After a 22-year hiatus, the Reserve Bank of India (RBI) will soon come out with draft guidelines following which it will resume issuing ‘on-tap’ licensing for urban co-operative banks.

RBI Governor Sanjay Malhotra said Wednesday the central bank had launched a discussion paper on this in January this year and the next steps will be followed up shortly.

"The draft guidelines will be issued shortly for stakeholder consultation,"  Malhotra said.

The RBI had paused issuing licences to urban co-operative banks since 2004. The reasons for this could have been concerns around governance issues, the control over these bodies which political leaders wielded and episodic stress at such lenders.

In January 2026, the RBI released a discussion paper proposing a framework for granting licences to new urban co-operative banks. 

The paper laid down minimum capital, track record, asset quality and governance criteria for eligible co-operative credit societies seeking to transition into urban co-operative banks.

The eligibility criteria under the proposed framework included a co-operative credit society having at least 10 years of existence; holding a deposit size of at least Rs 10,000 crore; and enjoying a minimum net worth of Rs 300 crore as of 31 March of the preceding financial year. 

It should also maintain a capital adequacy ratio of at least 12% and have a net non-performing asset (NPA) ratio of not more than 3% as on 31 March of the previous financial year of application.

The discussion paper further stated that an applicant should ideally have a sound financial track record for a minimum of five years. No member should have a shareholding of more than 5%. 

The RBI also proposed that applicants should have a wider geographical presence across multiple states. The society must be registered under Multi-State Co-operative Societies Act, 2002 at the time of application.

“Multi-state cooperative credit societies may be preferred entities. However, select single-state cooperative credit societies that otherwise meet the wider geographical footprint and other eligibility criteria may also be considered,” the discussion paper said. 

As of 31 March 2025, there are 1,457 urban cooperative banks in India, which hold around 2% of total bank deposits.  

The RBI had decided in June 2004 to consider issuance of fresh licenses only after a comprehensive policy on urban co-operative banks, including an appropriate legal and regulatory framework for the sector, was put in place and a policy for improving their financial health was formulated. 

“The financial health of the urban co-operative banks has improved over the years generally and also through consolidation in the sector and closure of many weak ones. Further, the regulatory and supervisory powers of the RBI have been strengthened following the Banking Regulation (Amendment) Act, 2020,” the central bank said.

Rural co-operative banks

On Wednesday, the RBI also announced a comprehensive review of the credit monitoring arrangement for rural cooperative banks, which was last revised in 2008.

"As the banking sector in general, and co-operative banking sector in particular, have undergone significant expansion and changes since then (2008), it has been decided to review these instructions, keeping in view the objectives of developing a vibrant co-operative sector," Malhotra said.

Prudential concerns arising from concentrated lending will be taken on board in the draft amendment directions which are being issued for wider stakeholder consultations, the Governor said.