Full-stack ‘digital banks’, which would mostly depend on the internet and other nearby means to supply their services rather than physical branches, were recommended by the government think tank NitiAayog on Wednesday to ameliorate the financial deepening difficulties being faced in the nation.
For India, the Aayog presents a framework and path for a licencing and regulatory system for digital banks in its discussion paper titled, “Digital Banks: A Proposal for Licensing & Regulatory Regime”.
Existing banks can implement digital strategies, so why do regulators require new licences?
On Nov. 20, 2021, the Indian government’s think tank, the NitiAayog, proposed a plan to award exclusive digital bank licences, which the Reserve Bank of India (RBI) issued operating instructions for earlier this month.
According to the study, India’s public digital infrastructure, particularly UPI, has effectively proven how to confront existing players in the industry. There have been more than 4 lakh crore transactions recorded on UPI. There have been 55 million successful Aadhaar authentications.
NitiAayog’s suggestions for digital banks indicate that neo-banks such as Razorpay X and Jupiter may be forced to maintain their collaboration model with banks.
According to well-placed insiders, the RBI was reluctant to issue new digital licences because it feared the result would be increased market fragmentation. In addition, it’s possible that the applicants struggled to meet the RBI’s criterion for bank promoters who are “fit-and-proper.”
In certain parts of the central bank, there is already a strong perception that too many small finance bank licences have been granted.” A source familiar with the situation claimed that there are just a few names that have even reached the level of critical mass that would be anticipated of a bank. There will be greater competition for the pie if more licences are given out.
The regulator was unsure whether this would really help in attaining financial inclusion. Nearly half of SFBs’ branches are currently located in urban and semi-urban regions, which were designated for financial inclusion. If digital banks are allowed, the regulator believes the customer experience would remain the same.
Regulators are becoming stricter
In light of the BharatPe story, the quality of financial company owners and the capabilities of private equity investors and business enterprenaur to guarantee exceptional corporate governance have also come under scrutiny. ‘ For now, regulators believe that fintech companies must first grow used to more stringent restrictions before aspiring to become full-fledged banks.
Rather than admitting that the model doesn’t operate as planned in retrospect, the general view appears to be those nations like Australia, Korea, Taiwan, and Singapore, who have rushed to award digital bank licences, should be allowed to fall behind.
According to a source with direct knowledge of the situation, the regulator is concerned that the licencing process may become an exit vehicle for significant private equity investors who have invested in fintech. In order to put an end to the rumours surrounding digital bank licences, the RBI has issued instructions for existing banks to establish digital banking divisions that would only serve their online clients.