Analyzing the Prospect of Developing Full-Stack Digital Banks in India

by | Feb 25, 2022

Over the past couple of years, the Indian government has made significant strides in expanding the horizon of financial inclusion among the country’s 137 crore populace.

Spearheaded by government organizations such as NITI Ayog, RBI & the Ministry of Finance by primarily leveraging the JAM (Jan Dhan-Aadhar-Mobile) trinity, the undertaken initiaves have largely been successful. However, while the various initiatives undertaken by the government have gained a significant amount of traction, yet there remains a gap in the market which the government hopes to bridge via the formation of digital banks.

As seasoned finance stalwarts, we are no strangers to the novel concept of digital banks, however the government’s outlook on how it might steer the nation into the next phase of financial inclusion is questionable.

In pursuit of the same, NITI Ayog recently released a paper titled “Digital Banks: A Proposal for Licensing & Regulatory Regime for India”, wherein it floated the idea of setting up full-stack digital banks.

Thus, in today’s article, we will take a deeper dive into the explanations put forth in this paper & analyze their real world practicality. Without further ado, let’s get started.

The Practicality of Developing Full-Stack Digital Banks

The initial hypothesis floated by the GOI is to develop a full-stack digital bank wherein the internet will be the primary mode of communication between the bank & the customer instead of present day physical branches.

The idea warrants the fact that adopting such a model will help in expanding the realm of financial inclusion across the country by lowering the associated cost with each transaction. While the initial hypothesis banks on the success of the JAM trinity in reducing the banking inequality, there are several questions it touches upon; however leaves remains unanswered.

The paper suggests that the country’s central banker, the RBI, issues two types of digital bank licenses, to begin with. The first one being a digital business banking license & once the authorities have gained successive experience, issue a digital universal banking license. As the name suggests, the former digital business banking license might arrive with several limitations such as minimum paid-up capital & business restrictions, while the latter will be equivalent to a present day full fledged banking license.

However, irrespective of the types of banking licenses the RBI issues, one of the primary concerns that remain is that the present cohort of banking license holders in India have been largely unsuccessful in meeting the originally planned goal at the time of their issuance.

For essence, an SFB or Small Finance Banking license was originally introduced with the thought of aptly servicing the needs of last-mile customers by offering zero-cost accounts, among others. However, although a significant portion of SFBs & young banks have managed to scale their operations by leveraging low-cost deposits, they still struggle with maintaining a robust CASA & thus tend to the sentiments of the dynamic Indian debt market.

Along with this, it goes without saying that as the supervisory head of the entire country’s finance, the RBI would ideally like to consolidate its license holders in a fixed jurisdiction; however, that might be a challenge for patrons who are eyeing a digital-only banking license.

In Conclusion

Going by the RBI’s historic timeline in approving new forms of licenses, it is largely evident that patrons need to have deep pockets & steady capital as there is still a long way to go for these hypotheses to manifest into reality.

Thank you for reading & I will see you in the next one.

The Reference Shelf

  1. New bank licenses: Why digital banks aren’t a good idea just yet [Link]
  2. NITI Aayog Releases Discussion Paper on Digital Banks Seeking Comments [Link]
  3. Digital Banks: A Proposal for Licensing & Regulatory Regime for India [Link]
  4. Enable any bank to become a “digital bank”: Nasscom [Link]