Officials also said the new rules would raise compliance costs by over 20 per cent
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Officials also said the new rules would raise compliance costs by over 20 per cent
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The Reserve Bank of India’s (RBI’s) revised guidelines on business authorisation plans for co-operative banks may restrict or slow the expansion plans of urban co-operative banks (UCBs), bank officials told Business Standard.
Under the new norms, UCBs that cross key deposit thresholds — ₹100 crore, ₹1,000 crore and ₹10,000 crore –are immediately pushed into higher regulatory tiers, which require compliance with stricter norms, including higher capital adequacy ratios.
Further, a UCB with Tier-III deposits (above ₹1,000 crore) must maintain capital adequacy at least 3 percentage points above the applicable regulatory requirement.
Officials said that these tighter requirements follow the recent failure of a UCB.
A senior official at Saraswat Co-operative Bank said that expansion for existing UCBs is now closely tied to deposit-linked tier classifications, acting as a natural break.
“As deposits rise and banks cross into higher tiers, they face progressively stricter capital adequacy norms, governance expectations and compliance costs. These act as disincentives to expand operations and increase the deposit base,” the official said.
As per RBI guidelines, a four-tier regulatory framework has been adopted for UCBs.
Tier-1 includes all unit UCBs and salary earners’ UCBs irrespective of deposit size, and all other UCBs with deposits up to ₹100 crore. UCBs with deposits above ₹100 crore and up to ₹1,000 crore fall under Tier-II, while those with deposits above ₹1,000 crore and up to ₹10,000 crore are classified as Tier-III.
Tier-IV UCBs are those with deposits exceeding ₹10,000 crore.
Capital is emerging as another major bottleneck, officials said.
The requirement to maintain higher capital to risk-weighted assets ratio (CRAR), particularly for banks aspiring to Tier-III status and inclusion in the Second Schedule of the RBI Act, poses a significant challenge for co-operative institutions that traditionally rely on member contributions rather than market-based capital raising.
Officials also said the new rules would raise compliance costs by over 20 per cent.
Expansion would require robust technology systems, stronger risk management frameworks and enhanced compliance capabilities– areas where many small and mid-sized UCBs continue to face resource constraints.
“The cost of upgrading core banking systems, cybersecurity infrastructure and regulatory reporting mechanisms is substantial, often stretching already thin balance sheets. Incurring these costs is more difficult for urban co-operatives, which rely purely on member contributions,” said a banking analyst at a rating agency.
RBI guidelines said that for a UCB to be included in the Second Schedule of the RBI Act, 1934, it must meet conditions such as maintaining the minimum deposit threshold required for a Tier-III UCB for two consecutive years, a CRAR at least three percentage points above the minimum requirement, and having no major regulatory or supervisory concerns.
Governance issues also complicate growth plans, officials said.
As banks expand geographically or operationally, they must demonstrate consistently clean supervisory records and professional management standards. However, legacy governance structures rooted in local co-operative traditions may require significant transformation to meet these expectations.
A senior official at Janata Sahakari Bank said that even the RBI’s provision of a two-year glide path for banks moving into higher tiers offers only limited relief, as aligning capital, systems and processes within this timeframe– while continuing normal banking operations– remains a difficult task.
While the revised regulatory framework provides clarity and stability, UCBs believe it also signals a shift toward consolidation and selective growth, where only well-capitalised and well-governed banks will be able to scale sustainably and smoothly.
Disincentivising growth?
- Expansion for existing UCBs now closely tied to deposit-linked tier classifications, with banks in higher tiers facing progressively stricter norms and expectations
- Requirement to maintain higher CRAR major challenge for cooperative institutions
- New rules would likely raise compliance costs by over 20%
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