New rules propose a tiered structure, growth incentives, and sharper penalties—public feedback invited till August 25
The Reserve Bank of India is proposing a sweeping overhaul of the rules governing India’s co-operative banks, in a bid to clean up the sector, push for professionalization, and make expansion conditional on financial health.
The central bank’s draft framework, released Monday, is open for public and industry feedback until August 25. The new guidelines, if finalized, could reshape how co-operative banks operate, grow, and are held accountable.
A Tiered Structure to Fit All Sizes
The RBI’s proposal introduces a four-tier classification system for co-operative banks based on their deposit base—a much-needed move, experts say, in a sector plagued by one-size-fits-all regulation.
Tier 1 banks will include those with deposits up to ₹100 crore. Tier 2 ranges from ₹100 crore to ₹1,000 crore, Tier 3 from ₹1,000 crore to ₹10,000 crore, and Tier 4 includes all those beyond ₹10,000 crore. The classification will be reset every year, based on the audited figures from March 31.
That means a small co-op bank in Gujarat and a behemoth operating across Maharashtra will no longer be evaluated by the same yardstick. And that’s a big deal.
Banks that shift to a higher tier will be given a buffer of up to two years to align with stricter regulations. It’s a nudge—but not a shove.
ECBA: No Greenlight Without Good Governance
Perhaps the most talked-about feature of the draft is the new Eligibility Criteria for Business Authorization (ECBA)—basically a checklist a bank must clear before it can open a new branch, expand services, or diversify.
At first glance, the ECBA looks simple. But it packs a punch. Here’s the minimum a bank needs:
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Net NPAs under 3%
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Profits in the past two financial years
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No outstanding regulatory restrictions
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Minimum Capital Adequacy Ratio as mandated
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100% Core Banking Solutions (CBS) coverage
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At least two professional directors on its board
That last one—professional directors—has industry insiders buzzing. “This will force co-ops to bring in domain experts, not just political appointees,” says a senior banker who requested anonymity.
A co-operative bank unable to meet these norms won’t just be denied permission to grow—it might be blocked from launching even basic services in new areas.
No Expansion Without Tech and Talent
The RBI isn’t just nudging banks to clean up their balance sheets—it’s also pushing them to upgrade their tech game and governance. The emphasis on CBS is unmistakable. If a co-op bank still runs on outdated ledger systems, its expansion dreams are over.
One-sentence paragraph for punch: That’s not optional anymore.
But CBS isn’t enough. The draft says expansion will be contingent on board competency too. Banks that lack professional directors—read: experts who actually understand banking—may be asked to wait until they fix that.
This clause is expected to hit some of the mid-tier banks hard. Many still rely on politically influential board members with little banking experience. Now, that’s about to get awkward.
Expansion Rules May Be Simpler—But Not Easier
Under the new regime, banks won’t need RBI approval for every small move. If they meet the ECBA conditions, they can self-authorize expansion within certain limits.
So, in theory, this reduces red tape. But in practice, fewer banks may qualify.
Here’s the twist: Instead of micromanaging branch approvals, RBI is shifting the responsibility back to the banks—with strings attached.
And that’s where compliance gets real. Any bank caught skirting rules could face temporary blacklisting, and possibly worse.
Table below shows proposed tier classifications:
| Tier | Deposit Range | Regulation Timeline |
|---|---|---|
| 1 | Up to ₹100 crore | Immediate |
| 2 | ₹100 crore – ₹1,000 crore | Up to 2 years to comply |
| 3 | ₹1,000 crore – ₹10,000 crore | Up to 2 years to comply |
| 4 | Above ₹10,000 crore | Up to 2 years to comply |
This kind of structured framework, RBI says, will offer clarity, scalability, and regulatory fairness.
Sector Reacts with Cautious Optimism
Reactions have started trickling in—and they’re mostly mixed.
Some co-operative bank associations welcomed the move, especially the relaxation of approval requirements. “If we meet the criteria, we should be trusted to grow,” said a UCB CEO from Pune.
But others are worried. The capital adequacy bar and CBS clause may disqualify many small and mid-sized players.
“This could trigger a wave of forced mergers,” warned a regional co-op federation leader. “Some of us simply don’t have the capacity.”
Still, many insiders see this as a long-overdue cleanup. Co-operative banks have faced criticism for everything from mismanagement to fraud. And the RBI, after years of incremental changes, seems to be going for the jugular.
What Comes Next?
For now, it’s just a draft. But deadlines are tight. The RBI wants stakeholder feedback by August 25.
In bureaucratic terms, that’s soon.
Bankers are scrambling to prepare responses, highlight gray areas, and suggest tweaks. At the same time, compliance officers are busy measuring their institutions against the proposed norms—sometimes nervously.
And here’s the catch: once these directions are finalized, RBI isn’t expected to offer too many second chances.
