Digital Banks


    In News

    • Recently the Government think tank NITI Aayog released its report titled ‘A proposal for Digital Banks in India: Licensing and Regulatory Regime’.

    About the report

    • About:
      • The report ‘focuses on avoiding any regulatory or policy arbitrage and offers a level playing field to incumbents as well as competitors
      • It offers a template and roadmap for licensing and regulatory regime for India. 
    • The report study and the methodology:
      • Given the need for leveraging technology effectively to cater to the needs of banking in India, this report studies the prevailing gaps, the niches that remain underserved, and the global regulatory best practices in licensing digital banks.
      • The methodology for the licensing and regulatory template offered by the report is based on an equally weighted ‘digital bank regulatory index’. This comprises 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.

    Significant report citations on financial inclusion

    • The rise in financial inclusion:
      • The report adds that India’s recent rise in furthering financial inclusion was catalysed by the Pradhan Mantri Jan Dhan Yojana and India Stack
    • JAM trinity and UPI:
      • With the launch of the Jan Dan-Aadhar-Mobile (JAM) trinity and Aadhaar, Unified Payments Interface (UPI), financial inclusion has become a reality for Indians. 
        • UPI-enabled digital transactions remained above Rs 10 lakh crore in June for the second month in a row, data from NPCI showed recently.
    • Direct Benefit Transfer:
      • ‘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.
    • AA framework:
      • The report also pointed out that 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. 
      • Once commercially deployed, the AA framework is envisaged to catalyse credit deepening among groups that have been hitherto under-served.

    Challenges delineated by the report

    • Credit penetration remains a policy challenge, especially for the nation’s 63-million-odd MSMEs
      • MSMEs contribute 30 percent to GDP, 
      • 45 percent to manufacturing output, and 
      • 40 percent to exports while creating employment for a significant section of the population.
    • The success that India has witnessed on the payments front is yet to be replicated when it comes to the credit needs of its micro, small and medium businesses. 

    Digital Banking

    • About:
      • A digital bank would be a bank defined in the Banking Regulation Act, 1949, and shall have its own balance sheet and legal existence.
      • It is banking done through the digital platform, doing away with all the paperwork like cheques, pay-in slips, Demand Drafts, and so on. 
      • It means availability of all banking activities online.
      • The shift from traditional to digital banking has been gradual and remains ongoing, and is constituted by differing degrees of banking service digitization.
    • Advantages of Digital Banking:
      • It saves effort and time where the customer can conduct banking activities without going to any bank headquarters, where he can keep it at home.
      • Ease of banking transactions in electronic banks and speed of handling them.
      • In addition to the reliability of cash flow and the speed of cash flow, it provides higher security and lower risk of check manipulation.
      • Reducing reliance on paper forms, as all transactions are done electronically.
    • Disadvantages of Digital Banking:
      • It is easy to fall prey to fraudulent transactions by falsifying some cards.
      • The professional computer technician can access accounts or copy another person’s information, enabling the information to come out of its confidential structure.
      • Digital banking forums are also prone to vulnerabilities and hacks such as phishing, pharming, identity theft, and keylogging.
      • Increase the gap that arises between the client and the bank.

    Unified Payments Interface (UPI): 

    • It is an instant real-time payment system developed by National Payments Corporation of India (NPCI)
    • The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions.
    • UPI is an open source application programming interface (API) that runs on top of Immediate Payment Service (IMPS).
    • It is regulated by the Reserve Bank of India (RBI) 
    • It works by instantly transferring funds between two bank accounts on a mobile platform.

    Way Ahead

    • The current credit gap and the business and policy constraints reveal a need for leveraging technology effectively to cater to these needs and bring the under-served further within the formal financial fold.

    Source: PIB