RBI Is Set To Issue Licenses to Urban Cooperative Banks Again: A Fascinating 20-Year Policy Shift

After keeping the door shut for more than two decades, the Reserve Bank of India is ready to start issuing new licenses to urban cooperative banks again. RBI Governor Sanjay Malhotra framed this as part of a bigger push to build a stronger cooperative banking sector.

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Rural Cooperative Banks Face a Fresh Look at Risk Rules RBI Moves to Rework Interest Rate Rules Across Lenders

“It has been decided to resume licensing of UCBs on ‘on tap’ basis,” he said, listing it among a set of additional measures the central bank is rolling out. Draft guidelines on how this will work are expected soon, and the RBI plans to put them out for stakeholder consultation before finalizing anything.

This move follows a discussion paper the RBI released on January 13, 2026, specifically on UCB licensing. The central bank gathered feedback from stakeholders on that paper, and the decision to reopen licensing came out of that process. For context on scale, RBI and NABARD data puts the current number of urban cooperative banks at 1,457.

Rural Cooperative Banks Face a Fresh Look at Risk Rules

Alongside the UCB announcement, the RBI also said it will review how rural cooperative banks manage concentration risk, meaning how exposed they are when lending gets too concentrated in a few borrowers or sectors. The reasoning: the banking sector as a whole, and cooperative banking in particular, has changed a lot over the past 18 years, and the existing rules haven’t kept pace.

Right now, rural cooperative banks operate under the Credit Monitoring Arrangement instructions, which date back to 2008. Governor Malhotra said the goal here is to build a healthier cooperative sector while still keeping a lid on the risks that come from concentrated lending. A draft of the amended directions will be released for broader stakeholder input before it’s locked in.

RBI Moves to Rework Interest Rate Rules Across Lenders

The RBI isn’t stopping at cooperative banks. It has also proposed, in principle, to rationalize the interest rate framework that applies to all regulated entities. The idea is to bring more consistency across different types of lenders while still allowing for proportionality, meaning the rules won’t necessarily be identical for every entity regardless of size or type.

The proposal also targets some of the operational kinks in the current MCLR (Marginal Cost of Fund Based Lending Rate) and EBLR (External Benchmark Lending Rate) systems, and it aims to standardize practices that currently vary from lender to lender, such as day count conventions and when benchmark rates get reset.

“These measures seek to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection,” Malhotra said. As with the other changes, this won’t happen overnight. The RBI intends to put out draft directions covering these proposals and open them up for public comment before anything becomes final.

Key Takeaway: The Reserve Bank of India’s decision to resume on-tap licensing of Urban Cooperative Banks (UCBs) after more than 20 years signals a major policy shift aimed at expanding and strengthening the cooperative banking sector. Alongside this, the RBI plans to modernize the regulatory framework by reviewing concentration risk norms for rural cooperative banks and rationalizing interest rate rules across all regulated entities, including improvements to the MCLR and EBLR frameworks.

Through draft guidelines, stakeholder consultations, and measures to standardize loan pricing practices, enhance transparency, strengthen monetary policy transmission, and improve consumer protection, these reforms reflect the RBI’s broader objective of building a more resilient, efficient, and well-regulated financial system while ensuring the cooperative banking sector remains aligned with the evolving needs of India’s economy.

M.C.Q.

Question 1: The Reserve Bank of India recently announced the resumption of ‘on-tap’ licensing for which category of banks after more than two decades?