NITI Aayog Report on Digital Banks

Digital banking in India: Relevance

• GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Digital banks in India: Context

• Recently, NITI Aayog has released a new report on digital banks where it has offered a template and roadmap for a licensing and regulatory regime for digital banks.

NITI Aayog Report on Digital Banks: Key points

• The report also focusses on avoiding any regulatory or policy arbitrage, besides offering a level playing field to incumbents as well as competitors.
• The report studies the prevailing gaps and the global regulatory best practices in licensing digital banks, given the need for leveraging technology effectively to cater to the needs of banking in India.

NITI Aayog Report on Digital Banks: Recommendations

• The report recommends a calibrated approach, which comprises the following steps:
  • Issue of a restricted digital bank licence: It means the license would be restricted in terms of volume/value of customers serviced.
  • Licensee enlistment in a regulatory sandbox framework enacted by the Reserve Bank of India.
  • Issue of a ‘full-scale’ digital bank licence: The license should be 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 the digital segment and highlights the challenges presented by the ‘partnership model’ of neo-banking.
• Neo banking has emerged in India due to a regulatory vacuum and in the absence of a digital bank licence.

Digital bank regulatory index

• The methodology for the licensing and regulatory template is based on an ‘digital bank regulatory index’.
• It is comprised of four factors
  • entry barriers;
  • competition;
  • business restrictions; and
  • 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.

What is Digital Banking?

• Digital Banking refers to present and future electronic banking services provided by a licensed bank for the execution of financial, banking and other transactions through electronic devices over web sites (i.e., online banking), mobile phones (i.e., mobile banking) or other digital channels as determined by the bank.

Digital banking in India

• Strengthened financial inclusion: Schemes like Pradhan Mantri Jan Dhan Yojana, India Stack, Jan Dan-Aadhar-Mobile (JAM) trinity, Unified Payments Interface (UPI) has made financial inclusion a reality for Indians.
• Implementation of schemes: 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.
• Open banking: India has also taken steps towards operationalizing its own version of ‘open banking’ through the Account Aggregator (AA) regulatory framework enacted by the Reserve Bank of India.

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