RBI to resume urban cooperative banks' licensing after 22-year pause, review rural bank rules

The Reserve Bank of India Governor Sanjay Malhotra on Wednesday announced two measures to strengthen the cooperative banking sector and a separate proposal to improve transparency in lending rates, at the conclusion of the August Monetary Policy Committee (MPC) meeting.

The two cooperative-sector measures include draft guidelines to resume licensing of urban cooperative banks (UCBs) after a pause of more than two decades and a comprehensive review of the credit monitoring arrangement for rural cooperative banks, which was last revised in 2008.

Separately, the RBI proposed to harmonise and standardise the regulatory framework on interest rates on advances for all regulated entities to enhance transparency in lending rates and strengthen consumer protection.


Also Read: Malhotra & Co lift FY27 GDP forecast to 6.7% from 6.6% on growth resilience

The announcements came after the MPC decided to keep the policy repo rate unchanged at 5.25% and retain its neutral stance. The RBI also raised its FY27 GDP growth forecast to 6.7% from 6.6%, citing resilient domestic economic activity and better-than-expected performance in the first quarter.

RBI to resume UCB licensing after 22-year pause

The RBI has decided to resume the process of issuing new licences to urban cooperative banks after a pause of 22 years.

"On the basis of the feedback received on the discussion paper on licensing of UCBs, we are issuing draft guidelines for resuming licensing of UCBs," Malhotra said.

The RBI had put the licensing of UCBs on hold in 2004 after finding that a large number of newly licensed UCBs became financially unsound within a short period.

The decision to examine the possibility of resuming new UCB licences was first announced in the monetary policy statement on October 1, 2025.

The RBI had noted that the operating environment had changed significantly since 2004, when licensing was paused, and that the UCB sector had transformed substantially.

The central bank had released a discussion paper on licensing new UCBs and sought feedback before moving towards draft guidelines for restarting the process.

How many urban cooperative banks are there in India?

UCBs form the largest cohort of banks by number regulated by the RBI.

Between 1993 and 2001, the RBI issued 823 UCB licences. As of March 31, 2025, the number of UCBs stood at 1,457, according to official data.

A cooperative society registered under a state Cooperative Societies Act or the Multi-State Cooperative Societies Act is required to obtain a banking licence from the RBI under Section 22 read with Section 56 of the Banking Regulation Act, 1949, to conduct banking business.

Also Read: Malhotra & Co trim FY27 inflation forecast to 5% as easing crude prices offer relief

UCBs were brought under the RBI's regulatory ambit in 1966 through an amendment to the Banking Regulation Act, 1949.

A cooperative society that has been granted a banking licence as a primary cooperative bank is commonly referred to as a UCB.

RBI to review rural cooperative bank credit monitoring

The RBI will also issue draft directions following a comprehensive review of the credit monitoring arrangement for rural cooperative banks.

The existing arrangement was last revised in 2008. The review takes into account the experience gained and developments in the banking sector since then.

The proposed directions are aimed at updating the framework governing credit monitoring in rural cooperative banks in line with changes in the sector over the past 18 years.

RBI proposes standardised lending-rate framework

Separately, the RBI proposed to harmonise and standardise the regulatory framework governing interest rates on advances for all regulated entities.

Malhotra said the measure is aimed at enhancing transparency in lending rates and further strengthening consumer protection.

The proposal seeks to bring greater consistency to the regulatory framework governing interest rates on advances across entities regulated by the RBI.

RBI keeps repo rate unchanged, raises FY27 GDP forecast

The announcements came after the MPC decided to keep the policy repo rate unchanged at 5.25% and retain its neutral stance.

The RBI also raised its FY27 GDP growth forecast to 6.7% from 6.6%, citing resilient domestic economic activity and better-than-expected performance in the first quarter.

West Asia conflict remains key global risk

Concluding his MPC statement, Malhotra said global economic conditions and sentiment continued to remain hostage to rapidly changing developments in the West Asia conflict.

The conflict has adversely affected India's domestic growth and inflation outlook, but stronger macroeconomic fundamentals are helping the economy navigate the global shock, he said.

Malhotra said the situation also presents an opportunity to accelerate measures to enhance India's resilience against external shocks.

The RBI will continue to implement policies aimed at facilitating sustainable growth, promoting consumer protection and preserving price stability, financial-system stability and currency stability, he said.

"We will do whatever it takes to ensure the same," Malhotra said.