NASSCOM’s Feedback: NITI Aayog’s Discussion Paper on Digital Banking

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NASSCOM’s Feedback: NITI Aayog’s Discussion Paper on Digital Banking

Apurva Singh

@apurvaa

December 31, 2021

Public Policy

299

Backdrop

In November, the NITI Aayog released a discussion paper on ““Digital Banks – A Proposal for Licensing and Regulatory Regime for India” (Discussion Paper). It describes the need for, and components of, a proposed regulatory regime for a new concept of “digital banks”. The Discussion Paper offers this solution as a response to two problems: the overarching issue of financial inclusion and the insufficiency of the existing licensing regime to address that issue:

The financial inclusion challenge. The Internet is seen as a powerful tool to leverage in addressing the challenge of financial inclusion. As the Discussion Paper notes, so far, the attention has been on leveraging the Internet in implementing reforms for payments (such as the account aggregator framework) or for improving the customer experience in banking. While these are necessary, the Internet is yet to be leveraged in the core utility banking layer to address gaps at that layer (for e.g., the gap of inadequate access to formal credit currently faced by medium, small, and micro-enterprises).
The insufficiency of the existing licensing regime. Currently, entities can only leverage the Internet in banking by picking one of three routes: by offering internet banking; by setting up a neo-bank or by setting up a payments bank.

NASSCOM’s feedback

NASSCOM’s feedback to NITI Aayog consists of two parts – how Indian banking can go digital and the need for engagement on encouraging digitisation in banking; and specific comments on the approach of, and template set out in, the paper.

How Indian banking can go digital

The recent advancements in FinTech necessitates exploring how the internet can be better leveraged to deliver banking services in India and mitigate challenges of financial inclusion. The Paper has restricted itself to present a case for a new license category of a digital bank. In this segment, we focus on a broader question - what regulatory frameworks can encourage responsible digitisation in banking? We analyse the broader question from the perspective of enabling any bank to become a digital bank; simplifying existing licensing categories, and learning from the experience of incumbent banks.

Suggestions on the template in Section VII

The Paper should clearly distinguish between a “full-stack digital business bank” and a “full-stack digital universal bank”. It may be simpler to have one concept – a “digital bank” license – and set out a sequence with 2 different steps – a restricted phase in a sandbox and then a second phase to graduate to a full-stack license (with no distinction between a “business bank” and a “universal bank”).
The Paper should clearly set out minimum paid-up capital thresholds for all stages. The Paper does not set out any such thresholds for the sequencing in stage 2. We have argued above that there should be just one license and one sequence. However, if it is decided that stages 1 and 2 should continue, then the Paper should set out minimum thresholds for both stages. Right now, the only upper cap we find in the Paper is of Rs. 200 crores for applicants seeking full-stack DBB licenses. We submit that this may not necessarily be sufficient to ensure long-term fiscal sustainability without also laying out stage 2 in more detail, so that there are additional progressions to consider. [1]
The minimum threshold for participation in the restricted phase can be raised. We do not recommend a specific number here, leaving that to the NITI Aayog to decide after due consideration of the risks involved. However, the goal should be to deter casual or trivial applications into the restricted phase. Here, we also note that, even to apply for a payments bank license, applicants had to have a minimum paid-up capital of Rs. 100 crores.[2]

You can download our detailed submission by clicking on the link below. For more information, kindly write to apurva@nasscom.in.

[1] For instance, under the Singaporean Digital Banking framework, the applicants at entry level are required to have minimum paid capital of S$ 15 Million. This increases progressively upon progression, and after being granted a digital full bank license, this has to be at S$ 1.5 Billion.[1] The licensees get 3-5 years to increase their paid-up capital to the stipulated limited. Under S. 9(1)(a) of the Singapore Banking Act, 2008, every bank in Singapore is required to have a minimum paid up capital of S$ 1.5Bn.

[2] See Reserve Bank of India, Guidelines for licensing of payments banks, (November, 2014), available at https://rbidocs.rbi.org.in/rdocs/Content/PDFs/PAYMENT271114.pdf (last accessed on December 29^th, 2021).

Digital Banking; NITI Aayog

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Apurva Singh

Senior Policy Associate

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