NITI Aayog has released a report that makes a case and offers a template and roadmap for a licensing and regulatory regime for digital banks. It focuses on avoiding any regulatory or policy arbitrage and offers a level playing field to incumbents as well as competitors.
The report was released by NITI Aayog Vice Chairman Suman Bery and CEO Parameswaran Iyer and Senior Adviser Anna Roy, in the presence of other officials.
NITI Aayog Report Recommendations
The report recommends a carefully calibrated approach, comprising the following steps:
- Issue of a restricted digital bank licence (to a given applicant) (the license would be restricted in terms of volume/value of customers serviced and the like).
- Enlistment (of the licensee) in a regulatory sandbox framework enacted by the Reserve Bank of India.
- Issue of a ‘full-scale’ digital bank licence (contingent on satisfactory performance of the licensee in the regulatory sandbox, including salient, prudential and technological risk management).
- The report also maps prevalent business models in this domain and highlights the challenges presented 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 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
- business restrictions
- 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.
In recent years, India has made a lot a efforts for financial inclusion and it is a moment of pride that we have reached a lot ahead. However, credit penetration remains a policy challenge, especially for the nation’s 63-million-odd MSMEs that contribute 30% to GDP, 45% to manufacturing output, and 40% to exports, while creating employment for a significant section of the population.
Financial Inclusion & UPI
Financial Inclusion been enhanced by the Unified Payments Interface (UPI), which has witnessed extraordinary adoption. UPI recorded over 4.2 billion transactions worth ₹7.7 trillion in October 2021. The platform approach taken by the government in conceptualizing UPI has resulted in valuable payment products being developed on top of it. As a result, payments can now be made with a click not just at retail outlets but also peer to peer, completely redefining the way in which money is transferred between individuals.
PM-KISAN & PM-SVANIDHI
A ‘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.
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.
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. 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.