After more than two decades of caution shaped by governance failures and weak balance sheets, the Reserve Bank of India has decided to resume licensing new urban cooperative banks on an “on tap” basis, signalling a carefully controlled reopening of a sector it now believes is better prepared for expansion.
The central bank said draft guidelines will be issued shortly for stakeholder consultation before the new licensing framework is finalised, placing the restart firmly within a tougher supervisory regime rather than a return to the looser expansion cycle of the past.
A Reset After Years of Regulatory Caution
The decision marks a notable turn in policy. The RBI stopped issuing fresh UCB licences in 2004 after a run of governance lapses and financial stress, including the collapse of Madhavpura Mercantile Cooperative Bank. The earlier expansion had been rapid: between 1993 and 2001, the regulator issued 823 licences, but nearly 31% of those banks soon became financially unsound.
"A discussion paper on Licensing of UCBs was published for stakeholder feedback on January 13, 2026, following a two decade pause on issuance of fresh licenses. On an analysis of the feedback, it has been decided to resume licensing of UCBs on 'on tap' basis," the RBI said.
In its January discussion paper, the RBI said the ground had shifted materially over the past 20 years. Stronger supervision, improved sector-level financials and the creation of support institutions, it argued, made it possible to revisit the licensing freeze without abandoning prudence.
A Stronger Rulebook For A Changed Sector
The regulatory architecture for cooperative banks has changed considerably since the pause began. The Banking Regulation (Amendment) Act, 2020 gave the RBI stronger oversight powers, while the tiered regulatory framework and the National Urban Co-operative Finance and Development Corporation have added support on governance, technology, liquidity management and shared services. The regulator has also pushed consolidation through mergers and the closure of weaker entities.
The sector is now smaller but financially stronger. The number of urban cooperative banks fell to 1,457 as of March 2025 from 2,104 at end-2003 after years of consolidation. Aggregate assets rose to ₹7.38 trillion from ₹4.35 trillion in 2015, while deposits increased to ₹5.84 trillion from ₹3.55 trillion. The average capital-to-risk weighted assets ratio improved to 18%, with 92% of UCBs meeting the regulatory capital requirement, compared with 83% a decade earlier.
The RBI, however, has made clear that governance remains the sector’s most persistent vulnerability. Most licence cancellations during 2020-25, the discussion paper noted, were linked to governance failures, management fraud, gaps in expertise at board and senior-management level, and weak technology and cybersecurity capacity, especially among smaller cooperative banks.
Higher entry bar, sharper scrutiny
To reduce those risks, the proposed regime sets a far higher threshold for new entrants. Only large cooperative credit societies would be eligible to apply. They would need minimum capital of ₹3 billion, at least 10 years of operations, a sound five-year financial record, a capital-to-risk weighted assets ratio of at least 12%, and net non-performing assets of no more than 3%. Multi-state cooperative credit societies with a broader geographical footprint are likely to receive preference, reflecting the RBI’s emphasis on diversification and durability.
The discussion paper also points to governance standards broadly comparable with those applied to commercial banks, including tighter norms on board composition, independent directors and shareholding, in an attempt to strengthen oversight and limit the recurrence of past failures.
Rural Cooperative Banks Also Under Review
Separately, the RBI said it will review the concentration-risk management framework for rural cooperative banks, replacing the Credit Monitoring Arrangement instructions issued in 2008. The proposed changes are intended to reflect the growth of the banking system and the evolution of the cooperative sector while addressing prudential risks from concentrated lending. Draft amendment directions will be issued for public consultation.
The draft licensing guidelines for urban cooperative banks will be released for stakeholder consultation before they are finalised. The RBI did not specify when the final framework would be issued or when the first new licences could be granted.
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