The Reserve Bank of India has issued draft guidelines for on-tap licensing of urban cooperative banks (UCBs) after a 22-year gap. Under these new norms, eligible multi-state credit cooperative societies with at least 10 years of operational track record, a minimum deposit base of ₹10,000 crore, and a net worth of ₹300 crore can apply for conversion into UCBs. This decision signals the regulator's growing confidence that statutory governance reforms have created sufficient safeguards for the sector. The move comes at a time when the RBI has been encouraging voluntary transition of UCBs into small finance banks (SFBs), with Shivalik Mercantile Co-operative Bank Ltd being the first UCB to successfully convert, receiving in-principle approval in January 2020 and starting operations as an SFB in April 2021. However, another large UCB entered the SFB sector via a regulatory rescue operation, as scam-hit Punjab and Maharashtra Co-operative Bank (PMC Bank) was amalgamated and converted into Unity Small Finance Bank Ltd, jointly promoted by Centrum Financial Services Ltd and Resilient Innovations Pvt Ltd (BharatPe).
RBI Deputy Governor Swaminathan J highlighted that UCBs face increasingly complex risks as they rely more on technology and third-party service providers for critical banking operations. Speaking at a keynote address on August 7, he emphasized that "the institution may be small, but the risk environment around it can be much larger." UCBs depend on outside service providers for Core Banking Solution, payment applications, data centres and other important services, which allows smaller institutions to access technology and expertise that may be difficult or expensive to build entirely on their own. However, this outsourcing model changes the nature of banks, with some critical activities now performed outside the bank. The deputy governor stressed that cyber threats and digital fraud do not distinguish between large and small banks, noting that a cyber attacker does not distinguish between a large bank and a small bank, and a vulnerability in a common technology platform can affect several institutions at the same time.
The cooperative banking sector's expansion began in earnest after May 1993, when the RBI liberalised licensing guidelines following the S S Marathe Committee recommendations. Between May 1993 and June 2001, the RBI issued at least 823 new licenses, with the total number of UCBs growing from 1,311 in 1993 to around 1,926 by March 2004. However, this expansion revealed underlying instability, as 205 newly licensed UCBs turned financially unsound and collapsed within a short period. The maths reveals an underlying instability: The net increase was only 615 banks, not 823, because 205 newly licenced UCBs turned financially unsound and collapsed within a short period. The high-profile collapse of the Madhavpura Mercantile Co-operative Bank in 2001 exposed the sector's vulnerabilities, prompting the RBI to suspend fresh UCB licensing in 2004. Looking back, India's first credit cooperative society was formed in Bengal in 1903 with the support of the local government and registered under the British Government's Friendly Societies Act. The Cooperative Credit Societies Act of India was subsequently enacted on 25 March 1904.
The high-profile collapse of the Madhavpura Mercantile Co-operative Bank in 2001 exposed the sector's vulnerabilities, prompting the RBI to suspend fresh UCB licensing in 2004. Due to liquidations and voluntary mergers following the freeze, the total number of operational UCBs dropped from 1,926 in March 2004 to 1,457 by March 2025. In FY25 alone, seven mergers took place—six in Maharashtra and one in Telangana, lifting the total number of UCB mergers to 163 between FY05 and FY25. From the turn of the century through FY26, depositors of 488 failed banks claimed ₹18,931.40 crore from the Deposit Insurance and Credit Guarantee Corporation, with 98.7% of all claim payouts going towards resolving failed cooperative banks. The history of cooperative bank failures in India is fundamentally a chronicle of systematic exploitation of a grassroots movement for political and personal gain. Cooperative banks are built on the democratic principle of "one member, one vote," but rather than safeguarding them against political capture, this governance structure has frequently been exploited beyond outright corruption, with state governments historically using their powers under state cooperative acts to supersede managing committees, delay elections, and stack boards with political nominees.
Despite challenges, the consolidated balance sheet of all UCBs grew 4.4% in FY25 to ₹7.39 trillion, with credit expanding by 6.7% against 5.2% deposit growth. The sector has undergone significant reforms, with amendments via the Banking Regulation (Amendment) Act 2020 bringing cooperative banks under direct RBI supervision. A committee chaired by former RBI deputy governor N Vishwanathan in 2021 charted out the roadmap for the sector, establishing comprehensive governance, audit, and management standards similar to commercial banks. The decision to reintroduce on-tap licensing signals the regulator's confidence that the sector has evolved from its past challenges and now merits the trust placed in it for providing last-mile financial connectivity to India's rural and semi-urban population. In their ideal form, UCBs provide the last-mile financial connectivity that India's rural and semi-urban population need, but the onus is now squarely on the sector to prove it merits the regulator's trust through professional management, insulation from political interference, and robust governance frameworks.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) replaced its flat-rate premium structure with a risk-graded framework effective April 1, 2026, ranging from 8 to 12 paise per ₹100 of deposits. Currently, 98.1% of all accounts in cooperative banks are fully covered up to the ₹5 lakh limit, higher than commercial banks at 97%. The decision to reintroduce on-tap licensing represents the regulator's confidence that the sector has evolved from its past challenges and now merits the trust placed in it for providing last-mile financial connectivity to India's rural and semi-urban population. The onus is now squarely on the sector to prove it merits the regulator's trust through professional management, insulation from political interference, and robust governance frameworks. The structural turning point came in March 1966, when cooperative banks with paid-up capital and reserves of at least ₹1 lakh were brought under the Banking Regulation Act, 1949, creating a complex system of dual regulation where the RBI became the authority for banking operations and supervision, while administrative management remained with state governments.
