RBI to issue fresh licences for urban cooperative banks, ending two-decade freeze

The Reserve Bank of India (RBI) on Tuesday released a discussion paper proposing the resumption of licences for new urban cooperative banks, ending a freeze that has been in place for more than two decades- a move seen as a major shift from its earlier stance.

The RBI had stopped issuing licences to such banks in 2004, citing their weak financial health. "As the operating environment has changed and the UCB sector has transformed significantly...(it) requires fresh licensing guidelines for the sector after a thorough discussion on the subject," the RBI said in the discussion paper.

The central bank has sought comments until February 13 after which it plans to issue draft guidelines. 

Urban cooperative banks are community-focused financial institutions in urban and semi-urban areas which offer an alternative to commercial banks.

India had 1,457 urban cooperative banks as of March 31, 2025, according to a statement by Union Home Minister Amit Shah to the Lok Sabha. The total outstanding loans in these banks are ₹3.68 lakh crore. 

The central bank said that these lenders have an important role in financial inclusion, but added that capital raising remains a challenge for them. "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," RBI said.

The issuance of new licenses will be subject to various regulatory requirements, including a minimum capital threshold of ₹300 crore. "Minimum capital requirement for a co-operative credit society should be ₹300 crore as on the March 31 of the previous financial year to be eligible to apply," RBI said.

The move offers new possibilities for states such as Kerala, which rely heavily on the cooperative sector to fuel growth. With the revival of new licences, urban cooperative banks will be able to extend more credit to the MSME sector, boosting growth in small-scale industries.

According to RBI data, Kerala currently has 58 urban cooperative banks, while Gujarat tops the list with 211.

(With inputs from Reuters)