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.

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.

Key Highlights of Report

Defines Digital Bank (DB)

• It defines digital Bank as defined in the Banking Regulation (BR) Act, 1949.

• In other words, they will issue deposits, make loans and offer the full suite of services that the B R Act empowers them to.

• They will principally rely on the internet and other proximate channels to offer their services and not physical branches.

• It would be defined in the Banking Regulation Act, 1949.

• It will have its own balance sheet and legal existence.

• It is different from Digital Banking Units (DBUs) mentioned in the budget.

• DBUs are being set up to push digital payments, banking and fintech innovations in underserved areas.

Suggestions

The report recommends steps for creating a new licensing and regulatory framework for digital banks:

• Issue of a restricted digital bank licence (to a given applicant)

• Enlistment (of the licensee) in a regulatory sandbox framework enacted by RBI

• Issue of a ‘full-scale’ digital bank licence

License

• Methodology for the licensing given in report is based on an equally weighted ‘digital bank regulatory index’.

• Index comprises four factors: (i) entry barriers; (ii) competition; (iii) business restrictions (iv) technological neutrality.

• RBI will issue a licence to a banking company under Section 22 of the Banking Regulation Act.

• It will create a licensing regime for digital business banks and digital consumer banks.

• Restricted licences should be issued for such banks to applicants.

• The restricted nature of the licence would limit the volumes and value of customers serviced.

• A full-scale licence would be issued based on satisfactory performance in Restricted licence

Requirements from Applicants

• Applicant for a licence require one or more controlling persons to have an established track record in e-commerce, payments, or technology space.

• Applicants may have the option to apply in the form of a consortium.

• Here consortium means numerous banks fund one project.

Existing Financial Institute Eligibility

• Existing neo-banks seeking to upgrade or small finance banks and Fintech businesses are eligible candidates.

• Centre will have to notify that a non-financial business (NFBs) is complementary to the core financial business of digital business banks/digital consumer

• The non-financial business means sectors of industry, construction, distributive trades and services.

• The Centre, in consultation with the RBI, may create list of permissible and non-permissible NFBs in Digital Banking.

Advantages of Digital Bank

• Check your balance any where

• Transfer funds

• Booking Deposits online

• Placing Orders for Bank Products online

• Set up a notification to alert you if you overdraft your account

• Ability to go cashless.

Disadvantages of Digital Bank

• No Cashless Deposit Option

• Internet Requirement

• Internet Fraud