Statement on Developmental and Regulatory Policies
Alongside the August 2026 Monetary Policy Committee (MPC) resolution, the Reserve Bank of India issued its accompanying Statement on Developmental and Regulatory Policies, covering measures outside the interest rate decision.
The RBI signalled it will resume licensing of new Urban Co-operative Banks (UCBs) on an "on tap" basis, after a discussion paper on the subject was released for public feedback in January 2026; draft guidelines are to follow.
A review of Concentration Risk Management guidelines for Rural Co-operative Banks (RCBs) was announced, updating credit monitoring instructions that have stood since 2008.
The RBI also proposed rationalising the interest rate framework — covering both the MCLR (Marginal Cost of Funds-based Lending Rate) and EBLR (External Benchmark Lending Rate) regimes — applicable across all Regulated Entities (REs).
UCB Licensing: From a Two-Decade Pause to "On Tap" Resumption
Licensing of new Urban Co-operative Banks was halted by the RBI in 2004 after observing that a significant number of newly licensed UCBs turned financially unviable within a short span. Since then, RBI policy favoured consolidation of the sector through mergers, voluntary amalgamations, and supervisory action against weak entities rather than new entry.
Key Details
- A discussion paper on "Licensing of UCBs" was published for stakeholder feedback on January 13, 2026, proposing a minimum capital requirement of ₹300 crore for new applicants, along with eligibility conditions such as at least 10 years of prior operational track record.
- "On tap" licensing means the RBI accepts and processes applications continuously through the year, rather than opening a specific window — a format already used for universal banks (since 2016) and small finance banks.
- UCBs are dually rooted institutions: registered as cooperative societies (state or multi-state) but regulated as banks by the RBI under the Banking Regulation Act, 1949 (as applicable to cooperative societies).
The August 2026 statement builds directly on the January 2026 discussion paper, moving from consultation toward the issuance of formal draft guidelines — a concrete step toward ending the 20+ year licensing freeze for the sector.
Concentration Risk in Rural Co-operative Banks (RCBs)
Concentration risk arises when a bank's credit exposure is disproportionately concentrated among a few borrowers, sectors, or geographies, raising the risk of large losses from a single default. RBI's prudential guidelines set exposure ceilings and monitoring norms to contain this risk.
Key Details
- RCBs comprise the short-term rural cooperative credit structure: State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs), which sit above Primary Agricultural Credit Societies (PACS) in the credit delivery chain.
- The existing Credit Monitoring Arrangement (CMA) instructions governing large-borrower monitoring for these banks date back to 2008 and had not been comprehensively revised since.
- The review aims to recalibrate prudential norms given the sector's expansion and structural changes over the intervening period.
By flagging an update to 17-year-old norms, the RBI is aligning RCB prudential regulation with the scale the cooperative credit sector has reached, similar in spirit to the modernisation push already underway for UCBs.
Lending Rate Framework: MCLR and EBLR Rationalisation
Indian banks price floating-rate loans using either an internal benchmark (MCLR) or an external benchmark (EBLR), and the RBI periodically revises the operational rules governing both to improve monetary policy transmission and borrower transparency.
Key Details
- MCLR (Marginal Cost of Funds-based Lending Rate), introduced in 2016, is computed from a bank's own marginal cost of funds and reviewed monthly by the bank itself.
- EBLR (External Benchmark Lending Rate) was made mandatory from October 1, 2019 for all new floating-rate retail and MSME loans; nearly all banks have linked EBLR to the repo rate, with the rate reset at least once every three months.
- The August 2026 measures propose harmonising rules across Regulated Entities on a proportionality basis, refining MCLR/EBLR operational aspects, and standardising practices such as day-count convention and benchmark reset dates.
Standardising these operational details is intended to sharpen monetary transmission — ensuring MPC rate decisions (like the repo rate held at 5.25% this cycle) pass through to actual borrower EMIs more uniformly and transparently across banks.
- UCB licensing pause: in effect since 2004; discussion paper for resumption released January 13, 2026.
- Proposed minimum capital norm for new UCB applicants: ₹300 crore.
- RCB Credit Monitoring Arrangement instructions under review date to 2008.
- EBLR made mandatory for new retail/MSME floating loans effective October 1, 2019; reset frequency at least once every three months.
- These measures were announced as part of the RBI's Statement on Developmental and Regulatory Policies issued alongside the August 3-5, 2026 MPC resolution.