NITI Aayog, in consultation with experts in finance, technology and law, has released a discussion paper titled ‘Digital Banks: A Proposal for Licensing and Regulatory Regime for India,’ seeking comments till December 31.
The discussion paper, which is available on the NITI Aayog website, provides a template and roadmap for India’s digital bank licensing and regulatory regime.
India has made rapid progress toward financial inclusion. However, credit penetration remains a public policy challenge, particularly for the country’s 63 million MSMEs. India’s success in retail payments and credit is yet to be replicated when it comes to the payments and credit needs of its micro, small, and medium businesses. The current credit gap, as well as business and policy constraints, highlight the importance of effectively leveraging technology to meet the needs of this segment and bring them further into the formal financial fold.
Summary of Reforms Proposed
The discussion paper recommends regulatory innovations such as digital bank licences, which have the potential to solve as well as mitigate the financial deepening challenges that are currently being faced. It goes on to discuss the challenges presented by the partnership model of neo-banking that has emerged in India as a result of the regulatory vacuum and the absence of a digital bank license.
The paper constructs an equal-weighted Digital Bank Regulatory Index comprised of four factors: entry barriers, competition, business restrictions, and technological neutrality, and maps the elements of these indices against the five benchmark jurisdictions of Singapore, Hong Kong, the United Kingdom, Malaysia, Australia, and South Korea.
The paper also recommends a two-stage approach, beginning with a digital business bank license and progressing to a digital (universal) bank licence after policymakers and regulators have gained experience with the former. An important recommendation is to focus on avoiding regulatory or policy arbitrage and ensuring a level playing field.
The paper recommends a carefully calibrated approach comprising of the following steps:
- Issuance of a restricted digital business bank license (to a specific applicant), which will be restricted in terms of volume/ value of customers serviced and the like.
- Enlistment (of the licensee) in a regulatory sandbox framework enacted by the RBI.
- Issuance of a ‘full-stack’ digital business bank licence, contingent on satisfactory performance of the licensee in the regulatory sandbox, including saliently, prudential and technological risk management.