digital bank, niti aayog, razorpay

After a working group under the Reserve Bank of India (RBI) came up with recommendations to regulate online lending, government think tank Niti Aayog has suggested the introduction of a digital banking licence.

Niti Aayog’s recommendations cover the new wave of neobank fintechs which currently work with partner banks and serve as a technology layer for customer acquisition and banking activities for these banks.

These include start-ups like Open, Jupiter, RazorpayX, Fi, Freo and Niyo. In the absence of a banking licence for themselves, neobanks cannot undertake banking activities like deposits and lending independently.

The report suggests a three-step process for neobanks to finally acquire a full-stack digital banking licence and says that these entities can be eventually allowed to offer lending, deposits and other banking services to medium, small and micro enterprises (MSMEs).

With many neobanks focused on retail (individual) customers, this could be a major setback and these start-ups plan to write to Niti Aayog to seek clarity on the same. The Niti Aayog has given time until December 31, 2021, to submit any comments on the discussion paper.

“We will write to them requesting that retail banking should also be included in the services that licensed neobanks will be able to provide. We will also add any recommendations on what more can be included,” said Jitendra Gupta, founder of neobank Jupiter, which provides tech for retail banking services.

A chance to become a full-stack bank

The discussion paper suggests that these fintechs should be first given a restricted digital business bank licence and then be allowed to operate in a regulatory sandbox. A sandbox is an ecosystem where companies can operate, innovate and experiment in a monitored environment.

After the start-up achieves requirements like minimum paid-up capital of Rs 200 crore, it can be extended to a full-stack digital business bank licence.

Harshil Mathur, Co-founder and CEO of Razorpay which runs an MSME neobank, RazorpayX, said that the industry has seen this as a welcome move. “Today neobanks operate as technology layers. What this paper is proposing is that over time we can foray into full-stack banking,” he said.

The RBI working group on digital lending too mentions in its report that neobanks must be brought under the RBI regulations. The licensing route to becoming a digital-only bank will independently help these businesses evolve further.

“The Restricted Digital Business bank licence is exactly what neobanks are doing today. It will be a really good move to allow neobanks to secure a full-stack licence,” Jupiter’s Gupta said.

Neobanks have helped further the cause of easy online access to banking services and financial inclusion over the past year. However, concerns about the viability of a business model that serves only as a technology intermediary and the possibility of misleading customers through words that do not clearly communicate that neobanks are not real banks make the Niti Aayog and the industry in favour of regulations and licensing.

Neobanks have no minimum requirements to start operations. The paper highlights that this can allow not fit-and- proper entities to enter the market, creating a consumer protection risk for retail customers.

How it stacks up against the payments bank licence

When the guidelines for payments banks were first announced in 2014, it received a lot of interest. The model, however, failed to take off. One of the reasons behind the failure is that payments banks are not allowed to lend and can only take deposits with the aim of increasing financial inclusion. Today, neobanks are serving the purpose by increasing banking access through the digital mode.

Paytm is one of the fintechs that has the RBI’s payments bank licence.

“Payments banks failed as a model. All payments banks now want to become small finance banks (SFB). So, this proposed digital banking licence is definitely better than a payments bank licence and is like a digital alternative to the SFB license,” an industry executive said on condition of anonymity.

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