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Urban Cooperative Banks

Posted 24 Mar 2025

Updated 28 Mar 2025

4 min read

Why in the news?

The RBI has imposed a six-month moratorium on New India Co-operative Bank Limited, restricting loans, deposits, and withdrawals.

More on the news

  • According to the RBI, these measures have been taken due to concerns over the bank's financial stability and liquidity situation. 
The infographic details the structure of Co-operative Credit Institutions, which are divided into Urban Co-operative Banks and Rural Co-operative Credit Institutions. These are further categorized into Short-Term Structure (including State Co-operative Banks, Central Co-operative Banks, and Primary Agricultural Credit Societies) and Long-Term Structure (comprising State Co-operative Agriculture and Rural Development Banks and Primary Co-operative Agriculture and Rural Development Banks).
  • The RBI also superseded its Board of Directors for 12 months, citing "poor governance standards".

About Urban Cooperative Banks

  • Urban Cooperative Banks (UCBs) are a subset of cooperative banks in India that operate primarily in urban and semi-urban areas.
  • History:  The Cooperative Credit Societies Act of 1904 (during Lord Curzon's tenure) and its 1912 amendment laid the legal foundation for these institutions.
    • The first urban cooperative credit society was established in 1889 in Baroda (Anyonya Sahakari Mandali).
  • Currentlythey are registered as cooperative societies under the respective State Cooperative Societies Acts (for single-state operations) or the Multi-State Cooperative Societies Act, 2002 (for operations across multiple states).
  • Control and Regulation: UCBs function under a dual regulatory framework:
    • Banking Regulation Act, 1949Since 1966, RBI has been supervising UCBs regarding licensing, capital adequacy, loan policies, and financial stability.
      • The Banking Regulation (Amendment) Act, 2020 has given RBI more control over UCBs, allowing it to intervene in their management and governance.
    •  Registrar of Cooperative Societies (RCS): The respective state governments or the central government control administrative functions through the RCS.
The infographic compares Urban Cooperative Banks (UCBs) and Commercial Banks across five key features: ownership, regulation, profit motive, lending focus, and voting rights. UCBs are member-owned, dual-regulated, not profit-focused, lend to small businesses and weaker sections, and operate on a one-member-one-vote system, in contrast to commercial banks which are shareholder-owned, RBI-regulated, profit-driven, focus on large corporate and retail banking, and have voting rights based on share ownership.

Significance of UCBs

  • Financial Inclusion: UCBs primarily cater to small borrowers, micro-businesses, and lower-income groups in urban and semi-urban areas.
  • Local Focus: UCBs operate within specific communities, allowing them to understand local needs and provide tailored financial services.
  • Priority Sector Lending: UCBs have to allocate 65% to PSL in FY 2024-25 but increasing it to 75% by March 2026. 
  • Developmental Support: UCBs are catering the needs of the non-agricultural sector, particularly small borrowers in urban and semi-urban areas.
    • UCBs, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.

Challenges Faced by UCBs

  • Weak Governance and Fraud Risks: Many UCBs suffer from political interference, nepotism, and financial mismanagement, leading to fraud and operational inefficiencies.
    • During 2023-24, licenses of 24 UCBs were cancelled.            
  • Competition from Commercial Banks and Fintechs: UCBs share in the banking sector declined to 2.5% of total banking assets in March 2024, down from 3.8% in 2017.
  • High Non-Performing Assets (NPAs):  High levels of NPAs erode profitability and weaken the financial health of UCBs.
    • Gross NPAs of UCBs were 8.8 per cent at the end of March 2024.
  • Capital Adequacy Shortfalls: Limited access to capital markets restricts their ability to meet regulatory capital requirements and expand operations.
  • Regulatory Non-Compliance: Dual regulation by RBI and state cooperative bodies leads to compliance challenges and operational inefficiencies.
  • Technological Obsolescence: Many UCBs lag in adopting digital banking technologies, impacting efficiency and customer experience.
The following infographic gives categorization if UCBs.

Recent measures taken

  • Banking Regulation Amendment Act, 2020: The amendment empowered the RBI to supersede boards, restructure managements and formulate resolution plans.
  • Revised Prompt Corrective Action (PCA) Framework: In 2024, the RBI extended the PCA framework to UCBs, setting thresholds for capital adequacy, asset quality, and profitability.
  • PCA is a mechanism that allows the RBI to intervene early when a bank shows signs of financial distress.
  • Liquidity Support via Umbrella Organization (UO): Established National Urban Co-operative Finance and Development Corporation as UO for UCBs.
  • Tiered Regulatory Framework: The RBI introduced a four-tiered regulatory framework for UCBs based on deposit size to tailor regulatory approaches effectively.
  • Other steps
    • UCBs can now open new branches up to 10% (maximum 5 branches) of the existing number of branches in the previous financial year without prior approval of RBI.
    • UCBs have been allowed by RBI to offer doorstep services to their customers.
    • Cooperative banks have been allowed to make one-time settlement of outstanding loans, like Commercial Banks.

Way forward

  • Strengthening Governance and Supervision: Mandate professionalization of UCB boards by requiring at least 50% of directors to have expertise in banking, finance, or law.
  • Consolidation and Mergers: Encourage voluntary mergers of weak UCBs with stronger ones to create financially resilient entities.
  •  ⁠Independent Audits:  Conduct regular audits by autonomous bodies for all UCBs to ensure financial discipline.
  • ⁠Technology Adoption: Cooperative banks are encouraged to adopt modern technology for efficient operations and better customer service.
  • Social Audits:  Enable stakeholder-led audits to assess policies and fund allocation. 
  • Tags :
  • Urban Cooperative Banks
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