Government think-tank Niti Aayog is batting for Digital Banks on the assumption that the country today has a technology stack that could facilitate this shift. Given the focus on developing a level playing field for digital retailing via its open network for digital commerce, the digital bank could be just the piece required in the jigsaw puzzle of creating a new entrepreneurship base.
In a strategy note titled “Digital Banks: A Proposal for Licensing & Regulatory Regime in India”, the Niti Aayog says such a regulatory framework would provide the heft to an idea that offers a template and roadmap for digital bank licensing and regulatory framework for India. Niti Aayog CEO Parameswaran Iyer says the move is a bold initiative towards an inevitable digital future.
So, what’s this all about?
The public digital infrastructure that the government has been building, starting from the unique identity to every citizen to facilitating easy money transactions via the unified payments interface (UPI), has challenged the established incumbents (banks) with digital payments now surpassing Rs.4 trillion in value.
Similarly, Aadhar authentications crossed 55 trillion which means that India is now at the cusp of operationalizing its own open banking framework. These indices demonstrate India possesses the technology stack to fully facilitate digital banking, the report said asserting that the time is now ripe for creating a blueprint for digital banking.
The blueprint could include both a regulatory framework as well as a detailed policy document that will help India cement its position as a global leader in FinTech while also solving several of the challenges posed by existing public policy regarding banking.
What is the next move?
The Niti Aayog report is now suggesting that a restricted Digital Business Banking License be introduced alongside another one for setting up digital banks for consumers. Those getting one of these licenses get enlisted in the regulatory sandbox and can start operating a digital bank for either consumers or businesses.
And once the licensee depicts satisfactory performances (the thought paper doesn’t elaborate on what this constitutes) within the sandbox, the government could relax restrictions whereby the entity moves out from the limited circle offered by the sandbox to become a full scale digital banking entity, says the report.
It suggests a minimum paid up capital of Rs.20 crore to start operations within the regulatory sandbox and once ready to move beyond, the capital requirement could be bumped up to as much as Rs.200 crore. This methodology is based on an equal-weighted digital bank regulatory index, the report said.
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, United Kingdom, Hong Kong, Malaysia, Australia and South Korea.
What about compliance with security?
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 netbanking. 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.
It mapped prevalent business models of the banking domain and highlighted the challenges that arose via the partnership model of neo-banking that has, off late, emerged in the country due to a lack of regulatory framework that includes the absence of a digital banking license. However, Niti Aayog is confident that digital banks have a high cost of efficiency.
So, where does all of this leave the neo banks? The report says neo-banking business has flourished in a regulatory vacuum and recalls a discussion paper that highlighted the importance of a full stack digital banking system as an alternative to overcome persistent policy challenges of deepening credit requirements.
