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The Reserve Bank of India has granted in-principle approval to Saraswat Co-operative Bank to acquire the troubled New India Co-operative Bank under the RBI’s Voluntary Amalgamation Scheme for Urban Co-operative Banks (UCBs), aimed at strengthening financial stability and depositor protection.

Key Terms & Concepts

Term	Explanation
UCBs	Urban Co-operative Banks – member-owned financial entities that operate mainly in urban and semi-urban areas.
Amalgamated Bank	The weaker co-operative bank whose assets and liabilities are being merged.
Amalgamating Bank	The stronger co-operative bank acquiring the weaker one.
Section 44A	Section of Banking Regulation Act dealing with voluntary bank amalgamations.
PACS	Primary Agricultural Credit Societies – grassroots cooperative credit institutions in rural India.

What is RBI’s Voluntary Amalgamation Scheme for UCBs?

Feature	Description
Objective	To enable financially stronger UCBs to acquire weaker ones voluntarily, protecting depositors and promoting financial stability.
Legal Basis	Sections 35A, 44A, and 56 of the Banking Regulation Act; further empowered by Banking Regulation (Amendment) Act, 2020.
Conditions	Mergers permitted with or without government support depending on net worth and depositor protection.
Approval Process	Requires 2/3rd board approval, 2/3rd shareholder approval (in number and value), followed by RBI sanction.
Applicability	Covers all primary UCBs, whether operating in one state or multiple states.

What are Co-operative Banks?

Feature	Description
Structure	Operate as co-operative societies, owned and managed by their members.
Objective	Provide affordable credit to small borrowers and underserved segments, particularly in rural and semi-urban areas.
Governance	Follow “one person, one vote” principle; decisions made democratically.
Regulation	RBI governs banking functions; state/central Registrar of Co-operative Societies oversees administrative matters.
Recent Reform	The 2020 Amendment Act gave RBI full regulatory powers over UCBs, reducing dual control issues.

Significance of UCBs in India

Area	Importance
Financial Inclusion	Serve small borrowers, micro businesses, and low-income groups in local communities.
Localised Credit Delivery	Understand community-specific needs and offer personalised services.
Priority Sector Lending (PSL)	65% ANBC PSL obligation in FY25, targeted to rise to 75% by 2026.
Support to Non-Agricultural Sectors	Play a key role in financing housing, MSMEs, and local services in urban settings.

Recent Developments in Co-operative Banking

Reform/Initiative	Details
National Co-operative Policy (2025–2045)	Aims to set up one co-op per village; create 2 lakh new PACS by 2026.
PSL Norms for UCBs	60% ANBC/CEOBE to PSL from April 2025, with further increase to 75% by March 2026.
Regulatory Action by RBI	215 penalties, 7 license cancellations, 23 UCBs under restrictions in FY25.
Fraud Management Guidelines (2024)	Introduced early warning systems, CBS integration, and accountability checks.
Digital Push	All UCBs mandated to implement Core Banking Systems by March 2025; supported by NABARD and NUCFDC.

Challenges Faced by UCBs in India

Challenge	Impact
Weak Governance & Frauds	Political interference, poor controls have led to scams (e.g., PMC Bank); 24 licenses cancelled in FY24.
Dual Regulation Legacy	Though improved, overlapping roles between RBI and state RCSs still create conflicts.
High NPAs	Gross NPAs at 8.8% (Mar 2024), limiting credit flow and profitability.
Tech Backwardness	Lack of modern banking infrastructure weakens service quality and competitiveness.
Declining Relevance	Share in total banking assets fell to 2.5% in 2024; from 64% agri lending in 1993 to just 11.3% now.

Way Forward

Reform Area	Suggested Measures
Governance	Mandate that 50% of board members have expertise in finance, banking, or law.
Consolidation	Promote voluntary mergers under RBI’s scheme to build stronger, more resilient UCBs.
Audits	Conduct regular, independent audits to improve transparency and accountability.
Technology	Accelerate adoption of mobile banking, cybersecurity, and digital interfaces.
Social Audits	Use community-led evaluations to ensure service delivery, inclusion, and fund utilisation.

In a Nutshell

Mnemonic: U-C-B-S
Upgrade governance
Consolidate weak banks
Boost digital systems
Strengthen depositor trust
UCBs remain key pillars of local finance, but their survival hinges on reforms, consolidation, and tech adoption to compete in a fast-evolving financial ecosystem.

Prelims Practice Questions

1. Which provision of the Banking Regulation Act empowers RBI to issue directions for public interest and bank management?
   A. Section 56
   B. Section 44A
   C. Section 35A
   D. Section 42
2. Which of the following is not a feature of Urban Co-operative Banks?
   A. Dual regulation by RBI and State Registrars
   B. “One member, one vote” principle
   C. Ownership by private shareholders
   D. Focus on financial inclusion in urban/semi-urban areas
3. Consider the following statements:
   1. UCBs are required to allocate 75% of ANBC to priority sector lending by March 2026.
   2. RBI has mandated CBS adoption by all UCBs by March 2025.
      Which of the above is/are correct?
      A. 1 only
      B. 2 only
      C. Both 1 and 2
      D. Neither 1 nor 2

Mains Questions

1. Examine the recent reforms in the co-operative banking sector and evaluate their effectiveness in addressing governance and financial stability issues. (GS3: Indian Economy)
2. Discuss the role of Urban Co-operative Banks in promoting inclusive growth. What challenges do they face, and what policy changes are required to revitalize the sector? (GS2: Governance, GS3: Inclusive Growth)

Prelims Answer Key and Explanations

Qn	Answer	Explanation
1	C	Section 35A allows RBI to issue directions in public interest.
2	C	UCBs are member-owned institutions, not owned by private shareholders.
3	C	Both statements are correct based on RBI’s FY25 and FY26 targets.