The Reserve Bank of India (RBI), in consultation with the Government of India, has rolled out a comprehensive reform package to strengthen the financial health, governance and digital capabilities of cooperative banks. A key policy change allows bank loans to the National Cooperative Development Corporation (NCDC) for onward lending to cooperative societies to qualify as Priority Sector Lending (PSL) from January 19, 2026.
This decision is important because it directly improves credit flow to cooperative societies, enhances depositor protection, and accelerates digital inclusion across rural and urban cooperative banks. The move impacts commercial banks, cooperative institutions, rural borrowers and depositors linked to the cooperative banking ecosystem.
Alongside PSL reforms, RBI and the government have introduced governance changes, higher lending limits, digital infrastructure support and regulatory strengthening measures to modernize the cooperative banking sector.
What Happened in RBI Cooperative Banks Reform 2026
RBI announced that loans sanctioned by banks to NCDC for on-lending to cooperative societies will be eligible for classification under Priority Sector Lending categories as per the PSL Master Direction 2025. This applies to banks other than Regional Rural Banks, Urban Cooperative Banks, Small Finance Banks and Local Area Banks.
NCDC, a statutory corporation under the Ministry of Cooperation, provides financial assistance to cooperative societies across agriculture, rural industries and allied sectors. The PSL classification is expected to encourage higher institutional lending to the cooperative sector.
Why Did RBI Introduce Priority Sector Lending Changes for Cooperative Societies
The primary objective of the reform is to ease credit constraints faced by cooperative societies, especially in rural and semi-urban areas. Many cooperatives struggle to access formal credit despite playing a key role in agriculture, dairy, and rural development.
By allowing PSL benefits, banks can meet their mandated lending targets while supporting cooperative financing. This creates a structured incentive for banks to channel funds into cooperative institutions without increasing compliance pressure.
Bigger Context Behind RBI’s Cooperative Banking Strengthening Measures
The cooperative banking sector in India has historically faced governance gaps, capital limitations and technological challenges. Over the past few years, RBI and the Government of India have taken multiple steps to improve stability, transparency and depositor confidence.
One major governance reform includes the amendment to the Banking Regulation Act, which increases the tenure of directors in cooperative banks from 8 years to 10 years, ensuring continuity and better institutional oversight.
Additionally, Rural Cooperative Banks have been brought under the Integrated Ombudsman Scheme, strengthening customer grievance redressal and regulatory accountability.
Key RBI Reforms to Improve Financial Health, Governance and Digital Inclusion in Cooperative Banks
Urban Cooperative Banks (UCBs) have now been permitted to open new branches, which is expected to expand their reach and support financial inclusion in urban and semi-urban regions.
RBI has also increased the housing loan exposure limit for UCBs from 10% to 25% of their total loans and advances, significantly boosting their capacity to support the housing sector and retail borrowers.
The licensing fee for onboarding cooperative banks to the Aadhaar Enabled Payment System (AePS) has been reduced, encouraging faster adoption of digital banking services in rural areas.
Further, the National Urban Co-operative Finance and Development Corporation Limited (NUCFDC), a non-deposit taking NBFC, has been established as an Umbrella Organization to provide IT infrastructure and operational support to Urban Cooperative Banks.
A Shared Services Entity named Sahakar Sarthi has been set up to deliver technological services to Rural Cooperative Banks, helping them modernize operations and improve digital efficiency.
How RBI’s Cooperative Bank Reforms Affect Depositors, Banks and Rural Credit Flow
The reforms are expected to enhance deposit security, improve governance standards and increase credit availability across the cooperative banking system. Deposits in cooperative banks remain insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to Rs 5,00,000 per depositor per bank, including both principal and interest.
Higher housing loan limits and branch expansion may lead to increased lending activity and deeper financial penetration. At the same time, improved IT infrastructure through NUCFDC and Sahakar Sarthi can reduce operational inefficiencies and strengthen risk management.
For rural economies, increased credit flow through NCDC-backed lending can support agriculture, cooperative enterprises and grassroots economic development.
What Happens Next for Cooperative Banking Sector After RBI’s 2026 Policy Move
Going forward, banks are likely to increase lending to NCDC due to the PSL classification benefit, which can significantly boost funding availability for cooperative societies. This may gradually strengthen the financial position of cooperatives across sectors.
The rollout of digital service entities like Sahakar Sarthi and IT support through NUCFDC is expected to accelerate technological adoption in cooperative banks, particularly in rural and underserved regions.
Overall, the reform signals a long-term regulatory push toward a more stable, transparent and digitally cooperative banking ecosystem in India.
Frequently Asked Questions
What is the RBI’s new rule on NCDC lending?
RBI has allowed loans given by banks to NCDC for onward lending to cooperative societies to be classified as Priority Sector Lending from January 19, 2026.
Which banks are excluded from this PSL benefit?
Regional Rural Banks, Urban Cooperative Banks, Small Finance Banks and Local Area Banks are excluded from this specific PSL eligibility rule.
How much deposit insurance do cooperative bank customers receive?
Deposits up to Rs 5,00,000 per depositor per bank are insured by DICGC, including principal and interest.
What is Sahakar Sarthi in cooperative banking reforms?
Sahakar Sarthi is a Shared Services Entity created to provide technological and digital support services to Rural Cooperative Banks.
Conclusion
The RBI’s 2026 cooperative bank reforms mark a significant step toward improving credit flow, governance standards and digital infrastructure in the cooperative banking sector. With PSL incentives, stronger regulation and enhanced technology support, the policy is expected to strengthen financial stability, boost rural lending and increase long-term trust in cooperative banks.
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