In a major step to strengthen the financial health of Urban Cooperative Banks (UCBs), the Reserve Bank of India (RBI) has released a Discussion Paper (DP) outlining fresh capital raising avenues and trading mechanisms for UCB securities.
The DP, issued on May 22, 2025, invites public feedback until July 15, 2025, through the RBI’s ‘Connect 2 Regulate’ portal.
Following the Banking Regulation (Amendment) Act, 2020, which allowed co-operative banks to raise capital through special shares, shares at premium, and unsecured debentures for the first time, the RBI’s latest DP aims to clarify how these provisions can be practically implemented. It also addresses legal and operational challenges faced by UCBs in issuing and trading these securities.
A key highlight of the DP is the introduction of a new type of capital instrument called Special Share Certificates (SSCs).
These non-voting, non-membership shares can be issued at book value by Tier 4 UCBs to members or residents within their operational area. SSCs will count as Tier 1 capital and come with safeguards such as a minimum three-year lock-in period and redemption only if the bank maintains required capital ratios.
To protect investors, the redemption value will be the lower of the issue price or the book value at redemption. UCBs are also barred from investing in SSCs of other banks or lending against them.
On the trading front, the RBI proposes a dual approach. First, it suggests enabling listing of select UCB securities on stock exchanges by amending existing laws.
However, this will require coordination with the Central Government and SEBI, and smaller banks may find compliance burdensome. To address this, RBI proposes an “exchange-lite” model similar to existing platforms like the Innovators Growth Platform or Social Stock Exchange, tailored for UCBs.
Second, as a quicker alternative, Tier 4 UCBs could allow trading of securities such as member shares and SSCs on their own websites. Trading prices for SSCs would be allowed within a plus or minus 25 percent band around the book value to protect retail investors. Transparency will be ensured by requiring banks to publish related financial data.
The RBI also notes that currently, UCBs can raise capital only from residents within their operational area, limiting investor pools. It proposes amendments to allow non-member securities to be issued to residents outside this area, increasing access to capital.
The paper outlines pros and cons for both approaches. Listing on exchanges would improve liquidity, investor protection, and market access but involves complex legislative changes and compliance. Website trading is easier to implement but lacks SEBI oversight and may create fragmented markets.
The RBI’s proposals aim to modernize UCB capital structures while respecting cooperative principles and operational realities. Stakeholders are encouraged to provide feedback, potentially shaping a new era of growth and stability for urban cooperative banks.
This is long awaited welcome step by RBI. This is design for few big coop banks. TIER 4 banks can think of this, particularly whose area operation is all over india. But still i couldnt understand how it will be operationalized. Investors can ensure its liquidity. It is good that its tier 1 capital. Crar will improve. At the same time banks NDTL will increase and bank has to maintained CRR/SLR also. On the whole its creative intiatives by RBI.