RBI proposes reopening urban co-operative banks’ licenses; favours large credit societies

Two decades after the Reserve Bank of India (RBI) stopped granting licenses for new urban co-operative banks (UCBs), the central bank has proposed reopening the licensing window. The move would favour granting UCB licenses to co-operative credit societies.

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, the RBI said in a discussion paper.  “A large co-operative credit society will have a longer track record. It would have established its governance and put in place sound management practices,” it said.

Credit societies are regulated by the Registrar of Co-operative Societies, and not by the RBI. They can accept deposits only from its members and lend only to its members. They can’t issue cheques payable to the public or offer full banking services like online fund transfer.

It has been two decades since the licensing of UCBs was put on hold by the RBI as it was found that a large number of the newly licensed UCBs became financially unsound within a short period. The High-Powered Committee on Urban Co-operative Banks — led by R Gandhi — recommended UCB licenses only for financially sound and well-managed co-operative credit societies having a minimum track record of five years. “Five years may be too short a period to judge the performance of a co-operative society. Hence, active operations for at least 10 years and a good financial track record of at least five years are desirable from a co-operative credit society to apply,” the RBI note said.

To analyse the financials, assessed capital to risk-weighted assets ratio (CRAR) should not be less than 12 per cent and the net non-performing assets (NNPA) ratio should not be more than 3 per cent at the time of grant of license to the eligible applicant, it said.

However, the paper listed several factors against granting new UCB licences. “Capital raising remains a problem. The distinct characteristics of shares of UCBs, in terms of refundability and their linkage to borrowing, add to the volatility of such capital and undermine the concept of capital as a loss absorber for the entity. This also challenges the very concept of perpetuity of share capital,” it said.

It said that the concept of one member one vote, regardless of shareholding, has been a deterrent in attracting growth capital into the sector and resolution of weak banks. “The principle of entry and exit of shareholders at face value does not provide any incentive to investors and makes buying shares of a co-operative bank an unattractive investment proposition,” the paper said.

Though there have been amendments to Banking Regulation Act, 1949, multiple legal challenges to these amendments and related RBI circulars in various courts have slowed the process of strengthening governance in UCBs. “Analysis of UCBs whose licenses were cancelled during the period 2020-25 reveals many instances related to governance failure or management fraud, especially in small UCBs,” the RBI said.

Directors on boards and senior management in UCBs are often found to lack adequate domain knowledge and expertise. Often, UCBs are being penalised for director related lending which is prohibited, the paper said.

Most UCBs small, but deposits with large banks

As on March 31, 2025, the number of UCBs totalled 1,457, comprising 838 tier 1 (57.52 per cent), 535 tier 2, 78 tier 3 and six tier 4 UCBs. In terms of deposits, tier 1, tier 2, tier 3 and tier 4 UCBs constituted 11.3 per cent, 30.6 per cent, 34.4 per cent and 23.8 per cent respectively of the total deposits of the sector.

As of FY25, 52 per cent of UCBs held deposits of below Rs 100 crore constituting 5.6 per cent of deposits while 7 per cent of UCBs held deposits of above Rs 1000 crore constituting 62.5 per cent of the deposits, the RBI paper said.

The total aggregate assets of the UCBs were Rs 7.38 lakh crore, and total deposits Rs 5.84 lakh crore as on March 31, 2025 as compared to Rs 4.35 lakh crore and Rs 3.55 lakh crore respectively in 2015.

The asset quality of UCBs — measured by gross non-performing assets (GNPA) ratio — was 6.2 per cent as of March 31, 2025 with net NPA at 0.7 per cent and provisioning coverage ratio at 90.1 per cent. The comparative figures for 2015 were 6.02 per cent, 2.66 per cent and 57.7 per cent respectively.