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--RBI releases discussion paper on licensing of urban cooperative banks

 

NEW DELHI – The Reserve Bank of India Tuesday floated a discussion paper on the licensing of new urban co-operative banks over two decades after it last issued a fresh licence. The paper asked for public comments on whether it should resume licensing these types of bank and what the broad eligibility criteria should be for such licensing, if resumed.

 

The RBI has asked for feedback on the two discussion points by Feb. 13. Governor Sanjay Malhotra had announced the regulator would issue a discussion paper after the October monetary policy outcome amid a swathe of proposals to loosen regulations on the banking industry. The central bank stopped licensing new urban co-operative banks in 2004 because the newly licensed entities often became financially unstable quickly. 

 

Arguments in favour include greater financial inclusion, better regulatory oversight and improved financial health over the last two decades, the RBI said. An umbrella organisation that began work in 2024 will also provide institutional support, including technological, to weaker and smaller urban co-operative banks.

 

However, the regulator also made multiple arguments against resuming licensing. Capital raising remains a problem and the ability of capital to absorb shocks remains low in the case of such banks. Growth capital and equity investment has also been stagnant as shareholders can only enter and exit at face value. Total deposits and advances of urban co-operative banks as a share of the banking sector also remain small at less than 4?ch.

 

Legal challenges to the RBI's regulations have slowed the strengthening of governance in urban co-operative banks, the RBI said. Those banks with cancelled licences between 2020 and 2025 also showed instances of governance failure or management fraud. The directors and senior management of such banks also lack adequate domain knowledge and expertise, with further roadblocks due to paucity of adequate technology, cybersecurity infrastructure, and operational capability. 

 

"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," the RBI said. "A large co-operative credit society will have a longer track record. It would have established its governance and put in place sound management practices."

 

The regulator also batted for stipulating stringent eligibility criteria. It also said governance standards should be equivalent between commercial and co-operative banks. Co-operative banks should also have guardrails on the conduct of its board similar to commercial banks through the Companies Act, 2013 and Securities and Exchange Board of India regulations. 

 

The RBI recommended a minimum capital requirement for a co-operative credit society to be INR 3 billion as on Mar. 31 of the previous financial year to apply for a bank licence. It also recommended the society should have active operations for 10 years and a good financial track record of at least five years. Its assessed capital-to-risk-weighted assets ratio should be less than 12% and the net non-performing asset ratio should be less than 3% at the time the licence is granted, the RBI said.

 

The number of urban co-operative banks has shrunk from 2,104 at the end of 2003 to 1,457 as of Mar. 31. Over half of these are tier-I urban co-operative banks with deposits of less than INR 1 billion, but they held only 5.6% of the total deposits. Total aggregate assets for urban co-operative banks were INR 7.38 trillion and total deposits were at INR 5.84 trillion as on Mar. 31.

 

"At present there are 82 weak UCBs under supervisory restrictions; while 28 very weak UCBs have been placed under the All-Inclusive Directions (AID), 32 UCBs are under Prompt Corrective Action (PCA) and 22 UCBs are under Supervisory Action Framework (SAF)," the regulator said. "These are also in Tier 1 to Tier 3," the RBI said, referring to urban co-operative banks with deposits of less than INR 100 billion in individual deposits.  End

 

Reported by Aaryan Khanna

Edited by Deepshikha Bhardwaj

 

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