Editorial . . . . . 

The Indian banking sector and financial inclusion have undergone a revolution, thanks to advancements in financial technology. Digital Banking Units (DBUs), which will be introduced to commemorate India’s 75th anniversary of independence, represent a significant advancement in utilising technology to deliver banking services in a connected and paperless environment. The Reserve Bank of India’s (RBI) decision to reject the NITI Aayog’s recommendations for the launch of digital banks revealed the central bank’s cautious and measured approach. According to the RBI guidelines for the establishment of DBUs, digital banking is the execution of financial, banking, and other transactions using internet banking, mobile banking, or other digital channels by a licenced bank. The DBUs will be specialised fixed point business units or hubs with a minimum amount of digital infrastructure to support the delivery of digital banking products and services as well as the digital servicing of current financial products and services, in both self-service and assisted modes, to provide customers with affordable and practical access. This DBUs are anticipated to provide the environment for creating the groundwork for regulated digital banks, according to a framework and roadmap for a digital bank that the NITI Aayog announced last month. In its report titled “Digital Banks- A proposal for Licensing & Regulatory Regime for India,” the NITI Aayog insists that “traditional banks may lack the ability to serve an emerging class of “digital-native” businesses” and that “a regulatory innovation in the form of a Digital Bank licence may be a potential solution so that these businesses located downstream of banks may thrive and become engines of employment.” According to the report, the Digital India revolution was sparked by Prime Minister Jan Dhan Yojana (PMJDY), India Stack, e-Know Your Customer, and Unified Payments Interface (UPI). Since PMJDY’s launch in 2014, 42 crore bank accounts have been opened, and since UP’s launch in 2016, there has been 4 trillion rupees worth of transactions. The main driver behind NITI Aayog’s desire for a licence and regulatory framework for digital banks is the lack of financial deepening, particularly in the area of small business lending, notwithstanding the tremendous advancement of financial inclusion. The think tank contends that even though 63.88 million unincorporated MSMEs contributed 30% of gross value added to the nation’s GDP in 2019–20, a sizeable portion of them continues to operate outside the purview of official finance and rely on unregulated money markets for funding. The report notes that despite the fact that contemporary NBFCs have fully digitalized every step of their value chain, they are still constrained by the lack of authority to collect deposits and must rely on funding from bank loans and debt capital markets. This results in higher capital costs for NBFCs and higher borrowing costs for MSMEs. In reference to a recent report by the Credit Information Bureau India Limited, the report notes that out of a total of 220 million credit-eligible retail customers, banks are servicing about 70 million customers and that there is still room to serve 150 million customers who will need credit in the future. This difference is widened by the 892 million active debit cards vs the approximately 66 million active credit cards. The RBI, on the other hand, issued a warning, noting that while innovative approaches to the creation, distribution and servicing of credit products have gained popularity through digital lending routes, some concerns have also surfaced that, if not addressed, may erode consumer confidence in the ecosystem of digital lending.

The working group proposed specific institutional and legislative interventions for the Central Government to take into consideration in order to stop the illegal lending activity being carried out by digital lending entities that are lending outside the scope of any statutory or regulatory provisions. The Working Group’s recommendations, which the RBI accepted for immediate implementation, include customer protection and conduct issues, technology and data requirements, and regulatory framework. These recommendations must be followed by RBI-regulated entities, their Lending Service Providers, and Digital Lending Apps. The anxiety of associated risks in the absence of a robust regulatory framework required to maintain the confidence of clients explains the RBI’s cautious stance on the NITI Aayog’s proposal for a licencing regime for digital banks. A licenced digital bank in India may be granted permission when the NITI Aayog releases a new template with more information on the problems raised by the RBI. Besides increasing credit flow, the action will certainly expand service providers’ access to the rural market. It was essential to create digital infrastructure to support digital banking, which has huge potential, given the quick expansion of digital payments, banking, and fintech innovation.