NITI Aayog’s reportmakes a case and offers a template and roadmap for a licensing and regulatory regime for digital banks. It focuses on avoiding any regulatory or policy arbitrage and offers a level playing field to incumbents as well as competitors.
The report was released today by NITI Aayog Vice Chairman Suman Bery and CEO Parameswaran Iyer and Senior Adviser Anna Roy, in the presence of other officials.
‘Given the need for leveraging technology effectively to cater to the needs of banking in India, this report studies the prevailing gaps, the niches that remain underserved, and the global regulatory best practices in licensing digital banks,’ said CEO Parameswaran Iyer.
Recommendations:
The report recommends a carefully calibrated approach, comprising the following steps:
- Issue of a restricted digital bank licence (to a given applicant) (the license would 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 Reserve Bank of India.
- Issue of a ‘full-scale’ digital bank licence (contingent on satisfactory performance of the licensee in the regulatory sandbox, including salient, prudential and technological risk management).
The report also maps prevalent business models in this domain and highlights the challenges presented by the ‘partnership model’ of neo-banking—which has emerged in India due to a regulatory vacuum and in the absence of a digital bank licence.
The methodology for the licensing and regulatory template offered by the report is based on an equally weighted ‘digital bank regulatory index’. This comprises four factors—(i) entry barriers; (ii) competition; (iii) business restrictions; and (iv) technological neutrality. The elements of these four factors are then mapped against the five benchmark jurisdictions of Singapore, Hong Kong, United Kingdom, Malaysia, Australia and South Korea.
