NEW DELHI: A discussion paper unveiled by government think-tank Niti Aayog has floated the idea of full-stack digital banks to deepen banking services and bridge credit gaps across the country, leveraging technology and massive digitalisation achieved so far.
The paper said that these entities will issue deposits, make loans and offer the full suite of services that the Banking Regulation Act empowers them to. As the name suggests, however, digital banks (DBs) will principally rely on the internet and other proximate channels to offer their services and not physical branches, it said.
"However, as a natural corollary to being a 'bank' in full sense of its legal definition, it is proposed that DBs will be subject to prudential and liquidity norms on par with incumbent commercial banks. Creating a new licensing/regulatory framework is being proposed as regulatory innovation and not as regulatory arbitrage," the paper said.
It said reports indicate that the RBI is contemplating to establish a working group to regulate "front-end only" neo banks that are currently operating in the partnership model. A useful point for consideration will be to evaluate a "full-stack" DB licence, which offers greater regulatory control and also further deepens the under-banked Indian market, instead of a piecemeal approach, the paper added. "The success that India has witnessed on the retail payments and credit front has failed to replicate when it comes to payments and credit needs of its small businesses. The current credit gap and the business and policy constraints reveal a need for leveraging technology effectively to cater to the needs of this segment and bring them within the formal financial fold," said Niti Aayog CEO Amitabh Kant.
It recommended a two-stage approach as part of the regulatory template. "Given the important role of credit in growth of the economy and pressing public policy necessity for bridging the Rs 25-trillion (Rs 25-lakh-crore) credit gap in the MSME sector, it is recommended that digital business bank licence be phased-in in stage 1. The RBI may consider introducing a 'digital universal bank' licence in stage 2 on the basis of regulatory experience gathered in stage 1," the paper said.
It recommended in the restricted phase, a digital business bank may be required to bring in Rs 20 crore of minimum paid-up capital. Upon progression from the sandbox into the final stage, a full-stack digital business bank will be required to bring in Rs 200 crore (equivalent to small finance banks).
It said that given the "digital-native" nature of banks that will operate under this licence, the licence may require one or more controlling persons of the applicant entity to have an established track record in adjacent industries such as e-commerce, payments, technology (eg, cloud computing). As with other licences (eg, payment banks, NUEs), applicants may have the option to apply in consortium. Existing neo banks seeking to upgrade or small finance banks/other regulated entities (eg, existing incumbent banks that may see the opportunity in full-stack digital business bank licence) are also potential eligible candidates for application.
"Creating a blue-print for digital banking regulatory framework and 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 paper added.