Page 36 - Banking Finance August 2023

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Licensee sufficient and fair time to observe the Licensee's
execution as a Digital Business bank in the sandbox before
graduating it to full-scale Licensee.

On the other hand, if the metrics agreed on ex ante are
not met over a defined period, the licensee may be given a
window to unwind the liabilities created including any term
deposits, assign assets created to an identified buyer and
exit the sandbox, per the process laid down in RBI's
regulatory sandbox framework.

What can make best in class Digital
Banks
Track record & Potential Applicant Pool: Here the small
Limited Revenue Potential
finance banks, neo banks with existing setup may be
Potential Obsolescence of the Partner Bank Core considered for establishment of digital banks. To become
Banking System successful in this venture it is important that controlling
persons of the applicant entity to have an established track
High Cost of Capital & No Entry Barrier
record in adjacent industries such as e-commerce, payments,
technology (e.g. cloud computing). Existing neo-banks seeking
India has the opportunity to leverage present enablers (digital
to upgrade or small finance banks / other regulated entities
innovations) to enact an industry leading regime for establishing
are also potential eligible candidates for application, fintechs
Digital banks. India has the technology stack to fully facilitate
should also be included in the potential applicant pool.
Digital Banks. Creating a blueprint for digital banking regulatory
framework & policy offers India the opportunity to cement its
Equal Access to the Infrastructure Enablers: In order that
position as the global leader in Fintech at the same time as
business proposition of a Digital Business bank / Digital
solving the several public policy challenges.Consistent with best
Consumer bank remain viable and to promote competition,
practises the following 3 step sequence is recommended for
it should have access to all the key infrastructure enablers
development of Digital bank eco system
in the Indian financial ecosystem, as traditional banks are.
Introduce a restricted Digital Business bank licence and
a restricted Digital Consumer Bank license
Phased relaxation of Business Restrictions: Minimum paid
The applicant acquiring this restricted license up capital requirement and other reserves & investment
("Licensee") enlists in the regulatory sandbox and related restriction may be loosened during sandbox testing
commences operations as a Digital Business bank/ and should be increased or enforced in phased manner to
Digital Consumer bank as the case may be, in the observe their effect and flexibility of those requirements in
sandbox. digital arena. Regulatory touchpoints like capital adequacy,
risk weights, liquidity coverage ratio will be required to be
Contingent on satisfactory performance of the Licensee
fully compliant Digital banks will start working out of
in the sandbox, the restrictions can be relaxed when
sandbox regulations.
the Licensee graduates from the sandbox and becomes
a full-scale Digital bank.
Technological Risk regulation: Technology risks assume
greater importance for Digital Business Banks / Digital
The duration of this progression, i.e. the duration for which
Consumer banks relative to the traditional banks because
the Licensee will operate in a regulatory sandbox will vary
they leverage their APIs to have relationships to numerous
from case to case. So, the regulation could leave for the RBI
counter-parties that risks can originate from. It should
to make that determination. Given the significance of this
neither express a preference nor bar a Digital Business bank
regulatory innovation, RBI is expected to leverage this built-
from using/ not using any technology.
in flexibility to decide the duration on a case-to-case basis
in consultation with the licensee and give itself and the
36 | 2023 | AUGUST | BANKING FINANCE