The NITI Aayog report is a case in point, offering a template and blueprint for a licensing and regulatory regime for digital banks. It aims to avoid any regulatory or political arbitrage and offers a level playing field for incumbents and competitors.The report was released today by NITI Aayog Vice Chairman Suman Bery and Director General ParameswaranIyer and Senior Advisor Anna Roy in the presence of other officials.“Given the need for effective use of technology to meet banking needs in India, this report studies the prevailing gaps, gaps that remain underserved and global regulatory best practices in licensing digital banks,” said CEO ParameswaranIyer.
The report recommends a carefully calibrated approach that includes the following steps:
•Issuance of a limited digital bank license (for a given applicant) (the license would be limited in terms of volume/value of customers served, etc.).
•Placement (of the licensee) in the regulatory framework of the sandbox enacted by the Reserve Bank of India.
•Issuance of a “full-fledged” digital banking license (conditional on the licensee’s satisfactory performance in the regulatory sandbox, including significant, prudent and technological risk management).
The report also maps the prevailing business models in this area and highlights the challenges posed by the non-banking ‘partnership model’ – which has emerged in India due to a regulatory vacuum and the absence of a digital banking licence.
The methodology for the licensing and regulatory template offered in the report is based on an equally weighted “Digital Bank Regulatory Index”. This includes four factors –
- Earriers to entry;
- Economic competition;
- Trade restrictions; and
- Technological neutrality.
The elements of these four factors are then mapped against the five benchmark jurisdictions of Singapore, Hong Kong, the United Kingdom, Malaysia, Australia and South Korea.
The Case Context of Digital Banks in India: In recent years, India has made rapid strides in promoting financial inclusion, catalyzed by the Pradhan Mantri Jan DhanYojana and India Stack. However, credit penetration remains a policy challenge, especially for the 63 million SMEs that contribute 30% to GDP, 45% to manufacturing output and 40% to exports, creating jobs for a significant portion of the population.
Over the last few years, the digitization initiated by the trio of Jan Dan-Aadhar-Mobile (JAM) and Aadhaar has made financial inclusion a reality for Indians. This was supported only by the Unified Payments Interface (UPI), which saw extraordinary acceptance. UPI saw over 4.2 billion transactions worth ₹7.7 trillion in October 2021. The platform approach taken by the government in conceptualizing UPI has led to the development of valuable payment products. As a result, click-to-click payments can now be made not only in retail stores, but also peer-to-peer, redefining the way money is transferred between individuals.
India has also taken steps to operationalize 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 expected to be a catalyst for deepening credit among previously underserved groups. The ‘All-India approach’ to financial inclusion has also led to direct transfer of benefits through apps like PM-KISAN and extension of micro-credit options to street vendors through PM-SVANIDHI.
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 enterprises. The current credit gap and business and political constraints reveal the need for effective use of technology to meet these needs and move the underserved further into the formal financial framework.
This report was prepared by NITI Aayog based on inter-ministerial consultations. Last year, NITI Aayog released a discussion paper on the topic for wider stakeholder consultation. Comments received from 24 organizations were reviewed and appropriately considered in the final report.Additional Secretary, Ministry of Financial Services (AS) SuchindraMisra, MeitY AS Amit Aggarwal, Assistant Commissioner for MSME Development DrIshita Ganguli Tripathy and Chairman Association of Indian Banks Atul Kumar Goel were also present at the launch today.
