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India's central bank on Tuesday floated a discussion paper to resume issuance of fresh licenses for urban cooperative banks after putting such authorizations on hold for more than two decades.

Urban cooperative banks are community-focused financial institutions in urban and semi-urban areas in India and offer an alternative to commercial banks.

The Reserve Bank of India had stopped issuing licenses for such lenders in 2004 due to their poor financial health.

"As the operating environment has changed and the UCB sector has transformed significantly...(it) requires fresh licensing guidelines for the sector after a thorough discussion on the subject," the RBI said in the discussion paper.

The central bank has sought comments until February 13 after which it plans to issue draft guidelines.

India had 1,457 urban cooperative banks as on March 31, 2025, with assets of 7.38 trillion rupees ($81.8 billion), and deposits of 5.84 trillion rupees, the RBI said.

The central bank said that these lenders have an important role in financial inclusion but added that capital raising remains a challenge for them.

"Considering the fact that most of the failures of UCBs have been of smaller banks, if licensing is resumed for UCBs, it may be prudent to license only large co-operative credit societies," RBI said.

($1 = 90.2250 Indian rupees)