Last week, federal think tank NITI Aayog released a report on digital banks, offering a template for their licensing in India. It said India already has a technology stack to facilitate digital banks.

What are the planned Digital Banks?

• Digital Banks or DBs are full-scale banks to be licensed under the Banking Regulation Act.
• Unlike traditional banks, which require brick-and-mortar infrastructure or physical access points, digital banks simply leverage technology to provide banking services through mobile applications and internet-based platforms.
• DBs behave like any other scheduled commercial bank, accepting deposits, giving loans etc.
• They will follow prudential and liquidity norms at par with the commercial banks.
• Globally, terms like “digital banks”, “neobanks”, “challenger banks”, and “virtual banks” are often used interchangeably.

What about digital banking units then?

• The Union budget for FY23 proposed to establish digital banking units (DBUs) of scheduled commercial banks in 75 districts.
• The objective is to ensure that the benefits of digital payments, banking and fintech innovations reach the grass-roots.
• DBUs are treated as banking outlets, equivalent to a branch.
• These units do not have a legal personality and are not licensed under the Banking Regulation Act.
• Only existing commercial banks may establish DBUs. In contrast, digital banks will be licensed.
• These banks are expected to ensure credit penetration to underserved MSMEs and retail customers.

What purpose will digital banks serve?

• Digital banks are expected to further innovation and support the underserved segments.
• However, some believe that it will only cater to customers with some level of comfort with digital transactions.
• According to them, RBI too is not comfortable with this model as the central bank believes that cash handling and credit decisions require physical branches.

What does NITI Aayog suggest for DBs?

• In the first phase, a restricted digital bank licence may be given, with limits in terms of volume/value of customers. In the second stage, the licensee will be put in a regulatory sandbox.
• Finally, a ‘full-scale’ licence may be granted contingent on satisfactory performance.
• A digital bank will be required to have initial capital of ₹20 crore while in the regulatory sandbox.
• Upon progression from the sandbox, a full-stack digital business/consumer bank will be required to bring in ₹200 crore capital.

What has been the global experience?

• The UK has led the pack in terms of digital banks, with new entrants in the form of Monzo and Starling Bank.
• Several jurisdictions in the South East Asian region have witnessed the rise of digital banks.
• Hong Kong has issued separate licences for virtual banks.
• As of May 2020, the Hong Kong Monetary Authority has licensed 8 entities out of 33 applications.
• In South Korea, Kakao Bank and K Bank operate as internet banks licensed under the Banking Act.
• The Philippines has approved six licenses for digital banks.

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