paper in January 2026 proposing a framework for issuing new UCB licences for the first time since 2004. Announcing the August MPC decisions, Governor Sanjay Malhotra said the central bank would now issue draft licensing guidelines after incorporating stakeholder feedback on the discussion paper.
The central bank said the operating environment has changed significantly over the past two decades, supported by stronger regulation, improved governance standards and healthier financial indicators across the UCB sector.
Under the proposed framework, only well-capitalised cooperative credit societies would be eligible to transition into UCBs. Applicants must have a minimum capital of ₹300 crore as of March 31 of the preceding financial year, maintain a capital adequacy ratio of at least 12 per cent, and a net NPA ratio of not more than 3 per cent at the time a licence is granted. The RBI has also proposed that applicants should ideally have been operational for at least 10 years, with a sound financial track record for a minimum of five years.
Recognising increasing competition from small finance banks (SFBs), commercial banks and non-banking financial companies (NBFCs), the RBI has proposed giving preference to multi-state cooperative credit societies because of their wider geographical footprint. However, select single-state cooperative credit societies that meet the prescribed eligibility criteria may also be considered.
The discussion paper notes that reopening the licensing window could deepen financial inclusion, particularly in urban and semi-urban areas where cooperative banks continue to play an important role in serving small borrowers and local businesses. The RBI also believes the presence of the NUCFDC, along with a stronger regulatory framework, now provides the institutional support needed for a more sustainable expansion of the UCB sector.
[The Business Standard]
