Page 35 - Banking Finance August 2023

ARTICLE

provide them with multiple credit opportunities
Digital Banks: The Promise They Hold for
such as small ticket personal loans, credit cards,
Buy-now-pay-later other substitutes to enable India
higher consumption and unleash economic growth. "Digital Banks" or DBs means Banks as defined in the
Banking Regulation Act, 1949 (B R Act). In other words,
To summarize, there is an opportunity for other banking
these entities will issue deposits, make loans and offer the
innovations that will support and facilitate a new class of
full suite of services that the B R Act empowers them to. As
business formation on the MSME banking side and retail
the name suggests however, DBs will principally rely on the
banking. In absence of such innovation existing digital
internet and other proximate channels to offer their services
payment product will soon loose their importance and flow
and not physical branches.
to informal sector will only increase leading to fall of banking
industry.There is scope for banking innovation on the credit
However, as a natural corollary to being a "Bank" in full
market side, to inject competition and facilitate corollary
sense of its legal definition, it is proposed that DBs will be
innovation for the issues mentioned here.
subject to prudential and liquidity norms at par with the
incumbent commercial banks. Having said that, DBs offer a
Digital banks may trigger those set of innovations or may
catalyse such innovations so that this credit side can be taken differentiated proposition and as such, there is scope for
care of and sufficient liquidity and availability can be insured. differentiated treatment in adjacent areas of their operation
Digital banks aresometime confused with Digital banking unit consistent with treating them identically with incumbent
(DBU) or Neo banks, without regard to whether these fintechs commercial banks, in the critical areas of prudential and
actually function as "banks" as the applicable law defines them. liquidity risk.

Digital Banking Units and Digital Banks

Since DBUs and Digital Banks are similar constructs, for the sake of abundant clarity and to distinguish from DBUs, we will
underline the key differences between the two.

Criteria Digital Banking Units (DBUs) Digital Banks (DBs)
Definition Present and future electronic banking services provided A fixed-point business unit/hub
by a licensed bank for the execution of banking and housing digital infrastructure for
financial transactions over websites, mobile phones delivering digital banking products
and other digital channels. and services.
Balance Sheet/ DBUs DO NOT have legal personality and ARE NOT Digital Banks will have a balance
Legal Personality licensed under Banking Regulation Act, 1949. Legally, sheet and legal personality & are
they are equivalent to "banking outlets" ie, branches. proposed to be duly licensed banks
u/ B R Act.
Level of Innovation/ DBUs improve existing channel architecture by offering In contrast, a licensing and
Competition regulatory recognition to digital channel. However, regulatory framework for Digital
they are silent on competition. The DBU guidelines banks as proposed here, is more
expressly state that only existing commercial banks enabling along competition/
may establish DBUs. innovation dimensions

Neo Banks and Digital Banks in the engagement layer and the former bring in the "utility"
In the absence of a licensing regime for "full-stack" digital layer and offer both sides of their balance sheet. These Neo-
banks, fintechs offering the Neo-bank proposition in India banks have further specialized into consumer-facing and
have improvised and adopted the "front-end neo-banks" small business-facing offerings respectively. However, these
model. As the name indicates, this is a partnership between Neo banks are different than Digital banks and have limited
traditional banks and neo-banks such that the latter bring area of operations with some inherent challenges;

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