The Reserve Bank of India is reintroducing on-tap licensing for select urban co-operative banks, signalling a cautious push towards sector stabilisation and growth amidst a history of vulnerabilities and regulatory interventions.
The Reserve Bank of India’s revival of on-tap licensing for urban co-operative banks marks a notable shift in a sector long defined by fragility, political interference and periodic rescue. Under the draft rules, multi-state credit co-operative societies with at least 10 years of operations, deposits of at least Rs10,000 crore and net worth of Rs300 crore would be eligible to apply for conversion, according to the business standard report. The move comes as the regulator has also been nudging stronger urban co-operative banks towards small finance banks, a path first taken by Shivalik Mercantile Co-operative Bank.
Shivalik received in-principle approval from the RBI on 6 January 2020 and began operating as a small finance bank in April 2021, making it the first urban co-operative bank to complete such a transition, according to the bank’s own announcement and subsequent reporting by Moneycontrol and others. The sector’s other high-profile route into the small finance bank space was less orderly: the troubled Punjab and Maharashtra Co-operative Bank was folded into Unity Small Finance Bank after a regulatory intervention involving Centrum Financial Services and BharatPe’s Resilient Innovations.
The broader history of co-operative banking in India helps explain why the RBI is approaching fresh licensing with caution. The movement began in Bengal in 1903, and by 1911 there were 5,300 societies with more than 300,000 members. The 1912 co-operative societies law then created a three-tier structure that linked village societies, district central banks and state apex banks. But the system soon developed a split identity: the RBI was given banking supervision, while state governments retained control over incorporation, management and winding up.
That split became more visible after liberalisation in 1993, when the RBI, acting on the S S Marathe Committee’s recommendations, relaxed the old “one district, one bank” approach and allowed new urban co-operative banks in the same area if there was market demand. Expansion followed quickly, but so did failure. The sector’s vulnerabilities were exposed by the collapse of Madhavpura Mercantile Co-operative Bank in 2001, and the RBI froze fresh licensing in 2004, shifting the emphasis to consolidation, restructuring and clean-up.
The toll has been severe. Business Standard says the number of operating urban co-operative banks fell from 1,926 in March 2004 to 1,457 by March 2025, even as mergers and cancellations continued. Deposit insurance data also show the depth of the damage: from the turn of the century through FY26, depositors of 488 failed banks claimed Rs18,931.40 crore from the Deposit Insurance and Credit Guarantee Corporation. After the collapse of PMC Bank, the insurance cap was raised from Rs1 lakh to Rs5 lakh in February 2020, and the DICGC later shifted to a risk-based premium system from April 1, 2026. Against that backdrop, the RBI’s new licensing plan suggests a belief that tougher governance rules, including the Banking Regulation (Amendment) Act, 2020, may finally be giving the sector a more durable footing.
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