Urban Co-operative Banks (UCBs)

The Reserve Bank of India (RBI) has proposed reopening the licensing window for new urban co-operative banks (UCBs).

• RBI had stopped issuing new UCB licences around 2004 after finding that many newly licensed UCBs became financially unsound within a short period.

Key Proposals of RBI

• Capital Adequacy: The capital to risk-weighted assets ratio (CRAR) must be at least 12%.
• NPA Ratio: The net non-performing assets (NNPA) ratio should not exceed 3% at the time of applying for a license.
• Eligibility: The RBI Proposal only for large co-operative credit societies with a minimum of 10 years of active operation and a good financial track record of at least 5 years.

About Urban Cooperative Banks (UCBs)

• UCBs are cooperative societies registered under either the State Cooperative Societies Act or the Multi-State Cooperative Societies Act. 
• They are granted a banking license under the Banking Regulation Act, 1949, and operate as primary cooperative banks.
• Current Status of UCBs in India
  • As of March 31, 2025, there are 1,457 Urban Cooperative Banks (UCBs) in India.
  • Asset Quality:
    • Gross NPA ratio: 6.2%
    • Net NPA ratio: 0.7% 
    • Provisioning coverage ratio: 90.1%
  • Assets and Deposit Growth: 
    • Total assets of UCBs stood at Rs 7.38 lakh crore.
    • Total deposits were Rs 5.84 lakh crore, a significant increase from 2015.
• Regulatory Framework and Dual Control
  • Reserve Bank of India (RBI) Regulation: Since 1966, the RBI has regulated UCBs, overseeing functions such as licensing, capital adequacy, loan policies, prudential norms, and ensuring financial stability.
  • Registrar of Cooperative Societies (RCS): The administrative and management aspects of UCBs are regulated by the Registrar of Cooperative Societies (RCS), under the supervision of either the state or central government.

Challenges in Granting UCB Licences

• Governance Risks: Capital raising challenges and volatility in capital structure due to share characteristics.
• Lack of Investment Incentives: The “one member, one vote” principle makes it difficult to attract growth capital.
• Weak Governance in Small UCBs: Issues such as management fraud, poor governance, and lack of domain knowledge among board members.
• Regulatory and Legal Barriers: Despite amendments to the Banking Regulation Act (1949), court interventions have slowed governance reforms.

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