Strategic Expansion of Urban Co-operative Banks: A 1991 Committee Review

India’s urban cooperative banking sector has always occupied a unique space in the country’s financial ecosystem – serving small traders, salaried employees, women entrepreneurs, and marginalized communities who often fell through the cracks of formal commercial banking. But by the early 1990s, the sector was in urgent need of a policy rethink. Outdated licensing rules, monopolistic structures, and governance gaps were holding it back. Enter the Marathe Committee of 1991 – a landmark exercise that sought to bring liberalization, inclusivity, and stronger regulation to urban cooperative banking in India.

Background: why the UCB sector needed a relook 🔗

Urban Cooperative Banks (UCBs) have a history stretching back over a century. The cooperative credit movement gained momentum through the early twentieth century, and UCBs gradually emerged as vital financial institutions serving lower and middle-income urban populations. However, their most significant regulatory milestone came in 1966, when large cooperative banks were brought under the Banking Regulation Act, 1949, placing their banking functions – including licensing, area of operations, and interest rates – under the Reserve Bank of India (RBI). Registration, management, and liquidation, however, remained with State Governments under respective State Cooperative Societies Acts.

This dual control structure was both a strength and a source of friction. On one hand, it brought regulatory discipline to the sector. On the other, it created ambiguities and delayed reforms. By the late 1980s and early 1990s, the UCB sector was marked by heterogeneity – vastly different in size, health, and reach across states. Most banks were concentrated in Maharashtra, Karnataka, Gujarat, and Tamil Nadu, while large parts of the country remained underserved. Many UCBs were unit banks without any branch network, operational inefficiencies were widespread, and governance left much to be desired.

India’s broader economic liberalization of 1991 made it imperative to revisit the policy framework governing UCBs. In this context, the RBI constituted the Committee on Licensing of New Urban Co-operative Banks, chaired by S.S. Marathe, a member of the RBI’s Central Board. The committee submitted its report in May 1992.

Key findings: recognizing the sector’s heterogeneity 🔗

One of the committee’s foundational contributions was formally acknowledging that the UCB sector could not be treated as a monolith. The heterogeneous character of the urban banking movement and its uneven geographical spread meant that a uniform, one-size-fits-all licensing policy was doing more harm than good.

The committee also noted that a long-standing policy – the “one district, one bank” approach – had created monopolistic conditions. Districts with a single licensed UCB saw no competitive pressure, resulting in poor service quality, high costs, and little incentive to innovate. Meanwhile, many communities and localities remained financially excluded even within districts that had a UCB. Marginalized groups, women, and micro-entrepreneurs were particularly left out.

Beyond the geographical rigidity, the committee flagged concerns about professional management in UCBs. The sector was largely run by elected boards without trained banking professionals, creating vulnerability to governance failures. Regulatory capacity at the RBI also faced strain given the growing number of banks under supervision.

Core recommendations of the Marathe Committee 🔗

Abandoning the “one district one bank” policy 🔗

The most consequential recommendation was to scrap the one-district-one-bank approach in favour of a needs-based licensing policy. The committee recommended that new UCBs be established on the basis of need and potential, with viability determined by local demand rather than geographic quotas. This marked a clear shift from an administrative criterion to an economic one – asking not “is there already a bank in this district?” but “does this community genuinely need one?”

The committee was explicit: the goal of licensing should be to expand access, not to protect incumbents. This principle was aligned with the broader spirit of India’s 1991 economic reforms, which sought to reduce monopolistic structures across sectors.

Needs-based licensing with viability norms 🔗

A more liberal entry policy came with conditions. The Marathe Committee insisted that new UCBs must meet revised viability norms – including minimum share capital requirements, initial membership thresholds, and other financial parameters – within a specified period after licensing. Achieving these prescribed norms in terms of share capital and initial membership within a defined timeframe was made a condition of the revised licensing framework.

This approach ensured that liberalization did not mean a free-for-all. Banks had to demonstrate genuine financial viability and community support before they could begin full operations. The norms also helped prevent the proliferation of undercapitalized or politically motivated UCBs – a concern that would become increasingly relevant in subsequent years.

Promoting Mahila banks and banks for marginalized communities 🔗

A particularly progressive aspect of the Marathe Committee’s recommendations was the explicit support for Mahila banks – cooperative banks run by and primarily serving women. The committee recognized that despite decades of growth in cooperative banking, women in urban areas continued to face both cultural and structural barriers in accessing formal financial services.

By recommending favorable licensing consideration for Mahila banks, the committee acknowledged that financial inclusion is not just about geography – it is also about serving communities that face discrimination or social barriers within existing banking structures. Similarly, the committee encouraged the licensing of UCBs catering to other marginalized communities, recognizing their distinct economic and social needs.

This recommendation was visionary for its time. It pre-dated India’s formal financial inclusion agenda by over a decade, yet anticipated many of its core concerns about reaching those excluded from mainstream banking.

Liberalizing branch licensing 🔗

The committee also recommended a more liberalized approach to branch licensing for UCBs. Under Section 23 of the Banking Regulation Act, 1949 (as applicable to cooperative societies), UCBs require RBI permission to open branches. The Marathe Committee felt that this process was unnecessarily restrictive and slowed down the sector’s ability to expand access to communities within its licensed area of operation.

By pushing for a more flexible branch licensing regime, the committee aimed to allow well-run UCBs to deepen their reach without being constrained by bureaucratic processes. Viability, not administrative restrictions, should determine how many branches a bank can open.

Encouraging professional management 🔗

Recognizing that governance gaps were a structural weakness across the UCB sector, the Marathe Committee emphasized the need for professional management. This meant encouraging – and in some cases requiring – the appointment of trained banking professionals alongside or instead of purely elected leadership.

The committee understood that cooperative democracy and professional management are not incompatible. Members can still elect their boards, but the day-to-day management of a bank – its credit decisions, risk assessment, and operations – needed trained hands. This recommendation laid the groundwork for later, more stringent governance reforms that committees such as the Madhava Rao Committee (1999) and R. Gandhi Committee (2015) would also champion.

Strengthening RBI’s regulatory oversight and early warning systems 🔗

One of the more technical but critical recommendations was the introduction of a monitoring system to generate early warning signals for detecting financial stress in UCBs before it escalated into full-blown failure. The committee called for a structured monitoring mechanism for timely detection of sickness in UCBs.

This was a forward-looking recommendation. Many UCBs at the time operated without adequate internal controls or external scrutiny until they were already in financial distress. An early warning framework would give the RBI the tools to intervene proactively, protecting depositors and the broader cooperative banking system.

RBI’s response: acceptance with modifications 🔗

The RBI broadly accepted the Marathe Committee’s recommendations, though with certain modifications to calibrate the pace of liberalization. The committee’s report, submitted in 1992, had primarily aimed at the removal of restrictions on UCBs’ freedom, and most recommendations were subsequently implemented, ushering in a phase of liberalization for the sector from 1993 onwards.

The post-Marathe period saw significant growth in the number of UCBs, particularly through the 1990s. However, this rapid expansion also brought challenges. The rapid licensing in the 1990s eventually led to governance failures, prompting the RBI to stop issuing new UCB licences altogether in 2004. This underscored the tension that the Marathe Committee itself had anticipated – liberalization must be paired with robust oversight.

The Marathe Committee in historical perspective 🔗

The Marathe Committee report sits at a turning point in the evolution of India’s cooperative banking policy. Before it, the sector was defined by geographic restrictions, monopolistic structures, and limited regulatory imagination. After it, the focus shifted – however imperfectly – to need, viability, inclusivity, and professional governance.

The Marathe Committee (1992) redefined the viability norms and ushered in the era of liberalization, even as subsequent committees like Madhava Rao (1999) had to course-correct by focusing on consolidation and control of financial sickness that the rapid expansion had produced. This is the nature of reform – each committee builds on the last, responding to new problems created in part by earlier solutions.

What makes the Marathe Committee’s legacy particularly significant is not just its specific recommendations but its underlying philosophy: that UCBs serve a unique and irreplaceable role in India’s financial ecosystem, one that complements rather than competes with commercial banks. Protecting that role required both freeing UCBs from unnecessary restrictions and equipping regulators to catch problems early.

Several committees – from the Satish Marathe Committee of 1991 to the R. Gandhi Committee of 2015 – have diagnosed the problems with UCBs and offered solutions, yet implementation gaps have persisted. Today, with the Banking Regulation (Amendment) Act, 2020 bringing over 1,500 cooperative banks under direct RBI supervision, the sector is finally moving towards a more unified, professionally governed structure – a direction the Marathe Committee pointed to three decades ago.

What do you think? Given that the Marathe Committee recommended needs-based licensing as far back as 1991, why do you think it took India nearly three decades to bring all cooperative banks under comprehensive RBI oversight? And do you think the recommendation for dedicated Mahila cooperative banks was bold enough – or should the policy have gone further in ensuring women’s financial inclusion?

References

1. https://www.sarvodayabank.com/pages/history-of-urban-co-op-banking/
2. https://en.wikipedia.org/wiki/Banking_Regulation_Act,_1949
3. https://pdvpmtasgaon.edu.in/uploads/dptsncommerce/ChapterNo-II.pdf
4. https://www.slideshare.net/slideshow/marathe-committee-ucb/13092240
5. https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=130
6. https://www.insightsonindia.com/2026/01/27/urban-co-operative-banks-ucbs/
7. https://www.businesstoday.in/industry/banks/story/urban-cooperative-banks-poor-governance-makes-ucbs-vulnerable-to-npas-non-performing-assets-pmc-bank-fraud-240065-2019-11-21