The idea of having digital-only banks as the way to power credit growth in India is valid, considering that India has transformed itself with its global-first-and-pioneering digital public infrastructure. Niti Aayog, in its 2021 discussion paper titled ‘Digital Banks: A Proposal for Licensing & Regulatory Regime for India’, floated this idea. Of late, the industry’s and influentials’ advocacy of this idea has been pronounced, as more private investors and existing FinTechs are looking to such a transition.
India surely needs digital-only banks to address the banking needs of its younger demographics. But it is not as simple as incubating an idea. It is not about ‘if’, but it is more about ‘when’.
Banking, as a regulated and licensed space, is not just about the initial capital or the set of banking professionals or leveraging the India stack. It is about sustainability of those banks, and assessment of fit and proper of the promoters, boards and key managerial persons (KMPs), source of funding, risk management capabilities, banking operational experience, compliance track record, past track of customer grievance handling, data protection, and privacy aspects — these all count.
It is true that India needs more banks, and more stable banks with a bigger balance sheet, to push national economic growth goals. The elephant in the room is the struggle to find domestic promoters who are not industrial houses or corporates. Promoters who will have patient long-term capital, and are in no hurry to divest to musical-chair valuations, as seen with digital startups. Importantly, we need to know the ultimate-beneficiary ownership, to determine the true colours of such funding. The regulator RBI does not get euphoric about enterprise valuations, and worries more about stress-tests that its entities have to pass with flying colours.
The RBI’s experience (or experiment) with different licence categories such as small finance banks, payments banks, among others, has not been smooth. No one wants to question if those licence categories are economically viable, or relevant-to-market.
The RBI regulates and supervises over 2,600 banks—which include public sector, private sector, small finance banks, payment banks, regional rural banks, foreign banks, local area banks, financial institutions, urban co-op banks, and multi-state co-op societies and banks. Unless the regulatory regime moves to a digital-first and real-time activity-based supervision, aided with physical inspection, pegged on common data standards across financial markets, its job will only get tougher in supervising newer entities. Hopefully, there can be a regulatory review to simplify the varied licences on their relevance to the current and future India.
The RBI has been increasing its own supervisory capabilities and agility, in view of issues that banks and non-banking groups have thrown at them. Added to it, the optical nuisance of unregulated digital lenders or even non-digital, unregulated lending entities. There is an irony that the RBI has not addressed, yet. Much of the digital business sourcing agents (on behalf of banks) use this catchy misleading phrase — ‘Neo Bank’. A name that does not have regulatory sanction — but then the regulator might blink soon.
The development of an appropriate regulatory framework for digital-only banks won’t be easy. Importantly, considering the speed of emerging technologies and the risks around them, the RBI would expect to be conservative and expect above-board processes, intent, and operational excellence across data, cyber, digital risk management, and consumer protection. It will need to ensure that adequate safeguards are in place to protect consumers’ interests, maintain financial stability, and prevent money laundering and other illicit activities.
The successful implementation of a digital-only bank requires a reliable and resilient technological infrastructure. The RBI will have to address challenges related to system interoperability, scalability, and uninterrupted service delivery. Ensuring the seamless co-ordination and interoperability between the digital-only bank(s) and the existing banking system will be critical. Clear guidelines and protocols for customer onboarding, fund transfers, interoperability, regulatory compliance, and consumer issues to be addressed will be essential to avoid disruptions, and to ensure a harmonious co-existence of digital and traditional banking services.
Banking is more about solving for the liabilities challenge. In a credit-starved market, asset generation is an easy task, especially fuelled by easy valuations-led money that thinks share-holding-exit. This would not cut ice with the RBI. Even the existing banks across categories have struggled for many of their initial operational years in raising their current account savings account (CASA) ratio.
The nature of banking operations is much about compliance of all sorts. Digital-only bank promoters and their track record will need to showcase compliance as a value system, and high governance standards as way of life, and not talk of only innovation.
In short, the RBI will want those it can bank-on, and to licence them for the market to bank-with.
(Srinath Sridharan is an author, policy researcher, and corporate adviser. Twitter: @ssmumbai )
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH