Digital Banks and the promise of digital inclusion

Source: The post is based on the article “Digital Banks and the promise of digital inclusion” published in Livemint on 26th July 2022.

What is the News?

NITI Aayog has released a report on digital banks offering a template for their licensing in India.

What are the planned digital banks? 

Digital Banks or DBs are full-scale banks to be licensed under the Banking Regulation Act. 

Unlike traditional banks, which require brick-and-mortar infrastructure or physical access points, digital banks simply leverage technology to provide banking services through mobile applications and internet-based platforms.

DBs behave like any other scheduled commercial bank like accepting deposits, giving loans etc. They will follow all prudential and liquidity norms at par with the commercial banks. 

How are digital banks different from digital banking units? 

The Union budget for FY23 proposed to establish digital banking units(DBUs) of scheduled commercial banks in 75 districts.

The objective is to ensure that the benefits of digital payments, banking and fintech innovations reach the grass-roots. 

DBUs are treated as banking outlets, equivalent to a branch. These units do not have a legal personality and are not licensed under the Banking Regulation Act. Only existing commercial banks may establish DBUs.

In contrast, digital banks will be licensed. These banks are expected to ensure credit penetration to underserved MSMEs and retail customers.

What purpose will digital banks serve? 

Digital banks are expected to further innovation and support the underserved segments.

However, some believe that it will only cater to customers with some level of comfort with digital transactions. According to them, RBI is not comfortable with this model as the central bank believes that cash handling and credit decisions require physical branches.

What does NITI Aayog suggest for DBs? 

What has been the global experience? 

The UK has led the pack in terms of digital banks with new entrants in the form of Monzo and Starling Bank.

Several jurisdictions in the South East Asian region have witnessed the rise of digital banks. Hong Kong has issued a separate license for virtual banks. The Philippines has also approved six licences for digital banks.