RBI signals cautious reopening of urban co-operative bank licences with strict eligibility criteria

After two decades, the Reserve Bank of India is set to reintroduce licences for new urban co-operative banks, but only for highly qualified applicants with robust financial and governance standards, marking a careful reboot of the sector.

The Reserve Bank of India is preparing to reopen the door to new urban co-operative bank licences after about 20 years, but only a narrow class of applicants is likely to qualify. According to The Hindu BusinessLine, the central bank’s draft guidelines would allow only existing multi-state credit co-operative societies with at least 10 years of operations, deposits of at least ₹10,000 crore and a minimum net worth of ₹300 crore to apply. The move marks a cautious return to a segment the RBI froze in 2004 because of weakness across the urban co-operative banking system.

The proposal, first outlined in a discussion paper earlier this year, is intended to support financial inclusion while keeping the entry bar high. The RBI said it wants to strengthen the co-operative banking structure without repeating past mistakes, and industry reports have noted that the sector has improved materially since the regulator last shut the licensing window. As of March 31, 2025, there were 1,457 urban co-operative banks in India with assets of ₹7.38 lakh crore and deposits of ₹5.84 lakh crore, underscoring the scale of the segment the central bank is seeking to reshape.

Under the draft rules, applicants would need to show a positive and improving trend in operating and financial performance over the previous five years. The capital to risk-weighted assets ratio must be at least 12 per cent and net non-performing assets must not exceed 3 per cent as of March 31 of the preceding financial year. The RBI also wants a formal shareholder resolution approving the conversion of a co-operative society into a bank, passed by a two-thirds majority in both number and value at a specially convened meeting.

The central bank is also setting strict governance requirements. It will assess the “fit and proper” status of directors, looking for sound credentials, integrity and no history of default with a bank or other financial institution. No member of the society may hold more than 5 per cent of the shareholding, and directors must meet eligibility norms under the RBI’s governance directions and the Banking Regulation Act as applied to co-operative societies.

Applicants will also have to submit a detailed business plan covering projected growth, branch expansion, product lines, technology use, risk management, staffing, priority sector lending and the planned separation of any non-banking activities. The RBI said the plan must be realistic and viable, warning that deviations after licensing could lead to restrictions on expansion, management changes or other regulatory action. Even then, approval is far from guaranteed: the RBI says licences will be granted selectively only to societies with strong track records and the ability to meet high standards of governance, customer service and efficiency.