Niti Aayog bats for full-stack digital banks

Digital banks will be subject to prudential and liquidity standards comparable to legacy commercial banks, Niti Aayog said in a discussion paper.

Government think tank Niti Aayog on Wednesday proposed the creation of full-stack “digital banks”, which would rely primarily on the Internet and other nearby channels to deliver their services and not on physical branches, in order to alleviate the problems. challenges of financial deepening encountered in the country.

“In other words, these entities will issue deposits, grant loans and offer the full range of services that the banking regulation law allows them. As the name suggests, however, DBs will primarily rely on the Internet and other nearby channels to deliver their services, ”he said in a discussion paper.

However, according to the document, as a natural corollary of being a bank in the full sense of its legal definition, it is proposed that DBs be subject to prudential and liquidity standards comparable to those of existing commercial banks.

“The creation of a new licensing / regulatory framework is proposed as a regulatory innovation and not as regulatory arbitration,” he said. The document noted that India’s public digital infrastructure, especially UPI, has successfully demonstrated how to challenge established incumbents.

Measured UPI transactions have exceeded the value of ₹ 4 lakh crore. Aadhaar authentications have exceeded 55 lakh crore. “Finally, India is on the verge of operationalizing its own open banking framework,” the newspaper said. “These clues show that India has the technology stack to fully facilitate databases. Creating a model for the regulatory framework and digital banking policy offers India the opportunity to consolidate its position as a world leader in FinTech while solving the many public policy challenges it faces ”, did he declare. The paper also recommends a two-step approach, with a digital merchant banking license to begin with and a (universal) digital banking license once policymakers and regulators have gained experience with the former. It is important to avoid any regulatory or political arbitrage and to provide a level playing field. “Further, even with the Digital Business Bank license, he recommends a carefully calibrated approach” including the issuance of a restricted enterprise digital banking license (in terms of volume / value of customers served, etc.). Enrollment (of the licensee) in a sandbox regulatory framework decreed by the RBI, and issuance of a “full-stack” Digital Business Bank license (subject to the licensee’s satisfactory performance in the regulatory sandbox, including the management of salient risks, prudential and technological), are the other steps suggested in the document.

The document says that while the RBI’s power to license a banking company under the Banking Regulation Act is straightforward, an extra step is needed to create a licensing regime for digital commercial banks that allows them to be licensed. ” offer value-added services that are complementary to their financial core business, on the same balance sheet as banking services.

He further suggested that the minimum paid-up capital for a restricted digital commercial bank operating in a regulatory sandbox may be commensurate with its restricted status.

While the RBI is the final arbiter of what numerical value constitutes “proportional,” the document proposed a scale for minimum paid-up capital for illustration.

“According to the illustration, as you progress from the sandbox to the final stage, a full stack digital merchant bank will have to earn 200 crore (equivalent to that required from Small Finance bank),” he said. He suggests. The paper states that estimates indicate that databases have high profitability.

He also noted that the neo-banking business model that prevails in India is a function of the regulatory vacuum. “In the absence of a licensing regime for full-stack digital banks, the fintechs proposing the neo-banking proposal in India have improvised and adopted the front-end neo-banking model,” he said. .

Niti Aayog CEO Amitabh Kant said in his foreword that this discussion paper examines the global scenario and, based on it, recommends a new segment of regulated entities – full stack digital banks. . “Based on the comments received, the document will be finalized and shared as a political recommendation from Niti Aayog,” he said. While India has made rapid strides towards financial inclusion, credit penetration remains a public policy challenge, especially for the country’s 63 million MSMEs.


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