Need for stronger governance, professional management of new urban co-operative banks
New Delhi, Aug 8
The Reserve Bank of India has decided to resume licensing of urban co-operative banks on '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.
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.
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.
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.
— IANS
Reader Comments
As someone who has worked with cooperative banks in India, I can say this is a double-edged sword. On one hand, more UCBs means better access to credit for small businesses. On the other, the regulatory burden is heavy and many smaller banks simply don't have the capacity to comply. The RBI needs to provide more hand-holding and technical support, especially for digital adoption. Otherwise, we might see a wave of consolidation or failures in the next few years.
My grandmother has been saving in a local UCB for 30 years. These banks are deeply trusted in our communities. But the report is spot-on about professional management—many of these banks are run by people who don't understand modern banking. The technology part is critical too. If they can't offer basic net banking or UPI, young people like us won't even consider them. Hope the new licensing framework pushes them into the 21st century!
Good step by RBI, but I'm a bit skeptical. We have seen what happens when regulations are relaxed too much—look at the PMC Bank crisis in 2019. Thousands of depositors were stuck. The RBI must ensure that the new UCBs have strong internal controls from day one. Also, the focus on rural cooperative banks is appreciated; they hold over 70% of cooperative assets now. Let's hope the credit monitoring changes actually reduce concentration risks.
The standardization of interest rate frameworks across all regulated entities is long overdue! It's confusing for customers when different banks follow different systems—PLR, base rate, MCLR, EBLR—it's a maze. As a customer, I just want to know clearly what interest I'm paying and why. This move towards uniformity will also help with monetary policy transmission. Good analysis by SBI Research. 👏
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