Government think tank NITI Aayog has suggested the introduction of a restricted Digital Business bank licence and a restricted Digital Consumer Bank licence to begin with. This is part of a phased licensing approach that the think tank has mooted in its newly released report on digital banks.

The applicant acquiring this restricted licence should ( in the second phase) enlist in the regulatory sandbox and commence operations as a Digital Business Bank/ Digital Consumer Bank as the case maybe, in the sandbox, NITI Aayog said in a new report “Digital Banks: A Proposal for Licensing & Regulatory Regime for India”.

Contingent on satisfactory performance of the licensee in the Sandbox, the restrictions can be relaxed ( in the final phase) when the entity graduates from the sandbox and becomes a full scale digital bank, the report suggested.

On the capital requirement, the report suggested that Digital Business Bank may be required to bring minimum paid up capital of ₹20 crore in the restricted phase. Upon progression from the sandbox, a full scale Digital Business Bank will be required to bring in ₹200 crore capital. 

Regulatory framework

The methodology for the licensing and regulatory template offered by the report is based on an equal weighted digital bank regulatory index. This comprises four factors — entry barriers; competition; business restrictions; and technological neutrality.

Parameswaran Iyer, Chief Executive Officer, NITI Aayog, said, the report offers a template and roadmap for a Digital bank licensing and regulatory framework in India.

He said that with the establishment of India Stack, the Aadhar layer and the UPI rails that catalysed a payments revolution in this nation, India has become a beacon for global community of Nations. 

Bold initiative

“Fully Digital Banks will reinforce India’s apex position on the global firmament. The Digital Bank licensing and regulatory framework proposed by Niti Aayog in this report is a bold initiative towards that inevitable digital future”, Iyer said.

Suman Bery, Vice Chairman, NITI Aayog, said that the report highlights the promise that full-stack Digital banks hold as a potential solution for the persistent policy challenge of credit deepening. It is the next stage of financial inclusion, he said.

Technology and increased digitalisation are bound to be disruptive for the incumbents impressing the need to provide a level playing field between different business entities for holistic growth of the sector, according to Bery.

Report highlights

The report addresses the feedback received from 24 organisations, large-scale multi-stakeholder round table discussion, and a series of consultations with industry leaders and experts. 

The report highlighted that India’s public digital infrastructure, especially UPI has successfully demonstrated how to challenge established incumbents. UPI transactions have surpassed ₹ 4 trillion in value. Aadhaar authentications have passed 55 trillion. Finally, India is at the cusp of operationalizing its own Open banking framework.

“These indices demonstrate India has the technology stack to fully facilitate Digital Banks. Creating a blue-print for digital banking regulatory framework & policy offers India the opportunity to cement her position as the global leader in Fintech at the same time as solving the several public policy challenges she faces”, report concluded.

It maybe recalled that NITI Aayog had last year issued a discussion paper on the subject of “digital banks”.

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