NITI Aayog moots licensing, regulatory framework for digital banks

The Centre’s policy think-tank NITI Aayog has made a case for setting up digital banks, which would accept deposits and advance loans through digital means, and suggested a licensing and regulatory framework for such lenders.

A digital bank would be a bank defined in the Banking Regulation Act, 1949, and shall have its own balance sheet and legal existence. Such a bank would be different from the 75 Digital Banking Units (DBUs) announced by Finance Minister Nirmala Sitharaman in Union Budget 2022-23 — which are being set up to push digital payments, banking and fintech innovations in underserved areas.

The success India has witnessed on the payments front is yet to be replicated in meeting the credit needs of its micro, small and medium businesses, said a NITI Aayog report titled ‘A proposal for Digital Banks in India: Licensing and Regulatory Regime’. “The current credit gap and the business and policy constraints reveal a need for leveraging technology effectively to cater to these needs and bring the underserved further within the formal financial fold,” the report said.

Banks and fintech businesses that offer digital banking services rely primarily on digital channels that organically have high-efficiency metrics relative to incumbent commercial banks, the report said. This structural feature makes them a potentially effective channel through which policymakers can achieve social goals like empowering the under-banked small businesses, and enhancing trust among retail consumers, the think tank said.