The Reserve Bank of India (RBI) has decided to resume licensing of urban co-operative banks (UCBs) on an ‘on tap’ basis but there is a need for stronger governance, professional management, timely oversight, and secure technology adoption for resilience, according to a new report.
RBI resumes licensing of urban co-operative banks
There are around 1,457 UCBs in India as of March 2025, which hold nearly 2 per cent of the deposits.
Licensing of new UCBs has been paused since 2004, so, this step will enhance financial inclusion, but there is a need for stronger governance and professional management, said SBI Research in its report.
UCBs have long been an essential part of India’s cooperative story, providing banking services to segments – often underserved by larger banks – small traders, self-employed individuals, salaried workers, and others in the informal sector.
Why stronger governance matters for new urban co-operative banks
The Central Bank is also issuing directions after a comprehensive review of the credit monitoring arrangement for rural cooperative banks (RCB), considering experience gained and developments since the framework was last revised in 2008.
Share of RCB in total assets of cooperative sector has increased from 66.9 per cent in March 2020 to 71.2 per cent in March 2024.
However, given the narrow business base on the lending side, RCB continue to face the challenges of lending portfolio concentration (sector and geographic) compared to UCBs. The current measure addresses this aspect of the RCB structure, the report mentioned.
RBI focuses on loan pricing transparency and monetary policy transmission
Regarding regulatory measures, RBI has proposed to harmonise and standardise the regulatory framework on interest rates on advances across all regulated entities (REs).
Pricing of bank loans has long history of evolution keeping in mind transparency and monetary policy transmission imperatives.
Up till 2010, banks used the Prime Lending Rate, followed by the base rate. After 2016, the banks have migrated to MCLR that links the lending rates to marginal cost of fund.
To further increase the transmission, in 2019, RBI permitted EBLR. Currently, 67.6 per cent of the bank loan are under EBLR regime.
“These parallel regimes need some standardisation to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection. The proposed measure is steering the loan pricing policy in this direction,” said the report.
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