New Delhi: NITI Aayog today recommended a licensing and regulatory regime for digital banks in a report on Digital Banking, released today. The report provided a template and roadmap for the same, with a focus on avoiding any regulatory or policy arbitrage. It offered “a level playing field to incumbents as well as competitors”.
The report was released today by NITI Aayog Vice Chairman Suman Bery and CEO Parameswaran Iyer and Senior Adviser Anna Roy, in the presence of other officials. It pointed out that the success that India witnessed on the payments front was yet to be replicated when it came to the credit needs of its micro, small and medium businesses. It said the current credit gap and the business and policy constraints revealed a need for leveraging technology effectively to cater to these needs and bring the under-served further within the formal financial fold.
“Given the need for leveraging technology effectively to cater to the needs of banking in India, this report studies the prevailing gaps, the niches that remain underserved, and the global regulatory best practices in licensing digital banks,” Iyer said. He noted that the Digital India revolution catalysed by the Pradhan Mantri Jan Dhan Yojana (PMJDY), e-KYC and the Unified Payments Interface (UPI) led a paradigm shift in the way India interacted with and consumes financial services. He pointed out that PMJDY, launched in 2014, witnessed 420 million bank accounts opened till date. UPI was launched in 2016 and has become a bellwether real-time payments system clocking Rs. 4 trillion in value transactions till date. “There is a long way to go when it comes to credit deepening in the economy,” he stated.
The report recommends the following steps:
- Issue of a restricted digital bank licence (to a given applicant) (the license would be restricted in terms of volume/value of customers serviced and the like).
- Enlistment (of the licensee) in a regulatory sandbox framework enacted by the Reserve Bank of India.
- Issue of a ‘full-scale’ digital bank licence (contingent on satisfactory performance of the licensee in the regulatory sandbox, including salient, prudential and technological risk management).
The report also maps prevalent business models in this domain and highlights the challenges presented by the ‘partnership model’ of neo-banking—which has emerged in India due to a regulatory vacuum and in the absence of a digital bank licence.
The methodology for the licensing and regulatory template offered by the report is based on an equally weighted ‘digital bank regulatory index’. This comprises four factors—(i) entry barriers; (ii) competition; (iii) business restrictions; and (iv) technological neutrality. The elements of these four factors are then mapped against the five benchmark jurisdictions of Singapore, Hong Kong, United Kingdom, Malaysia, Australia and South Korea.
The Context for the Case of Digital Banks in India: Financial Inclusion
In recent years, India made rapid strides in furthering financial inclusion, catalysed by the Pradhan Mantri Jan Dhan Yojana and India Stack. However, credit penetration remains a policy challenge, especially for the nation’s 63-million-odd MSMEs that contribute 30% to GDP, 45% to manufacturing output, and 40% to exports, while creating employment for a significant section of the population.
Over the past few years, thanks to digitization—ushered in by the Jan Dan-Aadhar-Mobile (JAM) trinity and Aadhaar—financial inclusion became a reality. This was furthered by UPI, which witnessed extraordinary adoption. UPI recorded over 4.2 billion transactions worth Rs. 7.7 trillion in October 2021. The platform approach taken by the government in conceptualizing UPI resulted in valuable payment products being developed on top of it. As a result, payments could now be made with a click not just at retail outlets but also peer to peer—completely redefining the way in which money is transferred between individuals.
A ‘whole-of-India approach’ towards financial inclusion has also resulted in Direct Benefit Transfer through apps such as PM-KISAN and extending microcredit facilities to street vendors through PM-SVANIDHI.
India also took steps towards operationalizing its own version of ‘open banking’ through the Account Aggregator (AA) regulatory framework enacted by the Reserve Bank of India. Once commercially deployed, the AA framework was envisaged to catalyse credit deepening among groups that have been hitherto under-served.
The report was prepared by NITI Aayog based on inter-ministerial consultations. Last year, NITI Aayog had released a discussion paper on the subject for wider stakeholder consultations. Comments received from 24 organizations were examined and have been suitably addressed in the final report.
– global bihari bureau
