Cooperative banks are India’s oldest grassroots financial institutions. They have sustained small traders, the self-employed, micro-enterprises and low-income households that often sit outside the risk appetite of large commercial banks. Policymakers routinely call them the last mile of India’s credit architecture.
Every few years, the Reserve Bank of India returns to the same question: should it issue new licences for urban cooperative banks. The debate persists because UCBs sit in a regulatory contradiction. A community-owned cooperative and a prudentially regulated bank are built on different assumptions about capital, governance and accountability. In their current form, many cooperative banks struggle to meet modern supervisory expectations.
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Cooperatives grew before commercial branch networks and digital finance reached most households. They relied on local knowledge and trust, mobilised small savings, and served customers whom formal banks found costly to underwrite. The 1954 All-India Rural Credit Survey described cooperatives as the last hope for rural credit delivery. Even now, in niche segments, they remain a channel for last-mile access.
Cooperative governance vs prudential supervision
The design problem is structural. Cooperatives are built on open membership, democratic control and withdrawable share capital. That is defensible as a social model. It is unstable as a banking model.
Share capital in a cooperative is not permanent the way equity is in a company. Members can exit and redeem shares at face value. Over time, this weakens the quality and stability of the capital base. Governance creates the second fault line. Borrower-members can dominate decision-making. Professional management is often thin. Boards can become local political arenas. The problem is compounded by split control: banking regulation sits with the RBI, but the cooperative form keeps governance incentives and elections embedded in the wider state-level cooperative ecosystem.
This is why cooperative banks repeatedly produce supervisory stress. The gap is not only between rules and compliance. It is between what a cooperative is meant to do and what a bank is required to be.
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Cooperative banks and the licensing debate
Multiple committees have cycled through the same terrain over the past decade and a half — from Malegam to Gandhi to Vishwanathan. The conclusion has rarely been that cooperative banking is dispensable. It has been that governance and supervision remain weak, and the sector’s structure makes the RBI’s job harder.
The current consultation is another turn of the same wheel. Will new licences deepen inclusion? Or will they simply expand the supervisory perimeter without fixing what repeatedly fails inside it?
India already has hundreds of cooperative banks with small balance sheets and limited geographic reach. Some operate with deposits under ₹100 crore. It is easier to supervise a smaller set of large banks with standardised systems and mature risk controls than a long tail of small institutions where governance quality is uneven and compliance capacity is limited. When failures occur, the credibility of depositor protection depends on how quickly resolution, mergers, and deposit insurance pay-outs can be executed, not on periodic reassurance.
Financial inclusion no excuse for supervisory fragility
So why does the system keep cooperative banks alive? Inclusion and decentralisation are the honest answers. But these goals do not dissolve prudential risk. The RBI’s dilemma sharpens when cooperative banks are encouraged to scale. If they begin to resemble commercial banks in function while retaining regulatory pathways designed for mutual organisations, the perimeter problem becomes a loophole problem.
Recent policy signals also show that cooperative banks are being positioned for roles beyond neighbourhood credit. Tamil Nadu’s decision to allow cooperative banks to maintain salary accounts of government employees and teachers—and to include the Tamil Nadu State Apex Cooperative Bank in the panel of authorised salary-account banks—reflects growing institutional confidence in service capability and operational stability. That is precisely why the licensing debate cannot be treated as a narrow inclusion question. The sector is being asked to do more. Regulation cannot pretend it is still small.
Federated models show what India is missing
In many advanced economies, cooperative banking operates through federated structures. Local credit unions handle deposits and small-ticket credit. Larger federated institutions provide shared technology, liquidity management, treasury functions, audit capacity and regulatory compliance support. Capital stability is strengthened higher up the federation, while local institutions retain their community character.
This layered structure reduces the number of entities regulators must engage with at the systemic level, without dismantling grassroots access. India’s cooperative banking ecosystem is closer to the opposite: fragmented, with many primary banks trying to function as fully independent banks despite limited capacity.
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From licensing to consolidation and differentiation
The practical reform agenda is not difficult to describe, only difficult to execute.
One direction is to prioritise federated capacity instead of issuing fresh licences. Strengthen apex and federated cooperative institutions that can provide common infrastructure, risk management, audit, and a credible regulatory interface. Smaller cooperative units can remain customer-facing, but they should not be forced—nor allowed—to pretend they can independently carry full-bank responsibilities.
A second direction is differentiation. Not every cooperative society engaged in limited financial intermediation needs to be pushed into the template of a full-service bank. And not every institution that wants to operate as a bank should retain a governance model that structurally resists prudential discipline. Clarity on categories—what can do what, under which capital and governance conditions—would reduce the ambiguity that currently burdens both supervisors and depositors.
The RBI’s 2026 question is not only whether it should issue new UCB licences. It is whether India wants cooperative banking as a meaningful pillar of inclusion, or as a periodic exception that the regulator must revisit after each cycle of failures.
Cooperative finance can remain valuable. But the answer is not more institutions. It is better architecture: federated capability, cleaner differentiation, and governance that is compatible with the obligations of banking. Until that happens, the licensing debate will return—right on schedule—every few years.