RBI to end 22-year freeze on new urban cooperative bank licences; draft guidelines soon

The Reserve Bank of India (RBI) on Wednesday said it will shortly issue draft guidelines to resume licensing of urban cooperative banks (UCBs) on an "on-tap" basis, a major step towards ending a more than two-decade pause on granting fresh licences to the sector.

The announcement follows stakeholder feedback on a discussion paper released in January this year on the licensing of UCBs.

RBI Governor Sanjay Malhotra, while announcing additional measures, said the central bank would issue draft guidelines for resuming licensing of UCBs based on the feedback received on the discussion paper.

"On the basis of the feedback received on the discussion paper on licensing of UCBs, we are issuing draft guidelines for resuming licensing of UCBs," he said.

The move comes after the RBI in January published a discussion paper seeking stakeholder views on whether the time was appropriate to restart licensing of new UCBs and what the eligibility criteria should be.

The central bank had noted that it has been more than two decades since licensing of UCBs was put on hold after a large number of newly licensed entities became financially unsound within a short period.

Licensing was effectively frozen in 2004, when the RBI decided that fresh licences would be considered only after a comprehensive policy for the sector and an appropriate legal and regulatory framework were put in place.

In the discussion paper, the RBI said the operating environment for UCBs has changed substantially since then.

It pointed to stronger regulatory powers following amendments to the Banking Regulation Act in 2020, the introduction of a revised tiered regulatory framework, and the establishment of the National Urban Co-operative Finance and Development Corporation (NUCFDC) as an umbrella organisation to support the sector.

The RBI also cited improvement in the financial health of UCBs.

As of March 31, 2025, the sector had 1,457 UCBs with aggregate assets of ₹7.38 lakh crore and deposits of ₹5.84 lakh crore.

The average capital to risk-weighted assets ratio stood at 18%, while the gross non-performing assets ratio was 6.2%.

But the central bank had also flagged persistent challenges, including governance failures, capital-raising constraints, technology gaps and cybersecurity risks, particularly among smaller UCBs.

The RBI said the draft guidelines would be released shortly for public consultation before the new licensing framework is finalised.