Page 26 - Banking Finance February 2024

ARTICLE

framework that motivates these personnel to be smartphone users by 2026 with rural areas driving the
proactive about these risks. demand. With one of the World's largest rural telecom
project "BharatNet programme" of Government of
Why Digital Bank is important and India, Internet enabled services and in particular digital
driving force for a successful Digital Bank banking services will also get a push.
An per an estimate of analyticsindiamag.com, 205
in India
million Indian adults already have a digital-only bank
A major problem still remains in Indian Banking sector account, and the number is predicted to increase
is inclusiveness. Certain sector of the societies are still further to 397 million within the next five years. India
deprived of formal banking channels, such as those with already has an established technology platform to
low-income, micro-businesses, farmers, or high-risk facilitate digital banks.
customers with no or low credit history, especially in
rural areas. Conclusion:
As per IFC's (International Financial Corporation) Major challenges in allowing Digital Banks licence is
estimates, the total credit gap in the MSME segment regulatory requirement, which needs to be address first by
is Rs 25.8 trillion appx. and is growing at 37 per cent RBI before licences could be granted to both private and
CAGR. The total demand by the MSME sector is public sector entities.
approximately Rs 37 trillion, of which banks, NBFCs &
other institutions supply approx. Rs 10.9 trillion. Allowing digital bank licence exclusively for MSMEs in a first
go may be a right solution, which may take deposits from
The current credit delivery systems in India are mainly businesses also. Over the last few years, we have seen a
paper-based, with high TAT and requiring multiple visits digital explosion in almost all aspects of life and financial
to bank branches. This results in high operational costs services are not any different.
for lenders and opportunity cost for borrowers. With
the advent of digital literacy, MSME borrowers now look As far as existing partnership-based neo-bank models are
fast approval process along with certainty regarding concerned, it faces several challenges, such as revenue
funds availability. generation and viability. Further, they don't have a bank
license of their own but count on bank partners to provide
If we analyze the success story of Digital Bank in China,
particularly, for the MSME segment, then we can say licensed banking services.
that a full stack Digital Bank is the need of hour for As discussed above, India's public digital infrastructure is
deeper credit penetration among MSMEs and it can be robust and is at the cusp of operationalizing its own Open
seen as next stage of financial inclusion. banking framework. India has the robust technology
One of the greatest advantage of Digital Bank is lower platform to fully facilitate Digital Banks in near future.
cost-to-serve and customer acquisition cost. Due to this
Over the past few years, many digital enablers like Open
factor, digital bank offers can expand their coverage to
Network for Digital Commerce (ONDC), Open Credit
last mile of country.
Enablement Network (OCEN), blockchain-enabled financial
Digital Banks use new age technologies like predictive system, Digital Rupee, and UPI, among others have been
analyses and artificial intelligence (AI) to arrive at real put into motion. These could leapfrog India as a leader-
time decisions for the busy MSMEs. These technologies nation in digital finance. To conclude with, co-existence of
allow them to move from traditional collateral based Digital and Physical banking is the need of hour.
funding methods to advance cash flow based lending
method.
Sources:
Due to adoption of AI, Big Data etc, digital banks have I. Niti Aayog Report, "A Proposal for Licensing & Regulatory
faster application process, with less or no paperwork. Regime for India" for Digital Banks, July 2022.
It works on simple process of downloading a banking II. Website of Starling Bank, WEBank, MY Bank etc.
app, entering personal details and verifying your identity
by photo or video.
''Views and opinions expressed in the article are of the
According to a study by Deloitte, India will have 1 billion author and not of the Bank''.

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