RBI revives UCB licensing after 21-year pause, SBI Research flags governance gaps
Synopsis
For the first time since 2004, the RBI is reopening the door to new urban co-operative banks — but SBI Research says governance gaps and technology risks could undermine the move. With 1,457 UCBs holding just 2% of deposits and RCBs facing concentration risk, the central bank is simultaneously tightening oversight across the entire cooperative banking sector.
Key Takeaways
The RBI has resumed 'on tap' licensing of urban co-operative banks (UCBs) after a 21-year pause since 2004 .
India has 1,457 UCBs as of March 2025 , holding nearly 2 per cent of total deposits.
SBI Research warns that stronger governance, professional management, and secure technology adoption are critical for new UCBs.
Rural cooperative banks (RCBs) now account for 71.2 per cent of total cooperative sector assets as of March 2024 , up from 66.9 per cent in March 2020 .
The RBI is proposing to standardise loan pricing across all regulated entities; 67.6 per cent of bank loans are currently under the EBLR regime.
The Reserve Bank of India (RBI) has decided to resume licensing of urban co-operative banks (UCBs) on an 'on tap' basis after a 21-year pause that began in 2004, a move that could significantly expand financial inclusion for India's informal sector. However, a new report by SBI Research warns that stronger governance, professional management, timely oversight, and secure technology adoption are essential for the sector's resilience.
State of Urban Co-operative Banks
As of March 2025, India has around 1,457 UCBs, which collectively hold nearly 2 per cent of the country's total deposits — a modest share that underscores the sector's limited but critical footprint. UCBs have historically served segments that larger commercial banks tend to overlook: small traders, self-employed individuals, salaried workers, and others operating in the informal economy.
The resumption of licensing is widely seen as a positive step toward deepening financial inclusion, but SBI Research cautions that new entrants must be held to higher standards than many existing UCBs have demonstrated. Governance failures and technology vulnerabilities have periodically destabilised UCBs, making regulatory rigour non-negotiable.
Rural Co-operative Banks Also Under Review
Alongside the UCB decision, the RBI is also issuing revised directions for rural cooperative banks (RCBs) following a comprehensive review of the credit monitoring arrangement — the first such update since the framework was last revised in 2008. The central bank says the revisions reflect experience gained and developments over the intervening period.
RCBs have grown in relative weight within the cooperative sector: their share of total assets rose from 66.9 per cent in March 2020 to 71.2 per cent in March 2024. Despite this growth, RCBs continue to face structural challenges, particularly concentration risk on the lending side — both by sector and geography — compared to their urban counterparts. The revised framework specifically targets this vulnerability.
Loan Pricing Standardisation on the Agenda
The RBI has also proposed harmonising and standardising the regulatory framework on interest rates on advances across all regulated entities. India's bank loan pricing has evolved through several regimes: the Prime Lending Rate (until 2010), followed by the Base Rate, and then the Marginal Cost of Funds-based Lending Rate (MCLR) from 2016, which linked lending rates to the marginal cost of funds.
In 2019, the RBI permitted the External Benchmark-based Lending Rate (EBLR) to further improve monetary policy transmission. Currently, 67.6 per cent of bank loans operate under the EBLR regime. According to the SBI Research report, 'These parallel regimes need some standardisation to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection. The proposed measure is steering the loan pricing policy in this direction.'
What This Means Going Forward
The convergence of these three regulatory actions — UCB licensing resumption, RCB credit monitoring reform, and loan pricing standardisation — signals a broader push by the RBI to modernise and unify India's cooperative banking architecture. Whether new UCBs can meet the governance bar will be the defining test. Regulators and analysts will be watching the first batch of 'on tap' licence applications closely.
Point of View
From PMC Bank to a string of smaller collapses. The 'on tap' model works only if the entry bar is set high and supervisory bandwidth keeps pace with new entrants. The simultaneous push on RCB credit monitoring and loan pricing standardisation suggests the RBI is aware of the systemic fragility — but awareness and execution are different things. The real test will be how quickly the regulator can act when the next UCB shows early stress signals, rather than years after depositors are at risk.
NationPress
8 Aug 2026
Frequently Asked Questions
Why has the RBI resumed licensing of urban co-operative banks?
The RBI has resumed 'on tap' UCB licensing to enhance financial inclusion, particularly for small traders, self-employed individuals, and informal-sector workers who are underserved by larger commercial banks. Licensing had been paused since 2004, making this the first reopening in over two decades.
What governance concerns have been raised about new UCBs?
SBI Research has flagged the need for stronger governance frameworks, professional management, timely regulatory oversight, and secure technology adoption before new UCBs can be considered resilient. The cooperative banking sector has a history of governance failures that have periodically destabilised individual banks.
What changes is the RBI making for rural cooperative banks?
The RBI is issuing revised credit monitoring directions for rural cooperative banks (RCBs) for the first time since 2008. The update addresses lending portfolio concentration risk — both sectoral and geographic — which RCBs face more acutely than UCBs due to their narrower business base.
What is the EBLR and why does the RBI want to standardise loan pricing?
The External Benchmark-based Lending Rate (EBLR), introduced in 2019, links bank lending rates directly to external benchmarks to improve monetary policy transmission. Currently 67.6 per cent of bank loans use EBLR, but multiple parallel regimes still exist. The RBI wants to standardise these to improve transparency, uniformity, and consumer protection.
How significant is the cooperative banking sector in India?
India has around 1,457 urban co-operative banks as of March 2025, holding nearly 2 per cent of total deposits. Rural cooperative banks account for 71.2 per cent of total cooperative sector assets as of March 2024, up from 66.9 per cent in March 2020, reflecting their growing systemic weight.
