RBI gives Urban Cooperative Banks new lease of life | Explained
The Reserve Bank of India signalled it will resume issuing fresh licences for Urban Cooperative Banks (UCBs), reversing a freeze on new licences that had lasted over two decades
The move follows draft guidelines for on-tap licensing of UCBs, building on an earlier discussion paper
Draft eligibility norms require applicant societies to have at least 10 years of operating history, minimum deposits of ₹10,000 crore, and a net worth of at least ₹300 crore as of the preceding financial year-end
The step is read as part of a broader effort to deepen financial inclusion and address persistent MSME credit gaps despite growth in digital lending
Dual Regulatory Structure of Cooperative Banks
Cooperative banks in India have historically been regulated by two authorities simultaneously — the Registrar of Cooperative Societies (state government) for incorporation, management, and administrative matters, and the RBI for banking-related prudential regulation (capital adequacy, cash reserves, licensing). This "dual control" structure is widely cited as a root cause of governance failures in the cooperative banking sector.
Key Details
- Registrar of Cooperative Societies handles: incorporation, registration, managerial appointments, audit, and supersession of boards
- RBI historically handled: licensing, branch expansion, capital adequacy, and prudential norms under the Banking Regulation Act, 1949 (as applicable to cooperative societies)
- This split accountability meant RBI could not always act decisively against mismanaged UCBs, since board-level control remained with the Registrar
The 2020s' UCB regulatory tightening and now the resumption of licensing both stem from the RBI consolidating stronger direct authority over UCBs to fix the weaknesses this dual-control structure exposed.
Banking Regulation (Amendment) Act, 2020 — Post-PMC Bank Reforms
The Punjab and Maharashtra Co-operative (PMC) Bank crisis of September 2019, involving large-scale exposure concealment to a single builder group, triggered the Banking Regulation (Amendment) Act, 2020, which substantially expanded RBI's direct regulatory powers over cooperative banks.
Key Details
- The Act brought about 1,482 Urban Cooperative Banks and 58 Multi-State Cooperative Banks under enhanced RBI supervision, effective from 26 June 2020
- RBI was empowered to regulate cooperative banks in a manner similar to scheduled commercial banks, including powers over management, audit, capital raising, and amalgamation/reconstruction schemes
- RBI can now frame amalgamation schemes for a distressed cooperative bank without first placing it under a moratorium — a power aimed at avoiding depositor panic and prolonged account freezes
- PMC Bank was eventually merged into Unity Small Finance Bank
The freeze on new UCB licences that lasted through and after the PMC crisis is now being lifted, but only after this 2020 reform strengthened RBI's supervisory toolkit — the licensing resumption is presented as the next phase after the "course correction."
Cooperative Societies as a Constitutional Subject — 97th Constitutional Amendment, 2011
Cooperative societies, the organisational form UCBs are built on, were elevated to constitutional status by the 97th Constitutional Amendment Act, 2011, which is relevant background for how UCB governance is constitutionally framed even as banking regulation itself falls under RBI/Union jurisdiction.
Key Details
- Inserted "cooperative societies" into Article 19(1)(c), making the right to form them a fundamental right on par with unions and associations
- Added Article 43-B to the Directive Principles, directing the State to promote voluntary formation, autonomous functioning, democratic control, and professional management of cooperative societies
- Introduced Part IX-B (Articles 243-ZH to 243-ZT) prescribing governance norms — board composition, elections, audits, and dispute resolution — for cooperative societies
- In 2021, the Supreme Court held Part IX-B unconstitutional for want of ratification by half the states as required for provisions affecting state subjects, but upheld the multi-state cooperative society provisions as severable and valid
UCBs sit at the intersection of state-subject cooperative society law (Part IX-B/state Registrar) and Union-subject banking regulation (RBI) — the same jurisdictional overlap that produced the dual-control problem RBI is now trying to work around through direct licensing authority.
- PMC Bank crisis: September 2019; merged into Unity Small Finance Bank
- Banking Regulation (Amendment) Act, 2020: brought 1,482 UCBs and 58 Multi-State Cooperative Banks under enhanced RBI supervision, effective 26 June 2020
- Draft on-tap licensing eligibility for new UCBs: minimum 10 years of operating history, ₹10,000 crore minimum deposits, ₹300 crore minimum net worth
- 97th Constitutional Amendment, 2011: added cooperative societies to Article 19(1)(c), inserted Article 43-B (DPSP), and Part IX-B (Articles 243-ZH to 243-ZT)
- Part IX-B held unconstitutional in 2021 for lack of state ratification, except provisions on multi-state cooperative societies