RBI Likely To Revive Urban Co-Operative Bank Licences After 22 Years

The Reserve Bank of India (RBI) is likely to approve fresh licences for urban co-operative banks (UCBs), reviving a practice that has remained suspended since 2004, according to sources aware of the development.

The move follows the RBI’s discussion paper released in January seeking views on whether new UCB licences should be issued again. Sources said the central bank has received encouraging feedback from industry participants, strengthening the case for reopening the licensing window.

Lowering Of Capital Requirement

Industry participants have also proposed lowering the minimum capital requirement from the ₹300 crore threshold suggested in the discussion paper, sources added.

The potential decision marks a significant shift in the RBI's approach towards the co-operative banking sector, which has undergone major regulatory changes over the past two decades.

Regulatory Standards Have Improved Since 2004

Sources said the RBI’s comfort stems largely from improvements in supervision and regulatory oversight of UCBs since licences were last granted. When the licensing process was halted in 2004, concerns around governance standards, risk management and financial stability were among the key issues facing the sector.

Since then, supervisory mechanisms have become stronger. Regulatory monitoring has also increased, giving the central bank greater confidence in the sector's ability to support new entrants. The January discussion paper noted that regulatory standards for UCBs have improved materially over the years.

Listed Benefits And Risks

In its discussion paper, the RBI outlined both the advantages and concerns associated with granting fresh licences. Among the benefits highlighted were:

• Improved supervisory standards across the sector

• Greater financial inclusion

• Better financial health of urban co-operative banks

• Support from the umbrella organisation for smaller UCBs through capital, technology and knowledge-sharing initiatives

The paper also flagged several challenges. These included:

• Difficulties in raising capital

• The existing principle of shareholder entry and exit at face value, which offers limited incentives to investors

• Relatively small contribution of the sector to the overall banking system

• Governance concerns

• Limited board-level expertise in some institutions

• Gaps in technology infrastructure

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Likely Impact On Listed Banks

Industry watchers feel any resumption of UCB licensing is unlikely to have an immediate material impact on large listed private and public sector banks because urban co-operative banks account for a small share of the overall banking system.

However, new UCBs could strengthen competition in local and semi-urban markets where co-operative banks traditionally have a strong presence and customer relationships. Private sector banks and small finance banks that focus on retail deposits and small-business lending may face incremental competition in specific regions if new licences are issued.

Source:

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