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Niti Aayog proposes setting up 'full-stack' digital banks; key highlights

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Niti Aayog makes a case for full-stack digital banks, or banks without any physical branches, based on the rising graph of UPI and other internet-based financial services in India.

Niti Aayog proposes setting up 'full-stack' digital banks; key highlights
In a bid to overcome the financial challenges the country is faced with, government think tank Niti Aayog has proposed setting up full-stack digital banks which will offer services through the internet and other proximate channels, and not physical branches.
Releasing a discussion paper called ‘Digital Banks: A Proposal for Licensing & Regulatory Regime for India,’ Niti Aayog offers a template and roadmap to make digital banks a reality.
Here are the highlights:
  • Niti Aayog has prepared the paper in consultation with experts in finance, technology and law and other inter-ministerial consultations.
  • The government think tank has sought comments on the paper, which can be accessed on the NITI Aayog website, till December 31.
  • The discussion paper makes a case for digital banks (DBs) in India.
  • Digital banks will help India mitigating the deepening financial challenges.
  • Digital banks are defined in the Banking Regulation Act, 1949 (BR Act) as entities which issue deposits, make loans and offer the full suite of services, but principally relies on the internet and other proximate channels and not physical branches, the paper said.
  • In the absence of a digital bank licence, a neo-banking system has emerged in India, Niti Aayog said.
  • Digital infrastructure such as UPI has emerged successful in challenging established incumbents. UPI transactions have crossed the Rs 4 lakh crore in value, the paper highlighted.
  • “These indices demonstrate India has the technology stack to fully facilitate DBs,” the paper said.
  • The paper offers a methodology for licensing and regulatory template for digital banks.
  • It proposes an equal-weighted ‘Digital Bank Regulatory Index,’ comprising four factors -- entry barriers, competition, business restrictions, and technological neutrality.
  • For licensing, the paper recommends a two-stage approach -- a digital business bank licence to be issued first, followed by a digital (universal) bank licence.
  • Licensing also requires a calibrated approach. Licences will be restricted in terms of volume and value of customers serviced. The licensee will be enlisted in a regulatory framework and upon satisfactory performance, it will be issued a ‘full-stack’ digital business bank licence.
  • Avoiding regulatory or policy arbitrage and providing a level playing field is mandatory for the establishment of digital banks.
  • The RBI, which issue licences to banking companies, will require additional powers to create a licensing regime for digital business banks.
  • “As per the illustration, upon progression from the sandbox into the final stage, a full-stack digital business bank will be required to bring in Rs 200 crore (equivalent to that required of the small finance bank),” the paper said.
  • DBs will have high-cost efficiency, the paper said.
  • Comments can be mailed to annaroy@nic.in with ‘Comments on discussion document on digital bank framework’ as the subject line.
     
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