The government's policy think tank Niti Aayog has recommended issuing full-scale digital bank licences to applicants once they satisfy the Reserve Bank's regulatory sandbox and other requirements. However, initially, they should get a restricted digital business bank licence or a restricted digital consumer bank licence and enlist under the RBI's regulatory sandbox, the Aayog has suggested.

These initiatives will ensure a licensing and regulatory regime for digital banks in the country, according to a report released by NITI Aayog vice-chairman Suman Bery and CEO Parameswaran Iyer and senior adviser Anna Roy. They have called for a carefully calibrated approach to enhance financial inclusion to make India a global leader in fintech.

“Digital Banks” means banks that will issue deposits, make loans and offer the full suite of services but will principally rely on the internet and other proximate channels to offer services and not physical branches.

As per CEO Iyer, this report studies the current gaps, the niches that remain underserved, and the global regulatory best practices in licensing digital banks. To leverage technology effectively to cater to the banking needs of India, it says an applicant who acquires a restricted digital bank licence -- meaning it'll provide services to a restricted volume or value of customers -- should enlist in the regulatory sandbox framework of the Reserve Bank of India.

The RBI’s regulatory sandbox framework recognises the need to offer relaxations, including financial soundness, and track record and other issues, to enlisted entities. The Niti Aayog report says digital business banks or digital consumer banks should get relaxation during the time they operate in the regulatory sandbox.

“The RBI and the applicant identify a set of metrics for which the Licensee will be progressively monitored. Without being exhaustive, such metrics could be around cost to acquire a customer, volume/value of credit disbursed to MSMEs, technological preparedness, compliance levels of the Licensee across prudential aspects, among other things,” it adds.

Full-scale digital banking licence

Based on the performance of the licensee, the curbs may be relaxed and can become a full-scale digital bank. The duration of this progression can vary from case to case, it says, adding this approach is mirrored by global regulatory best practices. If the metrics agreed earlier are not met over a defined period, the licensee may be given a window to unwind the liabilities created, including any term deposits, assign assets created to an identified buyer and exit the sandbox, it adds.

For minimum paid-up capital, in the restricted phase, the digital business bank may be required to bring in ₹20 crore of minimum paid-up capital. After it becomes a full-scale digital business bank, it may be required to bring in ₹200 crore, equivalent to a small finance bank.

The report titled 'Digital Banks, A Proposal for Licensing & Regulatory Regime for India' maps working business models and highlights the challenges posed by the ‘partnership model’ of neo-banking — which has emerged in India due to a regulatory vacuum and in the absence of a digital bank licence.

The Niti Aayog says the methodology for the licensing and regulatory template should be based on a ‘digital bank regulatory index’ comprising four factors — entry barriers, competition, business restrictions, and technological neutrality. The elements of these four factors are then mapped against the five benchmark jurisdictions – Singapore, Hong Kong, the United Kingdom, Malaysia, Australia and South Korea.

Notably, India's financial inclusion journey has made rapid strides, boosted by the Pradhan Mantri Jan Dhan Yojana and the India Stack. Despite that, credit penetration is still a policy challenge, especially for around 63 million MSMEs in the country. They contribute 30% to the nation's GDP, 45% to manufacturing output, and 40% to exports while employing crores of people.

With this, digitisation efforts like Aadhaar and the Unified Payments Interface (UPI) have only boosted financial inclusion. Services like direct benefit transfer via the PM-KISAN app and microcredit facilities to street vendors via PM-SVANIDHI have pushed the India growth story further, it says.

"UPI transactions measured have surpassed ₹ 4 trillion in value. Aadhaar authentications have passed 55 trillion.”

It highlights that the Centre is working on its own version of 'open banking' via the RBI's account aggregator regulatory framework. This will catalyse credit deepening for the under-served.

These indices, as per the report, show India's technological prowess to facilitate digital banking. It concludes that if there is a blueprint for digital banking regulatory framework and policy, the country can emerge as the global leader in fintech by solving public policy challenges.

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