Source: BS
Context:
The Reserve Bank of India (RBI) is set to resume licensing of urban cooperative banks (UCBs), after a pause of more than two decades, as part of developing a vibrant co-operative sector.
The Legal Basis
Licensing of UCBs is the regulatory authorisation granted by the RBI under Section 22 read with Section 56 of the Banking Regulation Act, 1949. It empowers primary cooperative credit societies to conduct banking — accepting public deposits and granting credit — in urban and semi-urban areas.
Section 56 is the provision that applies the Banking Regulation Act to cooperative societies with modifications.
Regulatory Timeline
| Year | Development |
|---|---|
| 1966 | UCBs brought under RBI’s regulatory ambit via amendments to the BR Act |
| May 1993 – June 2001 | Liberalised licensing era — over 820 new UCB licences issued |
| 2004 | RBI suspended new UCB licensing following widespread failures |
| January 2026 | RBI released a comprehensive Discussion Paper on reopening licensing |
| August 2026 | Governor announced draft guidelines for on-tap licensing based on stakeholder feedback |
Why Licensing Was Halted in 2004
- Widespread insolvency: nearly 31% of UCBs licensed during the 1990s liberalisation turned financially unsound within a short period, owing to poor credit appraisal and rapid unviable expansion.
- Governance failures and frauds: the Madhavpura Mercantile Cooperative Bank crisis (2001) — linked to the Ketan Parekh stock scam — exposed severe corporate governance deficits, conflict of interest and insider lending.
- Dual regulation gaps: banking operations were supervised by the RBI while administrative and managerial oversight rested with State Registrars of Cooperative Societies, creating enforcement delays and supervisory loopholes.
Why a Restart Is Now Feasible
- Strengthened statutory powers: the Banking Regulation (Amendment) Act, 2020 gave the RBI direct powers over UCB management, board constitution and resolution — effectively closing the dual-regulation loophole.
- Four-tier prudential framework: deposit-based tiered regulatory standards (Tiers 1 to 4) in force since December 2022, ensuring calibrated risk oversight.
- Improved sector balance sheets: gross NPAs of UCBs fell to a six-year low of ₹21,769 crore in FY26, with higher provisioning coverage ratios and capital buffers.
- Institutional backing: the National Urban Cooperative Finance and Development Corporation (NUCFDC), established in 2024, offers shared technology platforms, liquidity support and capital mobilisation for UCBs.
Practice MCQs
Q1. With reference to the licensing of Urban Cooperative Banks, consider the following statements:
a. Licensing is granted under Section 22 read with Section 56 of the Banking Regulation Act, 1949.
b. UCBs were brought under the RBI’s regulatory ambit in 1966.
c. Over 820 new UCB licences were issued between 1993 and 2001.
d. The RBI suspended fresh UCB licensing in 2004.
How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None
Answer Key
- (d) — All four are correct. Section 56 is the key provision — it applies the Banking Regulation Act to cooperative societies with modifications.
Exam Relevance
RBI Grade B — Very high relevance. Master the four-tier framework (Tier 1: deposits up to ₹100 crore; Tier 2: ₹100–1,000 crore; Tier 3: ₹1,000–10,000 crore; Tier 4: above ₹10,000 crore), the 2020 Amendment’s specific powers, NUCFDC’s role, and the Madhavpura episode as the reference failure.
