The Reserve Bank of India (RBI), in its recently released Discussion Paper on the licensing of Urban Co-operative Banks (UCBs), has raised serious concerns over the sector’s structural design, governance framework and limited ability to mobilise capital, outlining why the resumption of new UCB licences remains unlikely in the near term.
A key issue highlighted by the central bank is the inherent difficulty UCBs face in raising stable and loss-absorbing capital. Under the existing cooperative framework, shares are refundable and closely linked to borrowing activity.
This feature, the RBI noted, makes capital volatile and weakens its effectiveness as a perpetual buffer during periods of financial stress. As a result, UCBs often struggle to build robust capital bases comparable to other banking institutions.
The Discussion Paper draws particular attention to the cooperative principle of “one member, one vote,” irrespective of the size of shareholding. While the principle aligns with the cooperative ethos, RBI observed that it acts as a major deterrent for attracting growth-oriented capital.
Since voting rights are not proportionate to investment, external investors have little incentive to deploy funds in UCBs. This structure also complicates the resolution of weak banks, as capital infusion and ownership restructuring become challenging.
Further reducing investor appeal is the provision allowing shareholders to enter and exit at face value. According to RBI, this limits the potential for capital appreciation and makes investment in cooperative banks relatively unattractive when compared with commercial banking alternatives.
The central bank also underlined the modest footprint of the cooperative banking sector within the overall financial system. Cooperative banks account for 5.4 per cent of total deposits and 5.6 per cent of advances in the banking sector. UCBs alone contribute just 3.1 per cent of deposits and 3.8 per cent of advances, underscoring their limited systemic significance despite their long presence in urban and semi-urban areas.
Governance weaknesses remain another major area of concern. Although amendments to the Banking Regulation Act, 1949 were introduced to strengthen regulatory oversight, RBI pointed out that multiple legal challenges to these amendments and subsequent circulars have slowed the reform process. An analysis of licence cancellations between 2020 and 2025 revealed repeated instances of governance failure, weak internal controls and management fraud, particularly among smaller UCBs.
The Discussion Paper also noted gaps in professional competence at the board and senior management levels. Many UCBs continue to face penalties for violations related to director-linked lending, reflecting inadequate understanding of banking regulations and risk management norms. The lack of domain expertise among directors remains a persistent challenge in improving overall governance standards.
In addition, RBI flagged technology and cybersecurity deficiencies across a large segment of the UCB sector. Limited investment in core banking systems, cybersecurity infrastructure and operational resilience exposes these banks to heightened risks in an increasingly digital and hostile cyber environment.
Taken together, the RBI’s assessment suggests that without deep structural reforms, improved governance capacity and sustainable capital solutions, the existing cooperative banking model, particularly in the urban segment, may not be well-suited for rapid expansion through new licences.
