RBI issues draft norms for 'on-tap' licensing of urban co-operative banks

Mumbai: The Reserve Bank of India on Wednesday released draft guidelines for on-tap licensing of urban co-operative banks (UCBs). The central bank cited the sector's improved financial health alongside its own expanded regulatory and supervisory powers as key reasons for the move. The decision was announced in the statement on developmental and regulatory policies, released alongside Wednesday's monetary policy statement.

“The financial health of the UCBs has improved over the years generally and also through consolidation in the sector and closure of many weak UCBs. Further, the regulatory and supervisory powers of the RBI have been strengthened,” RBI said.

This follows a discussion paper published on 13 January 2026 for stakeholder feedback, marking the central bank’s first move toward issuing fresh licenses after a two-decade pause.

“The comments/suggestions received were comprehensively examined and it has been decided to issue a new framework,” the RBI said, noting that stakeholder feedback led to the decision to resume issuing UCB licenses on an ‘on-tap’ basis.

The norms are expected to pave the way for the entry of new players into the segment after the central bank last tightened guidelines. In June 2004, the RBI had decided to consider issuance of fresh licenses only after a comprehensive policy on UCBs, including an appropriate legal and regulatory framework for the sector, was put in place, and a policy for improving the financial health of the urban co-operative banking sector was formulated.

As of March 2025, there are around 1,457 UCBs in India, which hold around 2% of total bank deposits, SBI (State Bank of India) Research said in its 'Ecowrap' report. "This step will enhance financial inclusion but there is a need for stronger governance, professional management, timely oversight, and secure technology adoption for resilience," group chief economic advisor Soumya Kanti Ghosh said.

Eligibility criteria

Under the proposal, credit co-operative societies in existence for at least 10 years will be eligible to apply for the licence, subject to having deposits of at least ₹10,000 crore and a minimum net worth of ₹300 crore. Further, no member should hold a stake of more than 5%.

In the first phase, applicants must be registered under the Multi-State Co-operative Societies Act, 2002, to prove operational presence across multiple states. They must also demonstrate a “positive and progressive trend” in operating and financial parameters in the previous five years.

Applicants’ capital to risk-weighted assets ratio (CRAR) should be at least 12% and the net non-forming assets ratio (NPA) should not be higher than 3% at the end of the previous financial year. They will also be required to submit a detailed business plan stating the objectives, plans to achieve these objectives (especially those related to financial inclusion), and a project report covering business potential and viability.

The report should include the underlying assumptions, financial projections for five years, target locations for branch openings, proposed product lines, target clientele, technology usage, risk management, plans relating to human resources, priority sector compliance, compliance with prudential norms on CRR (cash reserve ratio)/SLR (statutory liquidity ratio), and comprehensive plan to separate and transfer all non-banking activities, among others, the draft said.

The RBI said it will conduct an initial screening to verify eligibility, returning any applications that fail to meet the required criteria. Due diligence of all existing directors will be carried out, followed by an inspection of the society to verify the financials and other information. Next, an internal screening committee (ISC) from RBI, comprising two deputy governors and two executive directors, will evaluate the applications and make recommendations to the committee of the central board (CCB) of the RBI for a final decision on issuing in-principle approval, which will be valid for 18 months. Rejected applicants won’t be eligible to apply for a banking licence for three years.

Cautious approach

Emphasizing that banking carries high financial leverage, the RBI said it will maintain a cautious approach to licensing. Approvals will be granted selectively to cooperative societies with flawless track records, robust standards of governance and customer service, and full compliance with regulatory norms. Consequently, meeting the basic eligibility criteria alone will not guarantee a license.

Licences will be issued selectively to co-operative societies that conform to the stipulated requirements, meet any other requirements deemed necessary, have an impeccable track record, and are likely to conform to the best standards of governance, customer service, and efficiency. “Therefore, it may not be feasible for the RBI to issue licenses to all the applicants meeting the eligibility criteria prescribed above,” the central bank said.