[Answered] Discuss the concept and rationale behind Digital Banking Units (DBU). Also, differentiate between DBU and Digital banks proposed by NITI Aayog.

DBU is a specialized business unit of a bank that houses certain minimum digital banking products and services. Each DBU must offer certain minimum digital banking products and services. The services include savings bank accounts under various schemes, current accounts, fixed deposits and Internet banking, debit and credit cards, UPI etc. Other services include making applications for identified retail, MSME or schematic loans.

Rationale behind Digital Banking Units:

• They will help banks themselves which are now looking to reduce physical footprint with fewer brick and mortar branches, with a ‘light’ banking approach.
• They will open up the rural market for service providers besides providing a boost to credit flow.
• It is also cheaper to establish than a new branch, and can provide better customer experience aided by technology.
• These units can help in providing personalised finance management tools to new consumers, require lesser staff, with cheaper maintenance due to technological tools and hence can be high-yield units for the parent bank.
• It will encourage more financial literacy and a favourable outlook towards digital banking.

The NITI Aayog has made a case for setting up digital banks, which would accept deposits and advance loans through digital means. A digital bank would be a bank defined in the Banking Regulation Act, 1949, and shall have its own balance sheet and legal existence.

Difference between DBUs and Digital banks:

• Digital banking is electronic banking services provided by a licensed bank for the execution of banking and financial transactions over websites, mobile phones and other digital channels. A DBU is a fixed point business unit/hub housing digital infrastructure for delivering digital banking products and services.
• Balance Sheet and Legal Personality: DBUs do not have legal personality and are not licensed under Banking Regulation Act, 1949. Legally, they are equivalent to “banking outlets” i.e., branches. Digital Banks will have a balance sheet and legal personality & are proposed to be duly licensed banks under this act.
• Level of Innovation and Competition: DBUs improve existing channel architecture by offering regulatory recognition to digital channel. However, they are silent on competition. The DBU guidelines expressly state that only existing commercial banks may establish DBUs. In contrast, a licensing and regulatory framework for Digital banks is more enabling along competition/innovation dimensions.

Despite the rapid strides India has taken to further its financial inclusion agenda, the lack of financial deepening remains a challenge, especially on the small business financing agenda. Creating a blue-print for digital banking regulatory framework offers India the opportunity to cement her position as the global leader in Fintech.