On Digital Banking Units (DBUs): Digital delivery

Context: The Union finance minister recently made a declaration at the Atlantic Council think tank that the government is planning to set up as many as 75 digital-only banks or non-banking financial companies (NBFCs).

Digital Banking Units (DBUs) could transform access to financial services in remote areas where the physical delivery of such services is difficult

Is the Govt move justified?

35-odd commercial banks and well over a hundred NBFCs are already looking at this space.

If instead, the govt wants to establish 75 new digital entities, this appears unnecessary — as the RBI reports indicate, the DBU space is already crowded and likely to become more so.

What are the Digital Banking Units (DBUs)?

As per the RBI,

A DBU is defined as a business unit, or hub, with the infrastructure for delivering digital banking products and services. At a DBU, everything from customer acquisition, to product delivery, to service provision will be done facelessly and in a paperless manner through digital interfaces.

What are the pros and cons of DBUs?

Pros

– DBUs reduce the locational hassles of accessing financial services, since the entire process is online.

– They also increase the convenience of product comparison.

Cons

Choice overload: As customers can easily compare the terms and conditions offered, they may run into what behavioural scientists like Sheena Iyengar call “choice overload”, given the high levels of competition.

What is the current and the future scope of digital lending in India?

The RBI data indicates that “faceless” digital lending has grown exponentially, contributing well over half of all NBFC loans and around 6% of bank loans.

Given the sector regulator’s liberal stance, there will be a natural expansion of DBUs. All scheduled commercial banks and NBFCs will enter the DBU space because they must, to remain competitive. Given the convenience of going digital, more retail customers will also shop online for the best terms available across an array of financial products.

What are the RBI’s suggestions on opening of DBUs?

The RBI has suggested scheduled commercial banks can open such DBUs without seeking specific permission.

It has specifically excluded regional rural banks, payments banks, and local area banks from opening DBUs.

But, it is silent on the subject of NBFCs, which can presumably open such outlets in the absence of prohibition.

What is the way forward?

The regulator has already taken cognisance of the digital space and issued clear instructions, though more tweaks and fine-tuning may prove necessary.

The RBI will have to oversee DBUs to enforce acceptable levels of interoperability, compatible standards, data protection, and cyber-security.

The government’s responsibility should be to ensure the minimisation of red tape in establishing and running DBUs.

Furthermore, it needs to ensure that the telecom infrastructure is up to the task of handling higher data flows, especially in rural and remote areas.

Source: This post is based on the article “Digital delivery” published in the Business Standard on 21st Apr 22.