Online broking firm Zerodha's co-founder Nithin Kamath on Wednesday expressed hope that banks like small finance bank, payments bank, neo bank, etc., will be able to take on full-fledged banks after government think tank NITI Aayog proposed setting up full-stack 'digital banks', which would principally rely on the internet and other proximate channels to offer their services and not physical branches.
Kamath pointed out that currently the moat which banks have is that it is very tough for new banks like small finance bank, payments bank, among others, to become full-fledged banks due to several regulatory restrictions on them. Moat refers to a competitive advantage which a company has over its competitors that can help it protect its market share and profitability.
Taking to Twitter, Kamath posted, "The moat banks have today is that it is very very tough to become a bank. Yeah, you can be a Small Finance Bank, Payments Bank, Neo Bank, but you can never compete with a full-fledged bank due to all the restrictions. But looks like there is hope that the future is different."
Kamath's comments came in the backdrop of NITI Aayog releasing a discussion paper which offers a roadmap for a full-stack digital bank licensing regime in India.
The think tank, in a discussion paper titled 'Digital Banks: A Proposal for Licensing & Regulatory Regime for India', makes a case and offers a template and roadmap for a digital bank licensing and regulatory regime for the country.
Digital banks or DBs are banks as defined in the Banking Regulation Act, 1949 (B R Act), the paper said.
"In other words, these entities will issue deposits, make loans and offer the full suite of services that the B R Act empowers them to. As the name suggests however, DBs will principally rely on the internet and other proximate channels to offer their services and not physical branches," it said.
However, the paper said as a natural corollary to being a bank in full sense of its legal definition, it is proposed that DBs will be subject to prudential and liquidity norms at par with the incumbent commercial banks.
"Creating a new licensing / regulatory framework is being proposed as regulatory innovation and not as regulatory arbitrage," it clarified.
The paper noted that India's public digital infrastructure, especially UPI, has successfully demonstrated how to challenge established incumbents. UPI transactions measured have surpassed Rs 4 trillion in value. Aadhaar authentications have passed Rs 55 trillion.
The paper also recommends a two-stage approach, with a digital business bank license to begin with and Digital (Universal) Bank license after policymakers and regulators have gained experience from the former. Focus on avoiding any regulatory or policy arbitrage and giving a level playing field is an important recommendation.
The paper said that while RBI's authority to issue a license to a banking company under the Banking Regulation Act is straightforward, an additional step is necessary for creating a licensing regime for digital business banks that permits them to offer value-added services that are complementary to their core financial business, on the same balance sheet as the banking services.
It further suggested that minimum paid-up capital for a restricted digital business bank operating in a regulatory sandbox may be proportionate to its status as restricted.
While the RBI is the final arbiter of what numerical value constitutes "proportionate", the paper has proposed a ladder for minimum paid-up capital by way of illustration.
The paper said estimates indicate that DBs have high cost efficiency. It also noted that the prevalent neo-bank business model in India is a function of regulatory vacuum. "In the absence of a licensing regime for full-stack digital banks, fintechs offering the neo-bank proposition in India have improvised and adopted the front-end neo-banks model," it said.
Niti Aayog CEO Amitabh Kant in his foreword said this discussion paper examines the global scenario, and based on the same, recommends a new segment of regulated entities -- full-stack digital banks. "Based on the comments received, the paper will be finalized and shared as a policy recommendation from Niti Aayog," he said. Last date for sending comments is December 31, 2021.
While India has made rapid strides towards enabling financial inclusion, credit penetration remains a public policy challenge, especially for the nation's 63 million odd MSMEs.
With agency inputs
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