The Reserve Bank of India has issued draft guidelines proposing on-tap urban co-operative banks- UCB licensing, under which eligible credit co-operative societies with a minimum deposit base of Rs 10,000 crore can apply for conversion into UCBs.

Key Highlights

• RBI proposes on-tap UCB licensing after 22 years, requiring a minimum deposit base of Rs 10,000 crore.
• Applicants need net worth of Rs 300 crore, CRAR of 12% and NPA ratio below 3% for conversion. 

RBI Governor Sanjay Malhotra said that the draft guidelines were prepared after incorporating feedback received on a discussion paper released in January, marking the resumption of UCB licensing after nearly 22 years. Under the proposed framework, a co-operative credit society seeking conversion into a UCB must have a minimum deposit base of Rs 10,000 crore and a net worth of at least Rs 300 crore as of March 31 of the preceding financial year.

Eligibility Criteria for Conversion

The society must also have been in existence for at least 10 years, maintain a capital-to-risk weighted assets ratio (CRAR) of at least 12%, and keep its net non-performing asset (NPA) ratio at no more than 3%, besides demonstrating a positive and progressive trend in its operating and financial parameters over the preceding five years.

Reserve Bank of India also specified that applicants must be registered under the Multi-State Co-operative Societies Act, 2002. In the initial phase, the RBI will consider multi-state co-operative credit societies, while select uni-state societies with a wider geographical footprint may also be considered, in line with the January discussion paper.

Under the proposed framework, no single member can hold more than 5% of the society's share capital. The RBI will also assess the fitness and propriety of the board of directors, who must have sound credentials and integrity and should not have defaulted on borrowings from banks or financial institutions. Directors will not be permitted to perform executive functions or hold executive positions within the converted entity.

Business Plan and Approval Process

Applicants will be required to submit a detailed business plan outlining their objectives, financial inclusion strategy, five-year financial projections, proposed branch network, product offerings, target customer segments, technology architecture, risk management systems, human resource plans, and compliance with priority sector lending and prudential norms. The RBI may restrict branch expansion, require management changes, or impose other supervisory measures if an entity materially deviates from its approved business plan after receiving a licence.

Applications will be accepted on an on-tap basis through the RBI's PRAVAAH portal. Applicants will also need to obtain a no-objection certificate from the Central Registrar of Co-operative Societies and secure shareholder approval for conversion, with the proposal requiring approval from at least two-thirds of shareholders, both in number and value, present at a meeting convened for the purpose.

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Screening and Licensing Timeline

The RBI will conduct preliminary scrutiny, due diligence of directors, and an inspection of the applicant society before placing the proposal before an internal screening committee comprising two deputy governors and two executive directors. The committee's recommendations will then go before the Committee of the RBI Central Board for a final decision on granting in-principle approval, which will remain valid for 18 months. Applicants whose proposals are rejected will not be eligible to apply for another banking licence for three years, though they may appeal the decision before the RBI Central Board within one month.

Before receiving the final licence, the applicant will need to establish the required IT and cybersecurity infrastructure, implement a core banking system, and comply with the governance framework prescribed by the RBI. The society will also have to amend its by-laws to align with banking regulations, and will be prohibited from admitting another co-operative society as a member, while its directors will not be allowed to serve on the boards of another bank or credit society.

Once compliance with all conditions attached to the in-principle approval is verified, the RBI will issue the banking licence. The newly licensed UCB must commence operations within six months of receiving the  co-operative banks licence and obtain deposit insurance cover within the timeline prescribed by the central bank.