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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 with “Comments on Digital Banking Framework Discussion Paper” as the subject line.

    (Edited by : Shoma bhattacharjee)

    First publication: STI


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