Niti Aayog proposes to create “Full-Stack” digital banks; Highlights
In an effort to overcome the financial challenges facing the country, government think tank Niti Aayog proposed to create full-stack digital banks that will offer services through the internet and other nearby channels, not physical branches.
By releasing a discussion paper titled “Digital Banks: A Proposed Licensing and Regulatory Scheme for India,” Niti Aayog offers a model and roadmap for making digital banks a reality.
Here are the highlights:
Niti Aayog prepared the document in consultation with experts in finance, technology and law and other inter-ministerial consultations.
The government think tank asked for comments on the document, which can be viewed on the NITI Aayog website until December 31.
The discussion paper makes a case for digital banking (DB) in India.
Digital banks will help India alleviate escalating financial challenges.
Digital banks are defined in the Banking Regulation Act 1949 (BR Act) as entities that issue deposits, provide loans, and offer a full range of services, but rely primarily on the internet and other nearby channels. and not on physical branches, according to the newspaper.
In the absence of a digital banking license, a neo-banking system has sprung up in India, Niti Aayog said.
Digital infrastructure such as UPI has emerged successfully challenging established incumbents. UPI transactions crossed the Rs 4 lakh crore in value, the document noted.
“These clues demonstrate that India has the technology to fully facilitate databases,” the newspaper said.
The document proposes a methodology for licensing and a regulatory model for digital banks.
It offers an equally weighted “digital banking regulation index” comprising four factors: entry barriers, competition, trade restrictions and technology neutrality.
For licensing, the document recommends a two-step approach: a digital banking license should be issued first, followed by a digital (universal) banking license.
Licensing also requires a calibrated approach. Licenses will be limited in terms of volume and value of customers served. The license holder will be registered in a regulatory framework and, in the event of satisfactory performance, he will be issued a “full-stack” digital merchant banking license.
Avoiding regulatory or political arbitrage and providing a level playing field is mandatory for building digital banks.
The RBI, which licenses banking companies, will need additional powers to create a licensing regime for digital merchant banks.
“According to the illustration, as the sandbox progresses to the final stage, a full-stack digital merchant bank will need to bring in 200 crore rupees (equivalent to that required from the small finance bank),” said said the newspaper.
The databases will have high cost effectiveness, the newspaper said.
Comments can be sent by mail to firstname.lastname@example.org with “Comments on Digital Banking Framework Discussion Paper” as the subject line.
(Edited by : Shoma bhattacharjee)
First publication: STI
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