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Source: The post is based on the article “NITI Aayog Releases Report on Digital Banks; Proposes a Licensing and Regulatory Regime for India” published in PIB on 20th July 2022.
What is the News?
NITI Aayog has released a report titled “A Proposal for Digital Banks in India: Licensing & Regulatory Regime”.
What is the purpose of the report?
The Report offers a template and roadmap for a Digital bank licensing and regulatory framework in India.
What are the key highlights from the report?
Need for Digital Bank: In recent years, India has made huge progress in furthering financial inclusion catalyzed by the Pradhan Mantri Jan Dhan Yojana, UPI among others.
– However, credit penetration remains a policy challenge, especially for the 63-million-odd MSMEs that contribute 30% to GDP, 45% to manufacturing output, and 40% to exports, while creating employment for a significant section of the population.
– Hence, there is a need to leverage technology effectively through steps like Digital Banks. This will help cater to these needs and bring the under-served further within the formal financial fold.
What would be the structure of the Digital Bank suggested by the report?
A digital bank would be a bank defined in the Banking Regulation Act, 1949, and shall have its own balance sheet and legal existence. It would accept deposits and advance loans through digital means.
They will principally rely on the internet and other proximate channels24 to offer their services and not physical branches.
However, digital banks would be different from the 75 Digital Banking Units (DBUs) as announced by the Finance Minister in Union Budget 2022-23. DBUs are being set up to push digital payments, banking and fintech innovations in underserved areas.
Roadmap for giving Digital Bank License: The report has recommended a carefully calibrated three-step approach for digital bank license by the Reserve Bank of India(RBI):
– In the first phase, a restricted digital bank licence should be given to an applicant with restrictions in terms of volume/value of customers serviced and the like.
– In the second stage, the licensee will be put in a regulatory sandbox framework by the RBI.
– Finally, the issue of a ‘full-scale’ digital bank licence will be given based on the satisfactory performance of the licensee in the regulatory sandbox, including salient, prudential and technological risk management.
Capital Requirement: A Digital bank may be required to bring in ₹20 crores of minimum paid-up capital in the restricted phase. Upon progression from the sandbox, a full-scale Digital Business bank will be required to bring in ₹200 crores.
Regulatory Norms: Digital banks will be subject to prudential and liquidity norms on a par with existing commercial banks.
