RBI Eyes UCB License Reopening for Large Credit Societies
Overview
The Reserve Bank of India (RBI) proposes reopening Urban Co-operative Bank (UCB) licenses after a two-decade hiatus, focusing on large, established co-operative credit societies. This strategic shift aims to mitigate risks associated with smaller UCB failures by setting stringent criteria, including a minimum 10-year operational history and robust financial health metrics like a 12% CRAR and 3% NNPA. The move signals a potential consolidation and re-regulation of the co-operative banking sector.
UCB License Window Poised to Reopen
The Reserve Bank of India (RBI) has put forth a proposal to reopen the licensing window for Urban Co-operative Banks (UCBs), ending a two-decade pause. This initiative specifically aims to grant licenses to co-operative credit societies, acknowledging that most past UCB failures involved smaller entities.
Strict Criteria for New Entrants
According to the RBI's discussion paper, potential applicants must possess a significant track record. Desired candidates would have at least 10 years of active operations and a sound financial history for at least five years. Stringent financial health indicators are also proposed, requiring a Capital to Risk-Weighted Assets Ratio (CRAR) of no less than 12% and a Net Non-Performing Assets (NNPA) ratio not exceeding 3% at the time of license application.
Governance and Capital Hurdles Remain
Despite the proposal, the paper highlights considerable hurdles. Capital raising remains a persistent issue, complicated by the unique characteristics of UCB shares. The principle of 'one member, one vote,' while democratic, deters growth capital investment. Furthermore, the RBI notes that governance failures and management fraud, particularly in smaller UCBs, have led to license cancellations in recent years.
Co-operative Banking Sector Snapshot
As of March 31, 2025, India had 1,457 UCBs. While small UCBs constituted over half of the total count, larger UCBs held a disproportionate share of deposits. Total aggregate assets stood at ₹7.38 lakh crore, with deposits at ₹5.84 lakh crore. The sector's asset quality showed a Gross Non-Performing Assets (GNPA) ratio of 6.2% and Net NPA of 0.7%.
