The Reserve Bank of India has proposed comprehensive new eligibility norms for granting urban cooperative banking licences, marking a significant policy shift after more than two decades of licensing restrictions. An internal working group of the central bank has outlined stringent financial and operational parameters designed to strengthen the cooperative banking sector's governance and resilience.

Proposed Eligibility Criteria

The discussion paper published on Monday establishes clear financial benchmarks for entities seeking UCB licences. The proposed requirements represent a substantial upgrade from previous standards:

Sector Challenges and Reform Objectives

The RBI's initiative addresses longstanding issues within the urban cooperative banking sector, which has historically faced significant operational challenges. The central bank identified key problem areas including weak capital structures, governance lapses, and technology gaps that have undermined sector stability.

The proposed framework emphasizes that only large, well-managed cooperative credit societies should be considered for conversion into UCBs. These entities must demonstrate progressive financial performance over the immediately preceding five years, ensuring only financially robust institutions enter the banking sector.

Current Sector Landscape

As of March 31, 2025, the urban cooperative banking sector comprises 1,457 institutions, with a significant portion operating under various forms of regulatory oversight. The current supervisory landscape reveals the sector's challenges:

Governance and Regulatory Framework

The RBI has emphasized that governance standards for UCBs must mirror those established for commercial banks, requiring professional and independent boards. This alignment ensures consistent regulatory oversight across different banking categories and promotes institutional accountability.

The implementation of these new norms may necessitate statutory amendments to State and Multi-State Cooperative Acts, indicating the comprehensive nature of the proposed reforms. These legislative changes would provide the necessary legal framework to enforce the enhanced standards effectively.

The discussion paper represents the first concrete step toward reopening UCB licensing, signaling the RBI's commitment to strengthening the cooperative banking sector while maintaining strict prudential standards.

The Reserve Bank of India's latest dollar-rupee swap auction demonstrated strong market appetite on Tuesday, with participants submitting bids worth $29.9 billion against the notified amount of $10 billion. The 3-year buy-sell swap attracted nearly three times the intended participation, highlighting significant demand for foreign exchange liquidity in the current market environment.

Auction Results and Premium Analysis

The swap auction concluded with key metrics showing increased costs compared to previous operations:

The cutoff premium of 728 paise represents a substantial increase of 127 paise from the last 3-year swap conducted in February 2025. This higher premium indicates that the RBI is purchasing dollars at a significantly increased cost compared to the previous auction, reflecting changed market dynamics and currency pressures.

Market Conditions and Currency Pressure

The elevated premium levels point to intensified pressure on the Indian rupee compared to previous periods. Market experts attribute this increase to the currency's weakened position relative to its historical trading ranges. The rupee's current vulnerability contrasts sharply with its more stable performance in earlier periods when it traded within the 85-86 range.

"Premiums have gone up because the rupee has been under that much pressure as compared to last year. This time last year, the currency was trading in the 85 to 86 handle," explained Anil Bhansali, head of treasury at Finrex Treasury Advisors.

Implications for Foreign Exchange Management

The overwhelming response to the swap auction underscores the market's need for dollar liquidity and the RBI's continued intervention in foreign exchange markets. The 3-year tenor of the swap provides medium-term stability for market participants while allowing the central bank to manage its foreign exchange reserves strategically. The higher premium reflects the true cost of dollar acquisition in current market conditions and demonstrates the RBI's commitment to maintaining adequate foreign exchange liquidity despite increased costs.