The RBI on August 5, 2026 released the “Draft Guidelines for ‘on tap’ Licensing of Urban Co-operative Banks” for public/stakeholders’ comments. The Draft Guidelines (DGs) specify stringent conditions for co-operative societies to apply for Urban Co-operative Bank (UCB) licences.The RBI Governor’s October 2025 Monetary Policy Statement proposed to publish a Discussion Paper (DP) on licencing of new UCBs. Although since 2004 the UCB licensing was paused, the sector had progressed well during the subsequent two decades. Therefore, the stakeholders were demanding to restore the licencing process.The DP, published in January 2026, recommended several tough conditions for licencing new UCBs.Prior to the DP, an RBI screening committee in 2001 had recommended that it should be made mandatory for all new UCBs to come into being through a process of graduation from a CCS on the strength of proven and verifiable track records.This was further supported by the Expert Committee on Licensing of New Urban Co-operative Banks (2011) (Chairman: Y H Malegam) and the High Powered Committee on Urban Co-operative Banks (2015) (Chairman: R Gandhi).Therefore, there was a compelling need to make available, on tap, strict licencing norms for the CCSs aspiring to become UCBs so that the latter remains, ab initio, strong, well-diversified and immune to failure.It is noteworthy here that UCBs are evidenced to be more fragile than the commercial banks.DGs: Entry NormsThe entry norms, as briefly mentioned below, mostly follow the DP’s recommendations.Eligibility: CCSs in existence for at least 10 years.Minimum Capital and Other Requirements: The CCS should have a deposit size of at least ₹10,000 crore and minimum net worth of at least ₹300 crore (as per audited financials at March-end of the previous financial year of application). [At March-end 2024 (latest available), only 6 out of 49 Scheduled UCBs had deposits above ₹10,000 crore.]Registration: In the initial phase, the MSCCSs will be considered.Track Record: The CCS must demonstrate a positive and progressive trend in operating and financial parameters in the previous five years. The Capital to Risk-Weighted Assets Ratio should not be less than 12 per cent, and the Net Non-Performing Assets ratio should not be more than three per cent at March-end of the previous financial year of application.Fit and Proper: No member should have a shareholding of over five per cent. The RBI would assess the ‘fit and proper’ status of the Board of Directors.Likely responseLack of a comprehensive, credible and up-to-date financial database of CCSs in the public domain restricts us to say how many, or which ones, would be eligible for UCB application. Even if some are eligible, whether their members would be willing is a big question. A bigger question is whether their applications would pass the RBI’s litmus test.If no single CCS is eligible, some CCSs would like to merge themselves to improve their financials to meet the RBI benchmarks. Thus, a ‘churn’ in the CCS segment may ensue.Whether individually or through mergers, the aspirational UCBs would like to improve their operations and financials with a view to meeting the RBI stipulations at a future date. In other words, the DGs would be a ‘challenge’ for them and in this sense, serve as a ‘wake-up’ call for CCSs to ‘sanitize’ themselves.The new UCBs cannot pay their depositors the high rates of interest as they used to do as CCSs. This may trigger inter-CCS deposit ‘flight.’ However, the CCS depositors should be happy that their deposits in the new UCB will be fully protected up to the prevailing deposit insurance limit.On the assets side, the new UCBs cannot deploy their lendable resources in any sector and at any rate.Together the above two will disincentivise aggressive depositors/members of CCSs to vote for UCB conversion.The challengesIn order to survive in the modern day banking the new UCBs have to invest in skilled manpower, especially those with knowledge on banking, accountancy, IT, compliance, cross-selling, etc. For this purpose, besides fresh recruitment, they may have to poach the existing UCBs – both necessitating payment of market-determined pay packages.Similarly, acquisition of appropriate IT systems is crucial, particularly when the IT environment is constantly mutating and ensuring cybersecurity has emerged as a major challenge even for the large commercial banks. The new UCBs have to continuously invest in IT empowerment.Last but not least, corporate governance, which has proved to be the Achilles’ heel in the case of several banking crises, has to be given the pride of place. Therefore, the ‘fit and proper’ test should aim at critical qualitative evaluation of the members of the Board as well as other critical areas of management.All said, it is felt that new UCB applications would trickle in in the medium-term, even though the final guidelines come out in one or two months.Das is a former Assistant General Manager (Economist), SBI. Rath is a former central bankerPublished on September 3, 2026