Government think tank NITI Aayog last week released a report on digital banks, laying out a blueprint for licensing digital banks in India.
NITI Aayog had last year issued a discussion paper on the subject of “digital banks”.
According to the think tank’s latest report, India already has a technology platform to facilitate digital banks.
In fact, as per news reports Prime Minister Narendra Modi is likely to roll out 75 Digital Banking Units across the country on August 15. These units will be totally paperless and will also work as digital financial literacy centres for the customers.
What Is Digital Banking?
A Digital Bank offers all its services online, doing away with all the paperwork like cheques, pay-in slips, demand drafts, etc.
Digital banks will be completely independent banks to be licensed under the Banking Regulation Act. They will follow the Reserve Bank norms on par with commercial banks.
These banks will behave like any other scheduled commercial bank and will give loans apart from accepting deposits.
Digital banks are expected to work on new technologies and provide services in areas where there is no or less service access.
The RBI, however, is of the view that cash handling and credit decisions require physical branches.
Digital Banking gives you the convenience of freely accessing and performing all traditional banking activities at any hour of the day without having to personally go to a bank branch.
The Niti Aayog report highlighted that India’s public digital infrastructure, especially UPI has successfully demonstrated how to challenge established incumbents. UPI transactions have surpassed Rs 4 lakh crore in value. Aadhaar authentications have passed 55 lakh crore. Finally, India is at the cusp of operationalising its own Open banking framework.
“These indices demonstrate India has the technology stack to fully facilitate Digital Banks. Creating a blueprint for digital banking regulatory framework & policy offers India the opportunity to cement her position as the global leader in Fintech at the same time as solving the several public policy challenges she faces”, the report concluded.
The Niti Aayog Paper focuses on preventing any regulatory or policy arbitrage and provides both incumbents and challengers with an even playing field.
In the first phase, a restricted digital bank license may be granted with a limit on the quantity/value of the customers. In the second phase, the licensee will be placed in a regulatory sandbox. Finally, a 'full scale' license may be granted based on satisfactory performance. A digital bank would require an initial capital of Rs 20 crore while being in a regulatory sandbox. A full-stack digital business/consumer bank would need to bring in Rs 200 crore of capital.
The four factors that such an index could carry are: entry barriers, competition, business restrictions and technology neutrality. These four elements are mapped against five benchmark jurisdictions of Singapore, the United Kingdom, Hong Kong, Malaysia, Australia, and South Korea.
The Niti Aayog paper says cyber risk remains a challenge as it does with the existing brick and mortar banks that have gone digital via net banking.
The prospective digital banks would face similar challenges in the internet paradigm in the form of a myriad of cyber attacks like phishing, malware, spyware, etc. However, Niti Aayog is confident that digital banks have a high cost of efficiency.
