DIGITAL BANKING UNITS

The Future Of Digital Banking In India

    Finance Minister Nirmala Sitharaman’s statement that “75 digital-only banks and non-banking financial companies” (NBFCs) are to be set up this year has caused a ripple of excitement. It is a reiteration of her stance in the Union Budget but in a much more public forum, the Atlantic Council think tank in Washington. The announcement clearly signals an acceleration of the government’s plans for digital-only banks. But these plans have to be seen in the context of the Reserve Bank of India’s guidelines for the “Establishment of Digital Banking Units.

    According to a latest report by the Reserve Bank of India, a Digital Banking Unit (DBU) is a business unit or hub with some digital infrastructure that helps in delivering banking products and services, in a digital form, in self-service mode. In simpler language, all the traditional bank work like depositing cheques, pay-in slips etc., will happen digitally in these units. Earlier this month, the Reserve Bank of India announced the guidelines for DBUs, following the report of a working group of the Indian Banks Association.

    As per the RBI, each DBU must offer certain minimum digital banking products and services. Such products should be on both liabilities and assets side of the balance sheet of the digital banking segment. Digitally value-added services to conventional products would also qualify as such. The services include savings bank accounts under various schemes, current accounts, fixed deposits and recurring deposit accounts, digital kit for customers, mobile banking, Internet banking, debit cards, credit cards, and mass transit system cards, digital kit for merchants, UPI QR code, BHIM Aadhar and point of sale (PoS). Other services include making applications for and onboarding of customers for identified retail, MSME or schematic loans. This may also include end-to-end digital processing of such loans, starting from online application to disbursal and identified government sponsored schemes that are covered under the national portal.

    Bankers say digital banking units can enable last-mile financial inclusion as a lender can reach a wider customer base in a more cost-effective manner. The limitations of DBU include low public awareness and internet penetration in lower-tier cities. Further, challenges such as cyber security, data privacy and phishing need to be resolved if DBUs are to reach their full potential, experts say. Compared to conventional banks with online and mobile banking facilities, neobanks or digital banks excel at product innovation and offer far better digital solutions. However, given the arrangement they have currently with NBFCs or scheduled banks to conduct the actual banking part, some in the industry have pegged these digital banks as “glorified digital distribution companies”.

    Alongside the first steps from the RBI and Niti Aayog to introduce regulatory tracks for digital banks for the first time, 75 new ‘digital banking units’ at 75 districts were announced recently in the Budget. Additionally, 100% integration of post offices with the core banking system was announced. These promise multiple new customer touchpoints, indicating that the government has also recognized the potential of digital banking as a strategy for financial inclusion. Collectively these developments hold promise not only for digital banks but also for end-consumers and for BaaS players.

    Digital banks, neobanks, challenger banks, etc. today (also bolstered by the pandemic driven demand for remote services) are making concepts like geography, location and branches in banking obsolete. Instead, banking accessible on a device instead of at a branch (via smartphones, etc.) or financial services available on-demand (at merchant checkout say), are catching on. Technological progress and customer convenience are driving a change to the very way in which banking is done, naturally catching the regulator’s attention. The recent budget announcements are a good step towards using technology to tackle financial inclusion. While more details on the regulatory approach are awaited, the ecosystem is poised to build a new face of banking in India. The future of digital banking is thus promising.