Digital banks and the promise of greater inclusion

What digital banks are planned?

Digital or DB banks are large-scale banks that must be licensed under the Banking Regulation Act. Unlike traditional banks, which require physical infrastructure or physical access points, digital banks simply leverage technology to deliver banking services through mobile apps and internet platforms. DBs behave like any other regular commercial bank, taking deposits, granting loans, etc. They will follow prudential and liquidity standards at the same level as commercial banks. Broadly, terms such as “digital banks”, “neobanks”, “challenge banks” or “virtual banks” are often used interchangeably.

So what about digital banking units?

The Union Budget for FY23 proposed to establish Digital Banking Units (DBUs) of regular commercial banks in 75 districts. The goal is to ensure that the benefits of digital payments, banking innovations and fintech reach the grassroots. DBUs are treated as bank outlets, equivalent to a branch. These units do not have legal personality and are not licensed under the Banking Regulation Act. Only existing commercial banks can establish DBUs. On the other hand, digital banks will be allowed. These banks are supposed to provide credit penetration to underserved MSMEs and retail customers.

What will digital banks be used for?

Digital banks should foster innovation and support underserved segments. However, some believe it will only appeal to customers with a certain level of comfort with digital transactions. According to them, RBI is also not comfortable with this model as the central bank believes that cash management and credit decisions require physical branches.

What does NITI Aayog suggest for DBs?

In the first phase, a restricted digital banking license can be granted, with limits in terms of volume/value of customers. In the second stage, the holder will be placed in a regulatory sandbox. Finally, a “large scale” license may be granted subject to satisfactory performance. A digital bank will need to have an initial capital of ₹20 crore in the regulatory sandbox. When progressing from the sandbox, a full digital commercial/consumer bank will need to bring ₹Capital of 200 million rupees.

What has been the global experience?

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

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