The Niti Aayog on Wednesday, 20th July, released a report wherein it proposes a Licensing and Regulatory Regime for Digital Banks in India. The report focuses on avoiding any regulatory or policy arbitrage and offers a level playing field to incumbents as well as new entrants.Over the past few years, thanks to digitization—ushered in by the JAM trinity, financial inclusion has become a reality for Indians. This has only been furthered by UPI, which has witnessed extraordinary adoption. India has also taken steps towards operationalizing its own version of ‘open banking’ through the Account Aggregator (AA) regulatory framework enacted by the RBI. Once commercially deployed, the AA framework is envisaged to catalyse credit deepening among groups that have been hitherto under-served.
Despite the rapid strides in financial inclusion catalysed by PMJDY and the India Stack, the success witnessed on the payments front is yet to be replicated on credit penetration, especially with regards to meeting the needs of micro, small and medium businesses. 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 under-served further within the formal financial fold.
The report recommends a carefully calibrated 3 step approach:
Issue of a restricted digital bank licence (to a given applicant) (the license would be restricted in terms of volume/value of customers serviced and the like).
Enlistment (of the licensee) in a regulatory sandbox framework enacted by the Reserve Bank of India.
Issue of a ‘full-scale’ digital bank licence (contingent on satisfactory performance of the licensee in the regulatory sandbox, including salient, prudential and technological risk management).
The methodology for this licensing and regulatory template is based on an equally weighted ‘digital bank regulatory index’. This comprises 4 factors—(i) entry barriers; (ii) competition; (iii) business restrictions; and (iv) technological neutrality. The elements of these four factors are then mapped against the five benchmark jurisdictions of Singapore, Hong Kong, United Kingdom, Malaysia, Australia and South Korea.
India has the technology stack to fully facilitate Digital Banks. Creating a blue-print for digital banking regulatory framework & policy offers India the opportunity to cement her position as the global leader in Fintech at the same time solving several public policy challenges.
RBI’s new regulatory framework for Urban cooperative banks
The RBI issued a four- tiered regulatory framework last week for urban cooperative banks (UCBs) based on the recommendation from NS Vishwanathan committee’s to make UCBs into friendly neighbourhood banks and to strengthen the financial soundness of the existing UCBs.
The differentiated regulatory approach was mainly recommended for key parameters such as net worth, Capital to Risk-weighted Assets Ratio (CRAR), branch expansion and exposure limits. The highlights of new regulations includes:
Net worth – A minimum net worth of Rs 2 crore for Tier 1 UCBs operating in a single district and Rs 5 crore for all other UCBs (of all tiers) has been stipulated.
Capital to Risk-weighted Assets Ratio – The minimum CRAR requirement for Tier 1 banks is retained at the present prescription of 9% and for Tier 2, Tier 3 and Tier 4 UCBs, revised the minimum CRAR to 12%.
In respect of housing loans, for all tiers of UCBs it has been decided to assign the risk weights on the basis of Loan to Value (LTV) Ratio alone which would result in capital savings.
Branch Expansion – The RBI also decided to introduce automatic route for branch expansion for UCBs
Umbrella organisation (UO) – Regulatory approval for setting up of UO for UCB sector which will have a paid-up capital of Rs 300 crore.
The National Cooperative Finance and Development Corporation Limited (NCFDC) has been incorporated, which is in the process of enrolling UCBs as members.
The Reserve Bank of India had last month asked non-bank Prepaid Payment Instrument (PPI) issuers not to load their wallets and cards from credit lines or preset borrowing limits. Following this rule, RBI governor Shaktikanta Das, last week stated that digital lending players should only carry out activities for which they have licences and violations are not acceptable.
The RBI governor also mentioned that the central bank wants to support innovation but at the same time it wants the entire ecosystem to grow in an orderly and regulated manner so that there was no compromise on financial stability.There are a large number of unregulated, unlicensed entities which are doing various kinds of lending activities. Also, there are licensed entities which are entering into activities they are not supposed to undertake. A committee has been formed to deal with this issue which will issue relevant guidelines very shortly. He also pointed out that good governance remains fundamental to success and should not be compromised, adding that due care needs to be taken to protect the stakeholders from digital frauds, data breaches and cybercrimes.
The Indian banking system has undergone significant changes in terms of market structure and competition. The increased adoption of technology by traditional banks through self-upgradation or collaboration with Fintechs is resonating with the idea of new-age banking. Going ahead, the world of banking is expected to be more collaborative as well as competitive, with newer players offering innovative financial products. The future of banking would witness a major shift in customers’ choices and preferences with enhanced expectations from the banking industry, the governor stated.
IRDAI gives insurers freedom to choose hospitals for cashless treatment
Insurance Regulatory and Development Authority of India (IRDAI) allowed the general insurers to empanel the network providers that meet the standards and benchmarks criteria as specified by their respective boards, thus easing norms for expanding cashless facilities in the country.
Earlier, only those network providers which were registered in the Hospital Registry ROHINI maintained by Insurance Information Bureau (IIB) could be empanelled by the insurers.
