By Karan Shelke, Advocate at Lex Credence on April 29, 2024


Rural banks, commercial banks, cooperative banks, non-banking financial banks and development financial institutions make up India’s financial system which is regulated by the Reserve Bank of India (hereinafter referred to as “RBI”). The RBI takes its name from the Banking Regulation Act, 1949. The RBI serves as the custodian of India’s monetary and financial system and plays a pivotal role in the country’s economic development. The RBI is crucial to the Indian economy for not only helping in maintaining stability and growth but also to mitigate any financial risks. 

On the other hand, urban cooperative banks (hereinafter referred to as “UCBs”) refer to small financial institutions started by a group of individuals to address the capital needs of their community. The board members of the cooperative banks are elected by the members only. The role of cooperative banks in capital disbursement to people who may need money to set up a small business like a kirana store or electronic repair shop or to buy a means of transport cannot be understated. The role of UCBs becomes even more crucial in the Indian economy where the traditional banks fail to provide capital disbursement. In hindsight, this article delves into the role of RBI in regulating UCBs, major constraints in UCBs and the way forward.

Role of RBI in the regulation of urban cooperative banks:

In 2020, the Central Government amended the Banking Regulation Act which gave RBI additional powers to regulate UCBs1. This was done after multiple cooperative banks granted huge loans to corporate houses with little or no due diligence at the expense of depositor’s money. In order to avoid issues concerning liquidity and to increase corporate governance in UCBs, the RBI performs three main functions: regulatory, supervisory and developmental.

For commencing any banking business, UCBs are required to obtain a license from the RBI. The UCBs are required to also obtain permission from the RBI to open branches. As in the case of commercial banks, UCBs are also required to maintain cash reserves and liquid assets in the form of cash, gold or unencumbered approved securities.

To ensure that the UCBs are conducting their affairs in the interests of the depositors, the RBI may undertake site inspections of UCBs depending upon the financial condition/status of banks. This supervisory function of the RBI upon UCBs is to ensure that bank’s affairs are not contrary to the interest depositor’s interest and also to ensure that the banks are solvent to perform their functions. The RBI with a view to extending institutional credit support to tiny and cottage units grants refinance facilities to UCBs. The RBI also imparts training to top and middle management of UCBs.

Major constraints in UCBs

For a long time, UCBs were regulated and audited by state and central governments with loose oversight. However, many UCBs became personal fiefdoms of the people who controlled them. People who were in charge of the UCBs started lending money to people who were related to the directors of the UCBs, or even to companies in which the directors were directly involved. As a result, regulatory governance issues started cropping up. According to the Print2, in 2023 alone, the RBI imposed fines on 127 UCBs for multiple reasons such as unpaid dues, breach of prudential norms or unethical charges levied, renewed and extended loans to related parties. According to N.S Vishwanathan Committee Report (2023)3, the sector faces constraints which include difficulty in raising capital, insufficient skill sets and lack of desired qualifications amongst the directors leading to lack of professional management of the UCBs, duality of regulation, etc. Some UCBs have embraced technology to improve their products and services but many still lag in digitalization which can hinder the competitiveness of UCBs while competing with traditional mainstream banks.

There is no doubt that UCBs play a very important role of financial intermediation, particularly for the people who are not readily catered to by the mainstream banks. However, UCBs face financial vulnerabilities such as high levels of NPAs which can be further accentuated by constraints listed by the RBI.

Way forward

UCBs are an important segment of India’s financial system. The structure of UCBs is unique as they are owned and managed by members who are mainly from urban and semi-urban communities. UCBs have played a prominent role in the financial inclusion of areas where traditional mainstream banks have been hesitant to establish a presence. The RBI must be proactive and stringent in its regulatory oversight by cancelling the license of UCBs which operate contrary to the interest of depositors. The RBI should also not shy away from a compulsory amalgamation of UCBs which are loss-making. The RBI should be vigilant in making sure that the people who are in charge of UCBs are professionals who are well-versed in the regulatory oversight of the RBI. To meet the capital requirement criteria of RBI, UCBs should actively raise capital from members or explore options for mergers and acquisitions where feasible. Currently, UCBs are subjected to dual regulations by the RBI and the Registrar of Cooperative Societies. This can increase the regulatory burden and create uncertainty on UCBs. Digital transformation in the form of mobile banking, online account opening and digital payment solutions can help UCBs attract a younger customer base which will in turn increase the competitiveness of the financial sector.

The article represents the personal views of the author.

  1.  Business Today, All urban cooperative banks, multi-state cooperative banks now under RBI.
    Available at: (Last Visited on April 06, 2024)
  2. The Print, Loan to own directors, families – why Gujarat’s cooperative banks are increasingly under RBI scanner, November 2023
    Available at: (Last Visited on April 05, 2024).
  3. Reserve Bank of India, Report of the Expert Committee on Urban Co-operative Banks, 2023
    Available at: (Last Visited on April 06, 2024).

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