Digital Banks: A Proposal For Licensing & Regulatory Regime For India

DIGITAL BANKS
A Proposal for Licensing & Regulatory

Regime for India
REPORT
July 2022
DIGITAL BANKS
A Proposal for Licensing & Regulatory
Regime for India
REPORT
July 2022
Acknowledgements
In writing this Report, “A Proposal for Digital Banks in India: Licensing & Regulatory
Regime”, we are pleased to have collaborated with Black Dot Public Policy Advisors as
the knowledge partner. Mr Mandar Kagade, Founder Principal at Black Dot made valuable
contributions in developing this Report.
Ms Shehnaz Ahmed of the Vidhi Centre for Legal Policy acted as external expert reviewer
of the Report and offered detailed comments and inputs. We acknowledge her valuable
contribution.
We are also grateful for the support and inputs from the Department of Financial Services,
Ministry of Finance, representatives of public sector banks including the State Bank of
India, and Sabyasachi Upadhyay, Associate, NITI Aayog.
Useful insights were also obtained from the deliberations in the conference, “Neo-banking
for Business: The Future of Digital Banking”, especially Mr Sopnendu Mohanty, Chief
Fintech Officer, Monetary Authority of Singapore. They are gratefully acknowledged.
Last but not the least, the inputs offered by the fintech sector stakeholders who were
approached for inputs in the course of drafting this Report is acknowledged. NITI Aayog
would endeavour to continue with the stakeholder consultation in evolving policy dialogue.
Anna Roy
Senior Adviser
NITI Aayog
Foreword
India has emerged as a global leader when it comes to fintech

innovation. IndiaStack and related developments in the domestic
fintech industry and Unified Payments Interface recorded
impressive growth. In addition, India has given the world its own
version of “open banking”, the account aggregator framework
that recently went live, enabling the consent-based transfer of
financial data between regulated intermediaries. Having prepared
the bedrock of financial innovation and inclusion, it is time to look
towards the next steps in the direction of digitalisation in the banking, financial services,
and insurance sector- with the advent of a “full-stack” digital bank – entities that will issue
deposits, make loans and offer the full suite of services under the existing regulatory
regime.
The Report on licensing and regulatory regime for Digital Banks released by NITI Aayog
aims to cement India’s place as a trailblazer in fintech industry. The report highlights
the promise that full-stack Digital banks hold as a potential solution for the persistent
policy challenge of credit deepening. It is the next stage of financial inclusion. Technology
and increased digitalisation are bound to be disruptive for the incumbents impressing
the need to provide a level playing field between different business entities for holistic
growth of the sector.
The Report addresses the feedback received from 24 organisations, large-scale multi-
stakeholder round table discussion, and a series of consultations with industry leaders
and experts. I extend my support to all the Ministries, Fintech organisations, platforms,
and others who can work on the implementation of the Report’s recommendations for a
“full-Stack” digital Bank.
Suman Bery
VC, NITI Aayog
Message from the CEO
This Report offers a template and roadmap for a Digital bank

licensing and regulatory framework in India.
While the Digital India revolution catalysed by PMJDY, e-KYC

and UPI has led a paradigm shift in the way India interacts with
and consumes financial services.(PMJDY, launched in 2014, has
witnessed 420 million bank accounts opened till date. UPI was
launched in 2016 and has become a bellwether real-time payments
system clocking ₹ 4 trillion in value transactions till date), there is
a long way to go when it comes to credit deepening in the economy. The IFC estimated
the addressable credit gap in the nation for MSMEs to be INR 25 lakh crores and growing,
in 2019. Meanwhile, credit to GDP ratio on the retail side is also low (compared to
economies of the size of India). This credit gap and the business and policy constraints
highlighted in the Report reveal a need for leveraging technology effectively to cater to
the needs of this segment and bring them within the formal financial fold. With this in
mind, the Report examines the prevailing addressable credit gap, demographic niches
that are presently underserved/ unserved, global regulatory best practices in licensing
Digital Banks and potential risks and mitigants involved to recommend a new segment
of regulated entities – full-scale digital banks licensed under Banking Regulation Act.
Furthermore, the Report lays out a detailed architecture and sequencing of proposed
reform. NITI Aayog in consultation with the Department of Financial Services had released
a draft version of this Report as a Discussion Paper in November 2021 to undertake
stakeholder consultations. Comments were received from 24 organizations on the Paper.
Responses were also received in a round table discussion on the Paper organised on
February 25, 2022. Based on all the comments received the final Report is now being
released as a policy recommendation from NITI Aayog.
In conclusion, with the establishment of India Stack, the Aadhar layer and the UPI rails
that catalysed a payments revolution in this nation, India has become a beacon for global
community of Nations. Fully Digital Banks will reinforce India’s apex position on the global
firmament. The Digital Bank licensing and regulatory framework proposed by Niti Aayog
in this Report is a bold initiative towards that inevitable digital future.
Parameswaran Iyer
CEO, NITI Aayog
Contents
I. Introduction 2
II. Financial Inclusion: Recent History & Evolution & India’s Rapid Strides 4
III. Are We There Yet? Current Credit Gap, Business & Public Policy Constraints 7
IV. Digital Banks: A New Kid In Town 14
V. Challenges With the Existing “Partnership-Based” Neo-Bank Model 20

Challenge #1: Limited Revenue Potential 21
Challenge #2: Potential Obsolescence of the Partner Bank Core Banking System 21
Challenge #3: High Cost of Capital & No Entry Barrier 21
VI. A Digital Bank Global Regulatory Index 24

A. Description of the Index 24
B. Mapping of Benchmark Jurisdictions Against the Index 26
VII. Digital Bank Regulatory Framework for India: A Template 29

A. The Sequence 29
B. Features/Conditions of Digital Business bank License/Digital Consumer bank Licence 31
C. Priority Sector Lending In the Context of Digital Banks 39
D. Legal Mechanics to Issue the License 41
Conclusion 43
Annexure-I 44
List of Abbreviations
AA Account Aggregator
ATM Automatic Teller Machine
B-A-A-S Banking as a Service
BR Banking Regulation (Act)
CAC Customer Acquisition Cost
CAGR Compounded Annual Growth Rate
CBS Core Banking Solution
CGTMSE Credit Guarantee Fund Trust for Micro and Small Enterprises
DB Digital Banks
DICGC Deposit Insurance and Credit Guarantee Corporation
e-KYC e-Know Your Customer
ECLGS Emergency Credit Line Guarantee Scheme
FIBAC Annual FICCI Conference on Banking
FPC Fair Practices Code
FSCS Financial Services Compensation Scheme
GDP Gross Domestic Product
GFC Global Financial Crisis
IFC International Finance Corporation
IMF International Monetary Fund
INR Indian National Rupee
MAS Monetary Authority of Singapore
MSME Micro Medium and Small Enterprises
NBFC Non Banking Financial Company
NEFT National Electronic Fund Transfer
NFB New Finance Bank
NIM Net Interest Margin
NPCI National Payment Corporation of India
PCI-DSS Payment Card Industry Data Security Standard
PMJDY Pradhan Mantri Jan Dhan Yojana
PRA Prudential Regulation Authority
PSP Payment Service Provider
RBI Reserve Bank of India
RTGS Real Time Gross Settlement
UK United Kingdom
UPI Unified Payments Interface
VAS Value Added Services
xii Digital Banking: A Proposal for Licensing & Regulatory Regime for India
July 2022 1
I
Introduction
This Report makes a case, and offers a template and roadmap for a Digital bank licensing
and regulatory framework in India.
Section II gives a summary of recent developments in the area of financial inclusion and
the rapid strides India has made in that direction catalysed by PMJDY and India stack.
Section III caveats these achievements by observing the identifying significant credit
gap that persists among various segments, like the MSMEs underlining the need for
complementary mechanisms. Likewise, section III also points to macro data on the retail
consumer credit market that suggest credit gap may be a feature of that market as well.
Section IV explains the promise and gives an overview of the prevalent business models,
while defining the concept of “Digital bank”.
Section V explains the bank-fintech partnership model that has emerged in India in the
context of absence of a Digital bank license regime.
Section VI describes the elements of a “Digital Global Regulatory Index”, created for
the purposes of this Report and maps out the regulatory practices of certain identified
benchmark jurisdictions against the Index.
Finally, Section VII serves as the capstone and recommends a template for a Digital
bank licensing regime/regulatory framework and a pathway for sequencing the ensuing
reforms. Section VIII concludes.
2 Digital Banking: A Proposal for Licensing & Regulatory Regime for India
Introduction 3
Financial Inclusion:
II Recent History &
Evolution & India’s
Rapid Strides
The Nachiket Mor Committee Report (“Committee”), released in 2014 marks an

important milestone towards promoting financial inclusion in a mission mode.1 One of
the salient recommendations of the Committee was differentiated banking policy, ie.
issuing specialized bank licenses that would harness narrow specialization along a given
dimension rather than have every bank do everything and pursue every opportunity on
both sides of its balance sheet.2
Pursuant to the Committee’s recommendations, RBI issued guidelines for both Payments
Banks (PBs) and Small Finance Banks (SFBs), in 2014 respectively. PBs were essentially
“narrow banks” that issue deposits, offer payments services and not issue credit in any
form , thus having no asset side of the balance sheet (See Box below). SFBs3 are full-
fledged banks that focused principally on lending to small businesses. The motivation
appeared to be that with the benefit of the banking license, SFBs could leverage low-
cost deposits to lend to micro, small and medium sector enterprises and enable financial
deepening.4
Payments Banks
Are essentially narrow banks that issue deposits and earn income from HQLAs
and fees from distribution, aimed at furthering financial inclusion.
The focus was issuing safe deposit as store for value to unbanked customers
and offer payments services on top of that account eg. remittance
Are also envisaged as distribution points for other socially relevant financial
instruments (e.g. insurance).
11 licensees applied. Only 6 continue to operate.
The RBI recently offered these Payments banks an up-ramp onto Small Finance
bank license.5
1 Report of the Committee On Comprehensive Financial Services for Small Businesses & Low Income Households (2014)
available at, https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf
2 See p. 4 of the Report (Preface).
3 The recommendation of issuing a specialized small finance bank was first made by the Committee on Financial Sec-
tor Reforms in 2008. See A Hundred Small Steps: Report of the Committee on Financial Sector Reforms available at,
https://faculty.iima.ac.in/~jrvarma/reports/Raghuram-Rajan/cfsr_all.pdf
4 The Committee defined “financial deepening” as the percentage of credit: GDP at various levels of the economy.
5 See https://www.bloombergquint.com/business/payments-banks-may-convert-to-small-finance-lenders-in-three-
years-rbi-working-group
Small Finance Banks
Have to maintain at least 50 % of the loan portfolio in ticket size of ₹ 2.5 million
and below.
75% of the credit to sectors identified as priority sector
Are envisaged to leverage technology to increase coverage and financial
deepening.
11 SFBs presently licensed and operational
The RBI recently issued a framework for “on-tap” regime for SFBs
Even as these reforms took shape on the banking front, a broader Digital India revolution
catalyzed by PMJDY, India Stack, e-KYC and UPI led a paradigm shift in the way India
interacted with and consumed financial services. Under PMJDY, launched in 2014, 420
million bank accounts have been opened till date. UPI, launched in 2016 was the bellwether
of enabling real-time payments system, clocking ₹ 4 trillion (in value) transactions till
date. Starting from peer-to-peer use-case, it has since leveraged third party applications -
fintechs and pure-play technology incumbents - as channel partners to add commercial
use-cases across varied contexts. In parallel, 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 hitherto
been under-served.
However, while regulatory innovation has catalysed payments sector reforms, the principal
beast of burden for credit delivery and issuance of demand deposits, ie. the incumbent
bank has remained undisrupted. Most of these reforms upended the user experience,
i.e. the engagement layer of payments but making little improvement in the core utility
banking layer.
Partly flowing from that inertia, the country still has large segments who have not befitted
from this digital revolution.
Financial Inclusion: Recent History & Evolution & India’s Rapid Strides 5
Are We There Yet?
III Current Credit Gap,
Business & Public
Policy Constraints
Despite the rapid strides India has taken to further its financial inclusion agenda, the lack
of financial deepening remains a challenge, especially on the small business financing
agenda. The latest MSME census (2015-16) figures indicate India has 63.88 million
unincorporated MSMEs, (of which about 99 % (63.5 million) are categorized in the
“micro” bucket).6 MSMEs have been creating north of 110 million jobs, per the 73rd round
of National Sample Survey, 2016 cited in the MSME Annual Report, 2020-21. The share of
MSME gross value added in the national GDP for the year 2019-20 is 30%.7
A substantial fraction of these 63.88 million remain outside the ambit of formal finance
and there is continued reliance on informal money markets like money lenders (quick
disbursal without documentation) or chit funds (delayed disbursal but lower interest rates
than money lenders) to finance itself, even at the cost of staying uncompetitive owing to
the usurious interest burden.8
IFC9 estimates the total addressable credit gap in the MSME segment to be ₹ 25.8 trillion
and growing at a CAGR of 37% (total addressable market demand by the MSME sector
is approximately ₹ 37 trillion, of which banks, other institutions and NBFCs supply about
₹ 10.9 trillion). Over the years, the RBI has aligned its regulatory policies towards the
objective of financial deepening including revising the Priority Sector Lending guidelines
and prescribing sub-bucket wise allocation for the micro and small segment. Despite
these measures having yielded some success10, an addressable credit gap of ₹ 25 trillion
credit gap suggests room for further structural policy reforms.
Traditional brick and mortar banks, even with the most optimum priority sector guidelines,
face business constraints in evaluating credit risks of small ticket sizes (roughly ₹ 0.1-
1 million) that the micro and small sector enterprises may require. A principal inhibiting
factor is lack of ability to under-write the credit risk (schematic given in Figure-I below).
6 See MSME Annual Report, 2020-21 available at MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf p. 23

7 https://www.pib.gov.in/PressReleasePage.aspx?PRID=1744032#:~:text=As%20per%20the%20information%20re-
ceived,30.5%25%20and%2030.0%25%20respectively.
8 See Estimation Of Debt Requirement of MSMEs in India available at https://www.intellecap.com/wp-content/up-
loads/2019/04/Financing-Indias-MSMEs-Estimation-of-Debt-Requireme-nt-of-MSMEs-in_India.pdf p. 38 (hereinafter,
“Estimation of Debt”)
9 See Estimation Of Debt, supra footnote 8, p.11
10 See footnote 2 at p. 40
Are We There Yet? Current Credit Gap, Business & Public Policy Constraints 7
Firstly, as IFC research suggests, many of these MSMEs rely on informal money market
instruments and money lenders for their debt demand out of preference. This “opting-
out” means that the owners never create a credit history with the credit information
companies that banks may evaluate the credit risk against. Secondly, even if the MSME
owners have a personal loan or other exposure to formal financial markets, their debt
profile is “blended” in that it is partly funded in formal and partly in informal money
markets. Since the informal debt definitionally is not visible in the credit bureaus, lenders
exercise rational apathy towards funding the MSME segment.11 In other words, the costs
of due diligence that a bank will incur towards evaluating the credit risk adjusted against
the ticket-size and the yield from the loan make it unviable.
High Lack of
transaction product
costs innovation
Limited SUPPLY
Low risk
underwriting SIDE
FACTORS appetite
ability
Figure I: Supply Side constraints in traditional brick and mortar banking
The other part of this conundrum is that being regulated entities and as fiduciaries of
public trust in that they issue retail deposits and are critical Payment Service Providers
(PSPs), the compliance requirements of applying for a bank loan are onerous for an
unincorporated micro and small enterprise owner (“MSE”). So, even in cases where the
bank may otherwise be willing to fund a prospect, the adjacent documentation cannot be
produced readily.12 In such cases, it is trite that the MSE owner will rationally opt-out and
prefer the informal markets with their light-touch processes. Thus there is both demand-
side and supply-side friction that results in what economists refer to as “market failure”
in the formal MSME debt markets.
The other supply side stakeholder here are the NBFCs. NBFCs are regulated moderately
relative to banks and have leveraged that autonomy to develop distribution, underwriting
and product expertise in niche areas that are not serviced by banks.13 This is especially
true of the modern NBFCs that have digitized all elements of their value chain14, giving
11 See Estimation of Debt, supra footnote 8 p.62

12 See Estimation of Debt, p. 60
13 Segments like Ho-Re-Ca (hotels, restaurants and cafes) that banks are reluctant to lend to, for example.
14 NBFCs leveraging financial technologies can embed MSE loan journeys in e-commerce platform applications for ex-
ample. They can underwrite the MSE basis the inventory and sales data available with these platforms.
them greater reach as evidenced by a larger market share than banks in MSME funding.
However, lacking the ability to take deposits, they rely on funding from bank loans and
debt capital markets themselves. This translates into higher cost of capital for the NBFCs
with corollary consequences for the MSMEs relying on them. By way of illustration, even
one of the largest well-capitalized (deposit-taking) NBFCs in India has a cost of funds of
approximately 7.5%.15 A well-capitalized bank by contrast raises funds at 3.8%.16
This canonical example informs us about the “bank license premium” that the credit
markets offer to the borrowing entity. Evidently, the cost of funds for NBFCs lower down
the pyramid is progressively and non-linearly higher. Prudent asset-liability management
requires them to observe credit cost discipline, thus limiting their ability to issue loans and
other facilitation to micro and small enterprises, lower than a viable level of net interest
margin (NIM). While NBFCs, especially those that utilize technology for distribution and
underwriting have lowered cost-to-serve in terms of these costs, their lack of access to
e-KYC channel via Aadhaar authentication constitutes a fixed cost-to-serve that policy
reform is yet to ameliorate. (The recent RBI circular opening up access to e-KYC via
Aadhaar for NBFCs on the approval route is one step in that direction).
The other salient supply side solution that has emerged in the recent years is Trade
Receivables Electronic Discounting System (TReDS). TReDS licensed in 2016 was aimed
at addressing the high receivables problem of MSMEs and brings corporate buyers, their
MSME supply chain and regulated financing entities together to enable “non-recourse”
funding to the MSME suppliers. While sound in theory,17 as observed by the U K Sinha
Committee, the bill discounting platforms have failed to take off and create meaningful
volumes of invoice discounting. Some of the principal challenges are:
Lack of corporate buyer incentive:

The procedural guidelines are too restrictive. The buyer is required to relinquish
any rights to dispute the service / goods delivered at the time it accepts the
invoice to be discounted (“factoring unit”).18 While this is assuring for the
financing parties, it inhibits the corporate buyer from on-boarding in the first
place because it would be waiving its rights to dispute the goods and services
by accepting the “factoring unit”. (A better design principle here could be for
the platforms to purchase business insurance for the benefit of the financing
party. That would preserve the rights of the corporate buyer without prejudicing
the financing parties).
Unduly restrictive: As these platforms are meant only for the MSME suppliers,
they deter corporate buyers with diverse supply chains that may have non-
MSME suppliers. They may be reluctant to bifurcate and operate two invoice
discounting systems.
15 See https://www.bajajfinserv.in/fy21-bajaj-finance-q3-investor-presentation.pdf available at, p.6

16 See https://www.kotak.com/content/dam/Kotak/investor-relation/Financial-Result/Annual-Reports/FY-2021/Ko-
tak-Mahindra-Bank/Kotak-Mahindra-Bank-Limited-FY-2020-21.pdf available at p.149
17 It shifts focus of financing parties from the seller that is financed to the corporate buyer because the financing parties
are in effect under-writing the buyers in this case. By so shifting the focus, it enables the micro and small enterprise to
get funded “off-balance-sheet”.
18 See eg. Clause 5.2.2 of the Master Supplier Agreement of M1 Xchange one of the TreDS available at, https://online.
m1xchange.com/docs/MasterAgreement.pdf
Other Lean proprietary invoice discounting programs on the market:
Many corporate buyers have corporate treasury departments that operate their
own reverse factoring programs (supply chain financing programs) for their
supplier ecosystem. Other banks including SBI also offer such programs for
their clients, for vendor and dealer financing.
Shallow pools of financing capital:

Only RBI regulated entities can bid on these platforms.
In fact, till the recent enactment of the Factoring (Amendment) Act, 2021, only
a limited set of NBFCs (NBFC-Factors) other than banks were permitted to
finance through these platforms.
The recent pandemic also brought the financing gap for MSMEs in the informal sector
into sharp relief. Although both Atma Nirbhar and ECLGS 2.0 were a success,19 coverage
had to be restricted to “banked” MSMEs only. Furthermore, disbursal of loans took upto
60 days leading to loss of critical business for some MSMEs.
An exhaustive review of reasons underlying the financing gap for the MSME sector is
beyond the scope of this Report. Nonetheless, the current credit gap and the business
and policy constraints this section highlighted, reveals there is a need for licensed
entities that leverage technology to moderate the costs of acquisition and cost-to-
serve and also have the benefit of low-cost deposits to sustainably supply credit to the
MSME sector.
Moreover, with the rise of entrepreneurship, there are new forms of “digital-native” micro
and small businesses emerging that have novel business use-cases that they expect their
bank to offer them. A typical example in this regard is a gourmet cafe / bakery (typically
incorporated as a privately held company) in an urban center that relies on subscription-
based S-A-A-S vendors for its office operations. It needs a credit line tailored to its billing
and payment cycle to manage its working capital cycle better. Traditional banks (including
small finance banks that essentially operate to issue loans to traditional micro and small
enterprises)20 may not be able to customize credit codes on their CBS on the fly for this
client.
Retail Credit: Data & Recent Evidence Suggest Credit Gaps Demand
Policy Intervention
Furthermore, as the feedback received on the first draft of the Discussion paper (published
on November 25, 2021), suggests, although policymakers have focussed on it less than
the credit gap for MSMEs, there is a discernible credit gap in the retail credit market in
India as well. Data supports this proposition.
19 8.7 million of the 9.2 million borrowers were MSMEs. 82 % of the ₹ 3 trillion CGTMSE guaranteed financial assistance
was disbursed. See Minister, MSME replying to a related query in Rajya Sabha.
20 See Management Discussion and Analysis AUBank available at, https://www.aubank.in/assets/Digital/pdf/mda.pdf
p.111 (highlighting the opportunities in the MSME credit space for Small finance banks lie with a borrower profile that is
in the unorganized sector relying on cash basis accounting). Moreover, established Small finance banks typically issue
loans in their core markets and rely on urban centers to issue demand and term liabilities. So, they are not the ideal
vehicle to serve the needs of urban businesses.
It is (also) an under-penetrated market in terms of credit.
There is significant room to grow consumption in India and promote credit usage.
A data point from a recent CIBIL Report underscores the point; out of a total
220 million credit-eligible retail customers, CIBIL found that banks are servicing
33%. As CIBIL notes, the balance 150 million customers are inactive but will
have credit needs that need to be serviced. Reflecting this, India has an under-
penetrated credit card market. There are approximately 66 million outstanding
credit cards (3 cards per 100 of pop; compare that to 892 million outstanding
debit cards).
At a macro level, the PFCE component of the GDP has been a moderated 60%.
India’s household debt/GDP is ~12%, arguably low by comparable standards.21
A BIS study estimates that household debt to GDP of ~55% appears to be
necessary for economic growth.22 Thus, policy levers facilitating personal credit
(a subset of household debt) at current levels of household debt to GDP, are
imperative to offer impetus to growth.
It (also) has significant potential to be more competitive and pro-innovation
As the events that precipitated the formation of internal working group of the
RBI on digital lending suggest to us, bad actors have perverse incentives to
take advantage of desperate borrowers in urgent need of funds. The RBI Report
recommends several supply and demand-side measures to mitigate the potential
risks flowing from digital lending. However, the fundamental drawback of the
formal and regulated retail banking space, is lack of innovation, which constrains
potential “thin-file” borrowers to look towards the unregulated and gray markets
for their financial needs. Innovation from within the regulated ecosystem and
products more tailored to the consumer niches that are otherwise under-served
appears to be one potential way to organically wean away consumers from
predatory suppliers of credit in the marketplace. The median age of India is 28
years (proxying an aspirational middle class) and it would be ideal to provide
them with multiple credit opportunities such as small ticket personal loans, credit
cards, Buy-now-pay-later or earned wage access and other substitutes to enable
higher consumption and unleash economic growth.
To summarize, there is an opportunity for public policy intervention in terms of banking

licence innovation that will support and facilitate a new class of business formation on the
MSME banking side. Absent such support, the “organic rate” of emergence and survival
of these digital-native businesses is likely to be artificially suppressed with corollary
negative spillovers on formal sector employment in urban centres.
Likewise, there may be scope for banking licence innovation on the retail (consumer)
credit market side as well, to inject competition and facilitate corollary innovation for the
reasons mentioned in the previous paragraph.
21 See IMF, Household Debt, Loans and Debt securities, available at, https://www.imf.org/external/datamapper/HH_LS@
GDD/GBR/USA/JPN (IMF data here also gives comparators. Comparatively, China is at 55% and US is 75%).
22 See Lombardi et al, The Real Effects of Household Debt In Short & Long Run (2017) available at, https://www.bis.org/
publ/work607.pdf
Licensed Digital banks is an emerging vehicle that policymakers globally, especially in
South East Asia, have implemented to try and achieve aforementioned objectives. (See
also, Box) We define and evaluate Digital banks in the following section.
Digital Banks In Pandemic: Evidence from China

Researchers at the IMF used the pandemic opportunity to test the correlation between
digital lending and firm performance. The pandemic offered a good context to test the
public policy utility of digital banking especially because “high touch” due diligence
was ruled out.
These researchers found that lending to a random sample of 40,000 MSEs by a Digital
bank (MyBank) was positively associated with sales growth at borrowers. They further
established a possible causal relationship between lending by a Digital bank and the
MSE’s higher sales growth during the pandemic.23
The results are an early empirical confirmation of the narrative in business media that
the ability of Digital banking to leverage data and platforms to lend remotely can play
a positive role supporting small businesses amidst the pandemic.
23 See Digital Banking Support to Small Businesses Amid Covid-19 available at, https://www.elibrary.imf.org/download-
pdf/journals/065/2021/002/article-A001-en.xml p. 9
IV Digital Banks:
A New Kid In Town
Several marketing expressions like “challenger banks”, “neo-banks” in addition to “digital

banks” are used interchangeably in financial / fintech discourse in India and elsewhere,
without regard to whether these fintechs actually function as “banks” as the applicable
law defines them.
“Digital Banks” or DBs referred in this Paper means Banks as defined in the Banking
Regulation Act, 1949 (B R Act). 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 channels24
to offer their services and not physical branches.
However, 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. Having said
that, DBs offer a differentiated proposition and as such, there is scope for differentiated
treatment in adjacent areas of their operation consistent with treating them identically
with incumbent commercial banks, in the critical areas of prudential and liquidity risk.25 A
template of a regulatory framework for DBs for India has been given in Section VII below.
Digital Banks (as proposed here) ARE DISTINCT from Digital Banking
Units
The Finance Minister in the budget address for FY-23 announced the proposal to
establish “Digital banking Units” (“DBUs”) of scheduled commercial banks in 75 districts.
The objective is to ensure the benefits of digital payments, banking and fintech
innovations reach the grass-roots of India in a consumer friendly manner. Pursuant to
the budgetary announcement, the RBI issued guidelines (“DBU Guidelines”) on DBUs
on April 7, 2022. Since DBUs and Digital Banks are similar constructs, for the sake of
abundant clarity and to distinguish the proposal advanced in this Report from DBUs,
this section will underline the key differences between the two.
24 Proximate channels will cover technologies like NFC for e.g.

25 This proportionate standard of regulation in a manner consistent with core principles of banking supervision is sup-
ported by the Basel Committee on Banking Supervision. See Regulating Fintech Financing: Digital Banks and Fintech
Platforms available at, https://www.bis.org/fsi/publ/insights27.pdf (see footnote 22 on p.13)
The DBU guidelines define, “digital banking” as, present and future electronic banking
services provided by a licensed bank for the execution of banking and financial
transactions over websites, mobile phones and other digital channels ....” 26. A DBU
is defined as, “a fixed point business unit/hub housing digital infrastructure for
delivering digital banking products and services…” Furthermore, the DBU guidelines
state DBUs will be treated as “banking outlets”27, (thus effectively equivalent to a
branch as “banking outlets” are essentially redefined branches to account for the use
of technology).28
That summary leads us to the following differences between “Digital banks” as this
Report recommends, and DBUs.
Balance Sheet/Legal Personality
DBUs DO NOT have legal personality and ARE NOT licensed under Banking
Regulation Act, 1949. Legally, they are equivalent to “banking outlets” ie,
branches.
Digital Banks will have a balance sheet and legal personality & are proposed
to be duly licensed banks u/ B R Act.
Level of Innovation/Competition
DBUs improve existing channel architecture by offering regulatory recognition
to digital channel. However, they are silent on competition. The DBU guidelines
expressly state that only existing commercial banks may establish DBUs.
In contrast, a licensing and regulatory framework for Digital banks as
proposed here, is more enabling along competition/innovation dimensions
Digital Banks: The Promise They Hold for India

Incumbent commercial banks have inefficient business models as evidenced by high cost
to income, and high cost to serve numbers. Banks and fintechs offering digital banking
services (so-called, neo-banks) rely primarily on digital channels that organically have
high efficiency metrics relative to incumbent commercial banks. This structural feature
makes them a potentially effective channel through which policymakers can achieve
social goals like empowering the hitherto under-banked small businesses, and enhancing
trust among retail consumers.
Neo-banking business models emerged globally in the aftermath of the global financial
crisis as a response to loss of faith in the incumbent banks. It came of age in 2015 in
markets like the United Kingdom and has since matured. Three models of these “challenger
banks” (so-called because of their emergence in the aftermath of global financial crisis)
appear to have emerged globally.29
26 See RBI Circular on DBUs available at, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12285&Mode=0 (Clause 3.1)

27 See RBI Circular on DBUs available at, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12285&Mode=0 (Clause 4.2)
28 See RBI Circular on Rationalisation of Branch Authorization Policy available at, Reserve Bank of India - Notifications
(rbi.org.in) (prefatory commentary).
29 See Deconstructing Digital-Only Banking Models: A Proposed Policy Roadmap for India available at, https://vidhi-
legalpolicy.in/wp-content/uploads/2020/09/Deconstructing-Digital-only-Banking-Model-A-Proposed-Policy-Road-
map-for-India-1.pdf p.17 (for a quick global snapshot of activity in this space).
Digital Banks: A New Kid In Town 15

(Front-End Only) Neo-banks: These neo-banks partner with incumbent licensed
banks to offer “over-the-top” services to the consumers “renting” the balance
sheet of a bank (properly so called) to lend and issue deposits from. (Open
Technologies, RazorPayX, Dave)
Full-Stack (Licensed) Digital banks: These entities are fully functional banks,
regulated by the banking regulator and issue deposits and make loans on their
own balance sheet. (Starling, Webank, Kakao, Monzo, N26)
(Autonomous) unit of traditional banks: These entities are essentially neo-
banking operations of traditional banks that function autonomously and compete
with stand-alone neo-banks. (Marcus,30 (Goldman Sachs) 811 (Kotak Mahindra
Bank), and Yono (State Bank of India).
Characteristic Features
Business proposition of neo-banks is niche products targeted to demographics
that are under-catered to, by mainstreet banks (eg. small businesses, migrants,
paycheck-to-paycheck retail consumers, gig economy workers and millennials).
They offer speed (and its corollary, the absence of friction), superior user
experience relative to traditional banks and low cost and transparent cost
structures, to their consumers.
Profitability has emerged a key challenge for entities that do not have regulated
status31 (See Box).
The Secret Sauce to Profitability: Starling bank Case Study32

While “front-end focused” neo-banks have found achieving balance between growth
and profitability a challenge, their full-stack (Digital bank) counterparts appear to
have found the secret sauce to profitability. An important case-study in this regard
is Starling bank (UK). It offers insights into the question of what is the most viable
business model for Fintechs offering digital banking services in India.
Starling Bank: Starling bank acquired a restricted license from the PRA Prudential
Regulatory Authority in 2016. In the past 5 years, it has come of age with offerings
both on the small business side and retail side. While in the initial years, interchange
revenue dominated other sub-heads, the latest annual Report reveals NIM to outrank fee
income from their interchange, B-A-A-S and marketplace offerings.33 Most importantly
and supported by NIM growth, Starling turned monthly profitable from October 2020.
On the other side of the balance sheet, acquiring the restricted banking license early
on the curve enabled Starling to issue low-cost deposits (protected by UK’s deposit
insurance scheme- FSCS).
30 See https://play.google.com/store/apps/details?id=com.marcus.android&hl=en_IN&gl=US
31 See https://www.economist.com/finance-and-economics/2021/08/21/can-neobanks-popularity-outlast-the-pandem-
ic
32 Kakao (South Korea) and WeBank (China) are other examples of profitable digital banks.
33 See Starling Trading Update 2021 available at, https://www.starlingbank.com/investors/2021/trading-update-
june-2021/
Starling’s case study highlights the importance of NIM and on-balance sheet lending
on profitability. The ability to do balance sheet lending is especially important for a
fintech offering digital banking in India given RBI’s prescriptive regulation capping
interchange. So, regulatory innovation in terms of engineering a DB license they can
leverage is the key.34
Estimates indicate that DBs have high cost efficiency. Webank for instance incurs a per-
account operation cost of $0.5. Compare that to traditional banks and (depending where
we are), it may come upto 10-20 times higher.35 In the Indian context, a FIBAC 2019
Annual Insights Report estimated the banking industry cost to income ratio at about
50 %. Looking beneath the hood, it is apparent that cost to income ratios of large and
medium PSBs as also old private banks are more than 50 %. The new private banks, while
they run a more efficient operation relative to their peers, still had a cost to income ratio
as high as 43 %.36
These ratios reduce their reach by excluding micro and small businesses, and credit of
smaller tickets from their reach. Digital banks offer promise because their business model
can organically cut down cost-to-serve and CAC37 thus offering them the headroom to
expand coverage than the incumbent commercial bank.
Illustrative Use-Cases Enabled by Digital Banks

B-a-a-S: Full-stack DBs offer the promise of enabling additional use-cases beyond the
conventional use-cases known to banking. B-a-a-S is one of the more important of
these additional use-cases because of the catalytic impact it can potentially have on
business banking.
B-a-a-S essentially will involve a DB white-labelling its banking technology stack to

other financial service providers that offer a narrower or similar suite of services to
their own customers. Imagine for example a multi-state co-operative bank that wants
to scale up and challenge the established players in its own native geography. The
costs of upgrading its own technology stack and managing it on a day-to-day basis
will be a significant overhang for such a small bank. Enter DB that offers its cloud,
balance sheet and expert risk staff to the “client” multi-state co-operative to scale
up. The client now has the capacity to grow its balance sheet and compete more
effectively in the local geography. On the other side, the DB augments its risk-adjusted
revenues like NIM with fee-based income.
34 See How the UK Became the Galapagos Of Fintech Innovation available at, https://www.altfi.com/article/5833_
11years-how-the-uk-became-the-galapagos-of-fintech-innovation
35 See https://thefinancialbrand.com/104213/digital-banking-transformed-podcast-china-webank-henry-ma/
36 See https://image-src.bcg.com/Images/FIBAC-2019-Report_tcm9-226576.pdf p.10 (C:I ratios of Indian banks)
37 They can acquire the customer at lower costs for example because using APIs, they can embed loan journeys in part-
ner e-commerce applications.

Here’s another example: Imagine for example that a Fintech NBFC intends to offer
a credit card with a unique instalment plan proposition for its business clients. Since
NBFCs can only issue credit cards in partnership with banks, they can partner with
a Digital Business bank and leverage their credit card issuance infrastructure to issue
and manage its own credit card clientele. The cloud-native architecture of the Digital
Business Bank can potentially cut down the time-to-market for the NBFC by an order
of magnitude, as opposed to traditional banks that can take upto 6 weeks to integrate
and run such a program.
To summarize, B-a-a-S makes it possible for the existing banking ecosystem to “do
more with less” (in other words, to enhance unit economics) thus making it more
competitive and efficient.
Custodian Banking
A custodian is a specialised financial Institution that holds customers’ securities for
safekeeping.38 Panel discussants in the industry consultation held in connection with
this Report also highlighted the need for creation of a specialised custodian banking
licence in India in keeping with the differentiated (specialised) banking licence policy
in India.
For background, in India at present, custodial services are regulated by SEBI.

Commercial banks may offer custodial services as permitted by the B R Act, 1949. The
other sub-set here is non-bank custodians. However, while institutional capital prefers
non-bank custodians to hold securities in their portfolio, the non-bank custodians lack
the ability to offer banking services to their clients as part of the bouquet owing to
lack of a specialised (and limited) custodial banking licence. This constrains the non-
bank custodians from partnering with commercial banks to offer adjacent transactional
banking services (e.g., deposits and accounts or foreign exchange management or
cash management). But on the same lines as fintechs partnering commercial banks
to provide banking services, these stitched-up partnerships are not conducive to ease
of business.
This is another illustration of why regulatory innovation through the fashioning of

innovative licensing frameworks ought to be in lockstep with development of capital
markets and financial technology innovation. It is understood that a proposal for a
specialised custodian banking licence was taken up by the RBI in the first monetary
policy statement of 2016.
Given the rapid rise in expanse and depth of India’s capital markets in the last half
a decade- and especially in the “pandemic years” of 2020 and 2021, there may be
a case for evaluating the proposal again. In the alternative, RBI may permit SEBI
regulated non-bank custodians to have a reverse repo account that would hold both
proprietary funds and client fund balances they hold under a Power Of Attorney, in
addition to issuing them a AD-I licence (for rendering forex services).
38 See Centre for Innovation in Public Policy “Reforms in Custodian Banking” Policy Brief on Custodian banking (2021)
available at, https://www.cipp.in/assets/img/CIPP_Report_210119_final_1_mc.pdf
Challenges With
V the Existing
“Partnership-Based”
Neo-Bank Model
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. As
the name indicates, this is a partnership between traditional banks and neo-banks such
that the latter bring in the engagement layer and the former bring in the “utility” layer
and offer both sides of their balance sheet.
These Neo-banks have further specialized into consumer-facing and small business-facing
offerings respectively. A typical consumer facing Neo-bank offers additional conveniences
like digital debit card, Personal finance management tools like spend analytics for better
budgeting, investment avenues through its mobile application through its B2B partnerships
and potentially a credit line. A typical small business-facing fintech offering neo-banking
services will offer expense management products (like employee prepaid cards), payroll
management, accounts receivables management platform and a business loan / credit
line facility through the banking partner.
A thematic sketch of the extant neo-banking model looks as follows.39
But this model presents several challenges including with respect to revenue and viability.
Some challenges have been presented below:
39 See https://www.outlookindia.com/outlookmoney/fintech/rise-of-neobanks-in-india-6862 (for the origin of thematic

Sketch).
Challenge #1: Limited Revenue Potential
Mapping this bouquet of services against revenue potential, it becomes immediately
apparent that fintechs have a monetization (and therefore viability) problem. They earn
fee-based revenue wherever they act as channel partners (account opening and on-
boarding, investment opportunities credit), and potentially earn a fraction of interchange
on payments processed through cards; but other than these two buckets, lack any other
revenue sources. Moreover, interchange is indirectly regulated in India (through merchant
discount rate regulation), so unlike developed markets like the United States (where
fintechs can earn revenue on interchange by partnering with small and medium banks),
fintechs in India are constrained along this dimension.
Challenge #2: Potential Obsolescence of the Partner Bank Core

Banking System
Fintechs offering neo-banking services are constrained by product buckets the partner
bank can offer within its business and technological infrastructure.40 Without the ability
to leverage their balance sheet and their own technological stack to create “ground-up”
credit products and user experiences, their potential will never be fully unlocked.
As we have pointed out above, traditional banks (with their legacy technology stack with
limited product codes) may lack the ability to serve an emerging class of “digital-native”
businesses. Solving for this gap through a regulatory innovation in the form of DB license
may be a potential solution so that these businesses located downstream of banks may
thrive and become engines of employment.
Challenge #3: High Cost of Capital & No Entry Barrier

Additionally, on the other side of the balance-sheet, absent the licensing framework, Neo-
banks cannot issue low-cost deposits and are constrained to rely on expensive equity
capital to fund innovation and operations. Finally, the licensing framework also serves as
a strategic moat for licensed entities. In absence of a licensing framework, entry barriers
for fintechs to enter Neo-banking space are low. This creates two negative externalities
for the ecosystem. First, as with any ecosystem with low barriers to entry, this context
offers opportunities for actors that are not fit-and- proper to enter the market creating a
consumer protection risk especially on the retail side. Secondly, it creates herd mentality
in terms of simply replicating business models and products already witnessed by the
markets, rather than genuine innovation. In other words, there is a “Me-too” risk.
Reports indicate that the RBI is contemplating to establish a working group to regulate
“front-end only” neo-banks that are presently operating in the partnership model. 41A
useful point for consideration will be to evaluate a “full stack” DB license which offers
40 See, Rising Challenges for Indian Neo-Banks at https://bfsi.economictimes.indiatimes.com/news/fintech/rising-chal-

lenges-for-indian-neo-banks/85028088
41 See https://economictimes.indiatimes.com/tech/technology/rbi-weighs-a-more-formalised-regulatory-system-for-
digital-banking-in-india/articleshow/83554764.cms?from=mdr
Challenges With the Existing “Partnership-Based” Neo-Bank Model 21

greater regulatory control and also further deepens the under-banked Indian market,42
instead of a piecemeal approach. Creating a Digital Bank license also raises the barrier
to entry and mitigates the “Me-too risk” to innovation flagged in the previous paragraph.
42 India has less than 1 bank per million population. See Nachiket Mor et al, https://www.bloombergquint.com/opinion/
fixing-indias-banks-making-banking-boring-again
Challenges With the Existing “Partnership-Based” Neo-Bank Model 23
VI A Digital Bank
Global Regulatory
Index
As we briefly touched upon in the previous section, Singapore, Hong Kong and Malaysia
have issued special DB regulatory regimes. Elsewhere, as in the United Kingdom, regulators
have recognized the DB business model by issuing banking licenses to banks offering
“digital-first” / “digital-only” propositions within already existing regulations without
creating specialist regimes.
In this section, we define a 4-factor “de jure” index— the Digital Bank Global Regulatory
Index (“Index”) — to map these global regulatory responses (whether through specialist
regimes or generally). As a first step towards doing that, we first describe the four factors
comprising the index and the scoring methodology adopted. In the next step, we score
each of the benchmark jurisdictions against the Index with a view to draw lessons for
the proposed Indian DB legal framework. The benchmark jurisdictions chosen for the
purposes of this Report are Singapore, UK, Hong Kong, Malaysia, Australia and South
Korea.
A. Description of the Index

The 4-factors comprising the Index are as follows:
Entry barriers: This factor will score a regime contingent on whether the entry
barriers for fintechs and adjacent entities in securing the DB licenses are high
or low. Illustratively, if a jurisdiction prescribes a one-size-fits-all minimum capital
requirement as eligibility without regard to their differentiated business models,
it will be scored negatively against this factor. On the other hand, calibrated
eligibility regulation that accounts for the differences between incumbents and
digital banks will be scored positively against this factor.
Regulators are also known to impose track record-linked eligibility conditions to
ensure only entities with acumen apply. The proportionality or otherwise of such
eligibility conditions is contingent on context. The Index will parse such eligibility
requirements asking the following question.
Is the eligibility barrier imposed bear a reasonable nexus to business sought to
be regulated?
Illustratively, this filter will determine an eligibility condition requiring prior track
record in e-commerce / financial services/ technology sectors to be proportionate.
On the other hand, eligibility conditions that disable a potential applicant based
on “status” will be marked negative. Illustratively, a eligibility barrier that states
only “entities already regulated by a defined financial regulator are eligible”
excludes several entities with expertise to deliver digital banking and as such
will be marked negative by the Index.
Competition: This factor scores a regime in terms of how pro-competitive it
is. In the context of the banking services market, competition arises between
incumbent predominantly “brick-and-mortar” commercial banks and digital
banks. Regimes that do not privilege incumbents relative to Digital banks
operationally will be scored positively against this factor. On the other hand,
regimes that discriminate against digital banks operationally by excluding them
from access to privileges that incumbent commercial banks can avail of, will
be scored negatively against this factor. (An illustration of this could be if,
say, a particular jurisdiction offers access to Central Bank payments systems to
legacy banks but denies such access to DBs. Another illustration in this regard
is unequal access to the deposit insurance system if the jurisdiction has enacted
one).
Business Restrictions (NOT adjusted for prudence): This factor scores a regime
in terms of the degree of autonomy it confers on a DB in its day to day
operations. The risks unique to banking as a business model means that certain
restrictions and calibration are necessary for prudential reasons. The “adjustment
for prudence” element of this factor accounts for these caveats. Illustratively, if a
regime restricts business growth in terms of a defined quantitative threshold of
assets / deposits in the initial phase of a DB’s journey as a licensed entity, this
factor will recognize the rationale driving the restriction if there is a transparent
pathway out of these restrictions.
Technological Neutrality: Fintech regulation has low shelf-life as the underlying
technologies that regulated entities use are in a state of dynamic flux. This
“natural rate of change” can be inhibited however if a regulatory regime leans
in favor of one technology / technology standards over another. Such regulatory
favouritism can have a chilling effect on innovation. Technological neutrality
is therefore a key metric to score a regulatory regime on. Consistent with
the above descriptor, regulatory regimes that mandate or otherwise privilege
specific technologies by hard-coding them in law are scored negatively against
this factor, and vice versa.
A Digital Bank Global Regulatory Index 25

B. Mapping Of Benchmark Jurisdictions Against the Index
Index Variable Looking Under the Hood
Are minimum capital

mandates proportionate?
  43   
Is the track record eligibility

Entry Barriers condition proportionate?

(If there are others), Are the

other eligibility conditions  
imposed proportionate?
Do Digital banks have equal

access to deposit insurance      
system
Do Digital banks have equal

Competition
access to all payments 44     
systems & schemes
Equal access to revenue

sources at par w/ incumbents
45  46   47
Are there any restrictions on

minimum balance fees NOT 48 49
justified by prudence?
Business
restrictions Are there any physical
(NOT adjusted presence mandates NOT   
for prudential justified by prudence?
reasons)
Are there any asset / deposit
caps NOT justified by      
prudence?
Are there any restrictions

Technological
Neutrality
against or a preference for a      
particular technology?
 = Yes  = No
43 HKMA prescribes identical minimum capital rules (HKD 300,000) for both incumbent commercial banks and Digital
banks (“Virtual banks” as they are referred to in HongKong). In so far the entry barrier applies a one-size-fits-all rule
without regard to the different business models, and objectives of two types of banks concerned, the Index marks it
as a negative.
44 MAS precludes Digital Full Banks from accessing ATM Network.
45 MAS regulation precludes Digital Banks from imposing minimum balance fees. In so far as such restriction reduces
avenues for revenue generation and has no nexus to prudential aspects, the Index marks it as negative. Note that
individual Digital banks may choose to voluntarily waive such fees to attract more customers. Competition on such
measures should be welcomed by the policymakers.
46 HKMA regulation precludes Digital Banks from imposing minimum balance fees. In so far as such restriction reduces
avenues for revenue generation and has no nexus to prudential aspects, the Index marks it as negative. Note that
individual Digital banks may choose to voluntarily waive such fees to attract more customers. Competition on such
measures should be welcomed by the policymakers.
47 Financial Services Commission precludes Digital banks from lending to Corporates.
48 See footnote 3
49 See footnote 4
Purpose of the Index is to give us a frame of reference for what “default settings”
India’s Digital bank regulatory framework should adopt.
As it will be apparent from the mapping out exercise:
Technological neutrality is a common theme. That is a learning India’s
regulatory policy can take home. There are certain technologies that have
gotten entrenched in regulation. Illustratively, India’s extant e-KYC regulations
embed use of OTP as the second factor in authentication. That has gained
ubiquity over the years despite the fact that there are other options with
lesser friction and same / more effectiveness available. While that promotes
standardization arguably, global regulatory practice is not in favor of such
prescriptive approach as it may have a chilling effect on innovation.
Calibration is another common theme. Differentiated minimum capital
requirements is the key-a progression to offer the new entities a head-
start is facilitative of competition. One size fits requirements for merely
commencing business favors incumbents over challenge
Exit plan “Living Wills” as they are called, is also a common feature.
A Digital Bank Global Regulatory Index 27

Digital Bank
VII Regulatory
Framework for
India: A Template
This section will serve as the capstone of this Report and recommend a potential template,
pathway and the operative steps under the applicable laws to be executed for enacting a
DB licensing and regulatory regime for India. The infrastructural enablers for it in terms of
a national ID, credit information architecture (credit information companies), a real time
payments protocol (UPI), and an emerging open banking regulatory framework (account
aggregators) are already present. India has the opportunity to leverage these enablers to
enact an industry leading regime for governing DBs.
The sequence and the template suggested here is informed by the DB Regulatory Index
created for the purposes of this Report.50 In addition, inputs and written submissions
received from stakeholders forming part of the 60 day consultation window, relevant
practitioners and public policy commentary and the interviews conducted for the
purposes of this Report have also been relied upon.
A. The Sequence
Consistent with best practises revealed by the DB Regulatory Index, the following 3 step
sequence is recommended:
Step 1: Introduce a restricted Digital Business bank licence and a restricted
Digital Consumer Bank license (the dimensions along which these licences will
be restricted has been detailed below in subsection-B and the legal mechanics
involved in sub-section- C below).
Step 2: The applicant acquiring this restricted license (“Licensee”) enlists in
the regulatory sandbox and commences operations as a Digital Business bank/
Digital Consumer bank as the case may be, in the sandbox.
RBI’s regulatory sandbox framework (“Sandbox framework”) recognizes the need
to offer relaxations (including inter alia financial soundness, track record and
adjacent issues) to entities enlisted in the sandbox to facilitate experimentation.51
50 See Section IV for a description of the four factors underlying the Index and the scoring methodology. Section V also
tabulates the results of mapping identified Benchmark Jurisdictions against the Index to tease out certain best prac-
tices that should inform the India template.
51 See Clause 6.2 of the RBI Regulatory Sandbox available at, https://www.rbi.org.in/scripts/PublicationReportDetails.
aspx?UrlPage=&ID=1161 (stating that the RBI may consider relaxing conditions regarding financial soundness, liquidity
and track record among other things for applicant(s) for the duration of the sandbox).
Digital Bank Regulatory Framework for India: A Template 29

Certain relaxations have been recommended for Digital Business banks / Digital
Consumer banks for the duration of the time they will be operating in the
regulatory sandbox.
The RBI and the applicant identify a set of metrics for which the Licensee will
be progressively monitored. Without being exhaustive, such metrics could be
around cost to acquire a customer, volume / value of credit disbursed to MSMEs,
technological preparedness, compliance levels of the Licensee across prudential
aspects, among other things.
Step 3: Contingent on satisfactory performance of the Licensee in the sandbox,

the restrictions can be relaxed when the Licensee graduates from the sandbox
and becomes a full scale Digital bank (Business or Consumer as the case may
be). (See diagram above for progression).
The duration of this progression, i.e. the duration for which the Licensee will
operate in a regulatory sandbox will vary from case to case. So, the regulation
could leave for the RBI to make that determination.52 In this regard, it is also
noted that the Sandbox Framework is designed for flexibility of duration at the
cohort level.53 Given the significance of this regulatory innovation, RBI is expected
to leverage this built-in flexibility to decide the duration on a case-to-case basis
in consultation with the licensee and give itself and the Licensee sufficient and
fair time to observe the Licensee’s execution as a Digital Business bank (or
Digital Consumer bank, as the case may be) in the sandbox before graduating
it to full-scale Licensee (or exiting them from the sandbox as the case may
be). There was feedback on this point with several comments seeking clearly
defined timelines. However, the sequence laid down in the previous version of
the Report is retained for the following reasons:
This decision is best taken at the time of entry into sandbox by the RBI in
consultation with the licensee.
Prescribing timelines at the policy proposal phase would be an exercise in
arbitrary guess-estimates.
52 This is on identical lines as Singapore. MAS retains the discretion to make the determination about the licensee’s
progress based on disclosed objective factors but does not prescribe any time period. See https://www.mas.gov.sg/-/
media/Annex-A-Digital-Full-Bank-Framework.pdf p. 2
53 See Clause 6.1 of the Sandbox Framework available at, https://www.rbi.org.in/scripts/PublicationReportDetails.aspx-
?UrlPage=&ID=1161#S8 (recognizes that cohorts may run for varying time periods and offers an indicative timeline of
6 months).
As already pointed out above, this approach is mirrored by global regulatory
best practices. It offers the RBI the opportunity to calibrate timeline based
on relevant factors. including experience / track record/ fit-and-proper of the
applicant.
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.
(For the sake of abundant clarity, other grounds for exiting the sandbox provided
therein would continue to be available to the RBI and the Licensee).54
B. F
eatures/Conditions of Digital Business bank License/Digital
Consumer bank Licence
Minimum paid-up capital: 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 following recommendations are offered:
As pointed out above, the Sandbox Framework recognizes relaxations along
the financial soundness dimension. It is recommended that the RBI consider
offering the Licensees relaxation in terms of minimum paid up capital using
this lever. In the restricted phase, Digital Business bank may be required to
bring in ₹ 20 crore of minimum paid-up capital.
Upon progression from the sandbox a full-scale Digital Business bank will
be required to bring in ₹ 200 Crores (equivalent to that required of the
Small Finance bank).55
The minimum capital for a Digital Consumer bank in the restricted (sandbox)
phase may follow the same approach as above. Since a Digital Consumer
bank is a case of first instance in India with no incumbent proxy, RBI may
consider asking the licensee minimum capital to bring in minimum capital
proportionate to the projected book size and risk profile of borrowers in
the business plan, while operating in the sandbox.
The same calibrated approach may be adopted after the Digital Consumer
bank “graduates” from the regulatory sandbox and begins operations as a
full-scale Digital Consumer bank.
Track record & Potential Applicant Pool: Given the “digital-native” nature of
banks that will operate under this license, the license may require one or more
controlling persons of the applicant entity to have an established track record
in adjacent industries such as e-commerce, payments, technology (e.g. cloud
54 See Clause 6.6 (b), and (c ) of the Sandbox Framework available at, https://www.rbi.org.in/scripts/PublicationReport-
Details.aspx?UrlPage=&ID=1161#S8 (stipulating grounds of exit at the behest of the RBI, and the sandbox entity (in this
instance, the Digital Business Bank licensee).
55 Small Finance Banks, with their focus on small businesses on the asset side are the closest equivalent to the (pro-
posed) Digital Business bank. As such, progressively raising the min. paid-up capital requirement to ₹ 200 crores
promotes competition without treating disproportionately favoring any entity.

computing). As with other licenses (eg, Payment banks, NUEs), applicants may
have the option to apply in consortium. Existing neo-banks seeking to upgrade
or small finance banks / other regulated entities (e.g. existing incumbent banks
that may see the opportunity in full-stack Digital Business bank license) are
also potential eligible candidates for application. Note that consistent with the
objective of promoting competition, this applicant pool is deliberately defined as
widely as possible, and specific categories mentioned are not to be construed as
exhaustive but indicative. Accordingly, while the language is clear, it is clarified
that fintechs are also included in the potential applicant pool. The same will
apply to the applicant pool for Digital Consumer bank licence.
Equal Access to the Infrastructure Enablers: In order that the license and
the business proposition of a Digital Business bank / Digital Consumer bank
remain viable and to promote competition, it should have access to all the key
infrastructure enablers in the Indian financial ecosystem, as traditional banks
are. That includes access to:
Aadhaar e-KYC / Credit Information Companies
UPI, IMPS / Central Payment Systems (NEFT/ RTGS).
ATM schemes
Deposit Insurance & Credit Guarantee Corporation (DICGC) (against levy of
appropriate premium as determined by the DICGC).
AA ecosystem.
For the sake of abundant caution, the categories of infrastructures listed here
are illustrative, not exhaustive. As such, the guiding principle for access to
infrastructures is parity with incumbent commercial banks. so as to ensure level
playing field.
Phased relaxation of Business Restrictions: The mapping of Benchmark
Jurisdictions on the Index revealed that several of them have started with
business restrictions (e.g. on asset and deposit size) accompanied with
proportionately reduced minimum paid-up capital thresholds. The restricted
Digital Business bank license can be designed to mirror that approach. These
business restrictions can be in terms of asset and deposit size (in value terms)
and / or number of customers serviced.
As pointed out in the earlier segment, the regulator may progressively relax them
contingent upon satisfactory performance of the Licensee on agreed metrics till
the point where the Licensee is ready to exit the sandbox and operate as a “full
scale Digital Business bank.”
The same principle is recommended to be applied to Digital Consumer banks.
Accordingly, Digital Consumer bank licensees may issue assets and liabilities
within the limits prescribed or service the number of customers within the limits
prescribed, in the sandbox phase. These restrictions may no longer apply when
it graduates from the sandbox and becomes a full-scale Digital Consumer bank.
Prudential / Liquidity risk regulation: This aspect will be identical for both
Digital Business banks / Digital Consumer bank that have progressed to full
license, and the incumbent commercial banks. Regulatory touchpoints like
capital adequacy, risk weights, liquidity coverage ratio will be included under
this head. Being a full-fledged bank, Digital business bank(s) will be required to
be fully compliant with the relevant thresholds applicable to them specifically
or commercial banks generally.
In the sandbox (restricted) phase of a Digital business bank, RBI may prescribe
prudential / liquidity standards proportional to the asset and deposit caps it is
subjected to.
Technological Risk regulation: Technology risks assume greater importance for
Digital Business Banks / Digital Consumer banks relative to the traditional banks
because they leverage their APIs to have relationships to numerous counter-
parties that risks can originate from. The licence should require conditions for
ex ante technological preparedness and ex post business continuity planning
(detailed in the following segment). Ex ante technological preparedness will
entail:
Incorporation of zero trust architecture to mitigate technology risks-
the panel discussants highlighted this point in the industry consultation
organized in connection with this Report.
Creation of clearly defined processes (leveraging technology) enabling
consumers that have encountered a security event, to report the event.
The panel discussants also stressed on this aspect. They also recommended
spreading awareness across the digital banking ecosystem including through
innovative use of marketing.
Continuing compliance with industry-grade certifications like PCI-DSS and
the attendant audits of the Digital Business Banks.
Board-level policies and expertise in assessing evolving cybersecurity risks
(including saliently that of ransomware illustratively), by mandating a defined
fraction of executive directors to have relevant skill sets, augmented by a
carrots-and-sticks compensation framework that motivates these personnel
to be proactive about these risks.
Additionally, installing and upskilling technology risk supervision personnel
of the RBI commensurately to offer intelligent oversight of the first line of
defence delineated above.
Due to their “digital-native” avatar, new technologies such as machine
learning and blockchain can be more easily and seamlessly integrated into
the overall operations of Digital Business banks (as also DBs generally).
These technologies can provide an extra layer of security.
Relatedly, panel discussants highlighted the need for clear regulatory
guidelines for deploying core banking system on cloud. At present, while
regulations do not foreclose such deployment in the absence of clearly

delineated framework, existing banks are reluctant to leverage cloud
architecture. Digital banks will have to rely on cloud architecture for scaling
their services efficiently so that they achieve their business as well as public
policy objectives. So, a clear regulatory framework for deployment of core
banking systems on cloud that is consistent with technological neutrality,
is the key.
Technology Risks: A Deeper Dive & Mitigation

As is with the existing challenges being faced by traditional brick and mortar banks
which have gone through the digital route like net banking, the prospective digital
banks face similar challenges in the internet paradigm in the form of a myriad of cyber
attacks that
Phishing and vishing leading to hijacking of accounts and takeovers
Malware, Spyware and other forms of cyber attacks coordinated by viruses,
botnets etc. With neobanks and digital-only banks being foresoon to be run
mostly on hand-held devices and desktop computers, there is an increased risk
posed by such cyber-attacks.
The aforementioned threats posed by technological risks primarily are pervasive in

both existing digital banking channels by scheduled commercial banks as well as
digital banks. It is imperative to lay out a strong technology foundation built on that
is cyber-proof along with building of capacities to deal with and mitigate such risks.
Given the fast-paced changing landscape of the regulatory templates, it will be

necessary for digital banks to use emerging technologies for seamless integration
with RegTech solutions of banks and regulators, along with Regulators themselves
developing emerging SupTech solutions to enable automated supervision. According
to the taxonomy adopted by the report of the Financial Security Board56:-
SupTech: The application of emerging technologies to help regulators automate their

supervisory requirements. This will “improve oversight, surveillance and analytical
capabilities, and generate real time indicators of risk to support forward looking,
judgement based, supervision and policymaking.”
RegTech: The application of emerging technologies to help financial institutions meet

their regulatory requirements.
Once neobanks and digital-only banks employ RegTech solutions, this could “improve
compliance outcomes, enhance risk management capabilities and generate new
insights into the business for improved decision-making.” According to a report by
Deloitte57, RegTech solutions provide five basis core services - Compliance, Identity
Management and Control, Risk Management, Regulatory Reporting and Transaction
Monitoring. The successful deployment of these technologies will help in facilitating
automated tech and data-driven two-sided flow of information and thereby enable
seamless compliance. Additionally, across all banks, whether traditional or digital:
56 https://www.fsb.org/wp-content/uploads/P091020.pdf
57 https://www2.deloitte.com/lu/en/pages/technology/articles/regtech-companies-compliance.html
There should be guidelines for the right standards of reporting to the authorities.
Common reporting standards can be developed for police authorities, regulators
etc. to enable easier investigation.
Automated generation of STR (Suspicion Transaction Report) can be made
a norm among all banks. Legal & departmental action against all such bank
managers and unit for negligence.
Digital banks should have an automated or emergency request team. This will cut
short the time in obtaining bank data. One of the biggest huddles with traditional
banking ecosystem is the non-availability of bank staff on some particular days
of the month. This is a huge challenge as it delays the investigation process.
Finally, appointment of CISOs (Chief Information Security officer) in digital banks.
The CISO will act as nodal officer for immediate response for any cyber-attack.
Business Continuity Planning: Since after the global financial crisis, regulators
including the Federal Reserve have required banks under their supervision to
submit “business continuity plans” (BCPs) (also known as “Living Wills”) in order
to game out “an exit strategy” for depositors and other creditors to the bank,
in the event of bank failure or winding down of business for other reasons. RBI
also has enacted such requirements in the regulations concerning P2P-NBFCs.58
As the Index reveals, almost every jurisdiction also requires DBs or banks generally
to submit these BCPs and keep them updated. On the same lines, Digital Business
banks / Digital Consumer banks will be required to submit BCPs to provide for
exit strategy for all potential creditors for all financial, operational and saliently,
technology risks. Regulatory oversight over BCPs is especially important in the
context of DBs given that they can leverage their APIs to have relationships to
numerous counter-parties that risks can originate from.
Other Regulatory Aspects / Ecosystem Enablers: Likewise, Digital Business
banks will be required to fully comply with any regulations touching upon bank
conduct that RBI may issue from time to time. This should also be the case for
Digital Consumer banks.
In terms of ecosystem enablers, financial literacy will be the key enabler (or
challenge, seen in a different lens) in the context of a regulatory framework for
digital bank licence. A National Centre for Financial Education (NCFE) survey
(2019) found that only 27 % of adult Indians are financially literate. The NCFE has
proposed a “5Cs” approach in its national strategy document released in 2020
to ensure a greater fraction of Indians are financially literate. The “5Cs” approach
is premised on:
Content
Capacity
Community
Communication
Collaboration
58 See https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11137

Financial service providers in general and any potential intermediaries relevant
to the digital bank licensing framework have a role to play along each of
these 5 channels for digital banks to achieve their public policy objectives. For
instance, they can leverage their app ecosystem, the aggregation of consumers
and technology to create contemporaneously relevant financial content that
they can dispense to the users through the applications. This dissemination
can also take innovative forms like quizzes, stories, GIFs and interest can be
sustained through introducing weekly leaderboards illustratively. They may also
partner government stakeholders to co-create mass media campaigns around
financial literacy; thus facilitating the “Collaboration” aspect of NCFE’s strategy.
Being focussed on leveraging technology, they can organically facilitate NCFE’s
recommendation for using technology to disseminate financial education
messages (“Communication”).
Other ways of communicating financial education/ financial literacy content/
messaging include the “Nukkad/ Natak” medium. The maximal use of local
languages for explanatory visuals can help in easier absorption of guided
journeys. Such employment of community-friendly and comprehensible media
of communication embedded within related life events like marriage, parenting,
will help enable financial literacy messages and engage various target audiences.
Technological neutrality: Consistent with the best practices that the Index
revealed, the Digital Business bank licence and the ambient regulation should
be technologically agnostic. It should neither express a preference for nor bar
a Digital Business bank from using/ not using any technology. This should also
be the case for Digital Consumer banks.
Products and services: Subject to asset and deposit limits and other restrictions
(including for eg, number of customers), a Digital Business bank may potentially
offer the following banking services in the restricted phase. Furthermore,
although the language used was clear, In response to one comment received,
it is clarified that these asset and deposit limits are at the entity-level, not at
the consumer level.
Loans to MSMEs / Credit cards (subject to appropriate prudential safeguards)
to MSMEs
Current Account services /business banking Services / time deposits from
retail consumers, MSME businesses, other corporate and unincorporated
entities
Factoring / Distribution (Channel Partner)
Others specified in Section 6 of the BR Act subject to exclusions issued by
RBI under the terms of the license
As will be apparent, the scope of liabilities is widened to include all categories
of persons consistent with input from stakeholders. But only time deposits may
be issued. This approach was thought to be prudent to propose in the sandbox
phase, given the structure of demand liabilities and the “run-risk” they engender.
Upon graduation from the regulatory sandbox and as a full-scale commercial
bank, the licensee may issue both types of deposits.
Furthermore, while tailoring of these restrictions is an operational decision that
is best taken at the time of entry into regulatory sandbox, experience with
Payments banks suggests that it may be prudent to not be too rigid in defining
these limits lest it create disincentives for micro and small businesses to utilize
these accounts for their business transactions. Illustratively, consider a limit
of ₹ 100,000/- for end of day balances in current accounts offered by these
banks. Such limits can restrict micro and small businesses from utilizing these
accounts during seasonal cash flow surges (eg, Diwali) or use these accounts as
designated accounts for loan disbursals. After the progression to fully licensed
stage, it can continue to offer these and other products and services at scale
and without restrictions.
The corresponding products/ services for the Digital Consumer bank in the
restricted phase may potentially include the following:
Term Loans / credit cards (subject to appropriate prudential safeguards)/
other innovative credit products to retail consumers (This expression is
worded broadly deliberately. It is expected that licensees will create
innovative products for retail consumers responding to felt needs of the
marketplace).
Time deposits from retail consumers, MSME businesses and other corporate
and unincorporated entities
Distribution of products and services
Others specified in section 6 of the BR Act subject to exclusions issued by the
RBI under the terms of the license
Progressive interpretation of branch mandates: Consistent with the best
practices that the Index revealed, the license may stipulate that the Digital
bank may have one place of business. Furthermore, consistent with the RBI’s
continuing progressive re-interpretation of branch mandates59 (issued pursuant
to the guidelines under Section 23 of the BR Act) to account for technology as
a factor in delivery channel, the license may lay down the objective of delivering
banking services to defined unbanked areas leaving the channels of delivery to
be determined based on the bank’s policies.
Value Added Services: Digital Business banks as a business construct are
uniquely placed to benefit from a unified offering of both banking and value-
added commercial services, because the idea of licensed Digital Business bank
has evolved from “front-end” Neo-banks that, as engagement layers of their
partner-banks, are already offering many of these services in India. APIs enable
them to integrate services like payroll, accounts receivables/ accounts payables
management, tax compliance and other S-A-A-S based services in the business
flows of their customers directly. These services offer both an engagement
avenue and revenue source for the proposed Digital Business Bank.
59 See first bi-monthly Monetary Policy Statement available at, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.

aspx?prid=36654 (para 28), See also Das, “Banking Landscape In the 21st Century” available at, https://www.bis.org/
review/r200302b.pdf (para 20)

Modern regulatory practice no longer eschews banks from offering complimentary
commercial services on the same balance sheet provided there is no prudential
risk flowing from the commercial operations to the banking end of the business.
(See Box below). In light of the fact that VAS offers a robust revenue model,
we recommend that the Digital business bank have the permission to engage in
non-financial business complementary to their core financial business, under this
license subject to there being no prudential risk in the same.
Finally, since policymakers will have the opportunity to monitor Digital Business
banks offering these complimentary commercial services through the regulatory
sandbox and beyond in our proposal, they will be equipped with more information
to consider extending the facility to incumbent traditional banks after they have
monitored the Digital Business banks over the full rating cycle.
Value Added Services on DB balance-sheet

Modern financial services and innovative regulatory approaches are increasingly
challenging traditional notions about separating banking from commerce. Modern
regulatory practice no longer eschews banks from offering complimentary commercial
services on the same balance sheet, provided there is no prudential risk flowing from
the commercial operations to the banking end of the business. One policy design
India could study in this regard is that of MAS. Under an amendment to Regulation
23G that is to enter into effect later this year, MAS has proposed that banks may
operate certain “Nonfinancial businesses” (NFBs) that are related or complimentary
to their core financial business. Pursuant to this reform, MAS has prescribed a list
of permissible NFBs that banks have “automatic permission” to operate.60 To further
support the banks in this regard, MAS has created an “approval” route that banks can
utilize to seek MAS’ approval to operate NFBs that are outside the “automatic route”.
More importantly, MAS has also created a clear list of non-permissible NFBs that are
clear no-go areas.61
This policy design can be applied beneficially in the context of creating a licensing
regime for Digital Business banks in India. Digital Business banks as a business construct
are uniquely placed to benefit from a unified offering of both banking and value-added
commercial services, because the idea of licensed Digital Business Banks has evolved
from “front-end” neo-banks that, as engagement layers of their partner-banks, are
already offering many of these services in India. APIs enable them to integrate services
like payroll, accounts receivables/ accounts payables management, tax compliance
and other S-A-A-S based services in the business flows of their customers directly.
Permitting Digital Business banks to continue to offer these and other value-added
services that are complementary to their core financial services will offer two-fold
advantage of enabling greater customer stickiness and increasing revenues for them. .
60 This is not an isolated shift. The Federal Deposit Insurance Corporation recently approved Square Inc’s “Industrial Loan
License”- a licensing structure that permits convergence of banking and commerce. See https://www.jdsupra.com/
legalnews/square-obtains-fdic-charter-to-operate-80734/
61 See a summary of the MAS reform measure here, https://e.linklaters.com/69/3466/downloads/210119-mas-stream-
lines-its-anti-commingling-framework-enough-to-level-the-playing-field-final.pdf.
Critically, from a regulatory stand-point, since these are fee-based services and do not
involve any incremental credit risk, there are no externalities flowing to the said Digital
Business bank from offering these services on the same balance sheet as the banking
business. In fact, deep integration with a business only enhances the transparency
between the business and the Digital Business bank.
The same principle should inform Digital Consumer bank proposed here. As with Digital
Business banks, Central Government in consultation with the RBI may lay down an
exhaustive list of “go” and “no-go” NFBs. Subject to exclusions, a Digital Consumer bank
may engage in NFBs that are unique to the niche retail consumer segment it may be
targeting.
C. Priority Sector Lending In the Context of Digital Banks

Several stakeholders sought clarity on how priority sector lending (“PSL”) obligations
would apply for Digital banks. Accordingly, this segment will offer recommendations
along this direction. Right at the outset, it is noted that these recommendations are
aimed at starting a public policy dialogue with financial sector stakeholders on how
best to manage the tension between legacy set of regulations i.e., PSL obligations and
regulatory innovation sought to be achieved through Digital bank licensing and regulatory
framework. As such, these recommendations are consultative in purport, not cast in stone.
As with differentiated minimum capital requirements earlier, application of PSL obligations

to innovative bank licensing regimes warrant nuance rather than a “checklist” approach
of extending PSL obligations mechanically. This is arguably all the more so when India’s
banking license policy pivoted to differentiated banking regimes in keeping with the
Nachiket Mor Committee recommendations. Keeping this in mind, the following may be
considered:
Digital Business Banks
The RBI master directions define “MSMEs” as one of the eligible categories
for PSL obligations. However, since Digital Business banks are proposed to be
established to enable credit penetration among under-served / unserved small
business niches by their very purpose, there is a justifiable case for keeping
the PSL mandate component of their book narrow (in terms of % of the total
book size). It is proposed that the RBI may determine the PSL obligations for
Digital Business bank licensees on a case by case basis at the time the licensee
is ready to begin full-scale banking operations. A case by case approach gives
all stakeholders the opportunity to be nuanced rather than prescribe heavily
bureaucratized PSL obligations. Additionally, being fully licensed banks under
the B R Act, these banks may participate in the market for PSL certificates
(recognized as a form of business banks may engage in under Section 6 (1)
(o) of the Act). Furthermore, as one of the stakeholders pointed out in the
consultation, investing in security receipts where priority sector assets are the
underlying is another way, these banks can meet their PSL targets.

Digital Consumer Banks
Under the extant RBI PSL master directions, loans to the following categories of
borrowers are eligible for “PSL treatment” under the “weaker sections” category.62
Loans to borrowers belonging to SC/ ST communities
Loans to individual women beneficiaries upto INR 100,000/- per borrower
Loans to individuals for education including vocational courses (upto INR
1 million)
Persons with disabilities
Loans to distressed persons other than farmers to refinance their non-
institutional debt
These categories, being in the nature of retail consumers are a natural target
group for Digital Consumer banks. In other words, Digital Consumer banks would
have the specialized capacity to under-write borrowers in these aforementioned
categories. So, it is recommended that upon being fully operational (ie after
“successfully” graduating from regulatory sandbox), Digital Consumer banks
may be considered to have complied with their PSL obligations if a defined % of
their asset book comprises of credit to these categories of borrowers.
Furthermore, since Digital Consumer banks are proposed to be established to
enable credit penetration among under-served retail consumer niches deliberately,
the PSL component of their book ought to be kept narrow. So, symmetrical to
Digital Business banks above, it is proposed that the RBI may determine the PSL
obligations for Digital Consumer bank licensees on a case by case basis at the
time the licensee is ready to begin full-scale banking operations. Additionally,
being fully licensed banks under the B R Act, these banks may participate in the
market for PSL certificates (recognized as a form of business banks may engage
in under Section 6 (1) (o) of the Act). Furthermore, as one of the stakeholders
pointed out in the consultation, investing in security receipts where priority sector
assets are the underlying is another way, these banks can meet their PSL targets.
Ancillary Issues re applicability of PSL to Digital Banks
Finally, it is observed that while the broader banking and financial marketplace
has moved to allocate credit based on market principles and RBI does not
prescribe interest rates on individual category of loans any more, the PSL
category continues to be governed by a set of legacy laws including administered
interest rates (by the Department of Regulation). This two-step / dual regulatory
architecture appears to be overdue for reform. While these recommendations
are specific to the scope of this Report, it may be feasible for policymakers and
RBI to consult the banking and finance industry about “upgrading” the legacy
PSL regulatory framework so we avoid the exercise of trying to retro-fit them to
new licensing regimes such as the ones recommended in this paper.
62 See Master Directions- RBI (PSL- Targets & Classification), 2020 available at https://rbidocs.rbi.org.in/rdocs/notifica-
tion/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF (p.15)
D. Legal Mechanics to Issue the License
While RBI’s authority to issue a license to a banking company under Section 22 of the
Banking Regulation Act (BR Act) is straightforward63, an additional step is necessary for
creating a licensing regime for Digital Business banks and Digital Consumer banks that
permits them to offer value-added-services (and generally, NFBs) that are complementary
to their core financial business, on the same balance sheet as the banking services.
The enumerated forms of business stipulated in Section 6 does not stipulate NFBs. So,
the Central Government will have to invoke its powers under the residuary clause, (o) of
Section 6 to notify, “NFBs that are complementary to core financial business of banks” as
an (additional) business that a Digital Business Bank may engage in.
Accordingly, the legal engineering for the respective license takes the following two steps:
A Digital business bank license / Digital Consumer bank license under Section
22 with the requisite enablers and business restrictions (minimum capital / asset
& deposit size caps et al) as described above. The license may also lay down
the path to “Full scale” Digital business bank / Digital Consumer bank license.
A central government notification under Section 6 (0) notifying “NFB that is
complementary to core financial business of Digital business banks”/ “Digital
Consumer Banks as an additional line of business they can engage in.
Following the MAS template, the Central Government in consultation with the
RBI, may create permissible list of NFBs for Digital business banks and Digital
Consumer banks respectively, and a list of non-permissible NFBs to ensure
prudential decorum.
63 Both Payments bank and Small Finance bank licenses were engineered pursuant to the authority under Section 22.

Conclusion
India’s public digital infrastructure, especially UPI has successfully demonstrated how to
challenge established incumbents. As pointed out in the opening section, UPI transactions
measured have surpassed ₹ 4 trillion in value. Aadhaar authentications have passed 55
trillion. Finally, India is at the cusp of operationalizing its own Open banking framework.
These indices demonstrate India has the technology stack to fully facilitate DBs. 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 as solving the
several public policy challenges she faces.
Conclusion 43
Annexure-I
Digital bank Licensing & Regulatory Regime Report: Accounting

for Comments (Consolidated)
S.No. Institution Comment received Action Taken

1 Vidhi Center of Suggestion to add a foonote Added in related footnote 3 of Report
Legal Policy about the Rajan Committee Version 2.
Report, 2008-where the
proposal for Small Finance Banks
originated.
2 Vidhi Center of Suggestion about a tangential Not added because it was not directly
Legal Policy detail in connection with RBI’s relevant to the broad strokes context-
recent move to let Payment Banks setting.
on-ramp to Small Finance Banks
3 Vidhi Center of Suggestion about highlighting Added in Section III (p.4)
Legal Policy the role MSMEs play in the Indian
economy
4 Vidhi Center of Suggestion about adding a The Report captures this lacuna in section III
Legal Policy segment dealing with how banks (p.8) and section V (p.16) respectively.
fail to appreciate the unique
business needs of MSMEs.
5 Vidhi Center of Suggestion about including a Referred the readers to Vidhi’s work in
Legal Policy snapshot of growing neo-bank related footnote 23 of the Report Version 2.
market in India, and globally,
pointing to Vidhi’s own work.
6 Vidhi Center of Suggestion about reaffirming the Added the BIS paper in footnote 22
Legal Policy point made in the text, using the adjacent to the text.
BIS paper in the footnote.
7 Vidhi Center of Suggestions about flagging risks We have accounted for and flagged off
Legal Policy emanating from existing “neo- the consumer protection risks emanating
banks” from the prevalent partnership model and
market structure in Section V.
We have NOT included Vidhi’s suggestions
in this regard to their full extent, in the
interests of economy and brevity of the
Report as also to focus on the narrow
objective here- that of creating a regulatory
template and roadmap for full-stack digital
bank.
8 Vidhi Center of Suggestion about specifying The Report already incorporated the
Legal Policy the relaxations if any that would recommended relaxations in Section VII,
be available for licensees in the Sub-section B at pp. 23, 24 (in terms of
regulatory sandbox minimum-paid up capital).
We further also highlighted that the extant
regulatory sandbox framework of the RBI
recognizes these types of relaxations as
being available.
9 Vidhi Center of Suggestion about providing for Added in section VII at p.23 of the Report.
Legal Policy the situations in which the Digital
bank licensee has to exit the
sandbox (eg, when it is unable to
meet regulatory expectations /
benchmarks).
10 Vidhi Center of Suggestion about dealing Added in section VII at p.22 of Version 2 of
Legal Policy explicitly with the timelines for the Report
the Digital bank licenses in the
sandbox (duration of a Digital
bank licensee in a sandbox)
11 Vidhi Center of Suggestion about recommending Added in section VII at p. 24 of the Report
Legal Policy an eligibility criteria for Digital Version 2
bank license
12 Vidhi Center of Suggestion about providing for The Report already provides for this on
Legal Policy RBI monitoring and supervision a composite read of Section VII at pp. 21
over Digital bank licensees in the and 25.
sandbox phase.
13 Vidhi Center of Suggestion to clarify if incumbent Added a clarification in section VII at p.29
Legal Policy traditional banks will also have of the Report Version 2.
the license to offer “NFB” on their
balance sheet
14 Vidhi Center of Suggestion to illustrate a list of The Report has referred the interested
Legal Policy permissible NFBs. reader to a note by LinkLaters discussing
the issue via footnote 33.
So, this suggestion was NOT included.
15 Vidhi Center of Suggestion to add a segment NOT added as being too obvious.
Legal Policy recommending RBI to publish the When the RBI issues license under S. 22 of
Digital bank guidelines. the Banking Regulation Act, it is trite that
the process thereunder will be followed.
16 Sabyasachi U Suggestion about use-case for The use-case about collective lending
“group-based” lending(similar to products/ schemes is already provided for
SHGs in villages) by MFI-NBFCs.
The digital bank licensing and regulatory
framework proposed here was primarily
aimed at bridging the INR 30 trillion (by
latest estimates) credit gap in the micro
and small segments of the MSME sector
primarily (with one-to-one lender-borrower
privity).
So, this suggestion was not included.
Annexure-I 45
17 RazorPay Suggestion about including a Added specific paragraphs dealing with

Technologies section dealing with why NBFCs why NBFCs also can’t solve for the
are also inadequate in fully addressable credit gap in the MSME sector,
addressing the addressable credit in Section III. on p.6 of the Report Version 2
gap in the MSME sector, in the
interests of 360 degrees view of
the supply ecosystem.
18 RazorPay Suggestion about including B-a- Added a separate box highlighting

Technologies a-S as a use-case that a Digital illustrative use-cases that a Digital bank
bank license enables license will enable, on p. 14 of the Report
Version 2.
19 RazorPay Suggestion about highlighting Added the importance of regulatory reform

Technologies that digital-native businesses that in the direction of Digital bank license to
urban centers have witnessed promoring and facilitating “digital-native”
in recent years, demand newer micro and small businesses that urban
banking products and solutions centers have witnessed in the recent years.
from their banking partners that The Report Version 2 has data pointing out
traditional banks may not be fully that existing vehicles- SFBs for instance,
be equipped to offer. are typically in the business of lending to
In the absence of reg.reform by traditional businesses in their core markets.
way of Digital bank license, this Thus, there is a public policy intervention
downstream entrepreneurship will needed here. See Sections III and V (p.16)
fade away.
20 SBI Raising caution about the Added a detailed ex-ante and ex-post
increased cyber-security risks technology risk mitigation framework in
from a full-stack Digital bank the Report Version 2.
license See section VII (pages 25, 26).
21 IAMAI Recommendation to include The recommendation is included in the

Digital Retail (Consumer) bank final version of the Report.
licensing framework as well in the Please see p. 51, 52 and following pages.
Report
22 IAMAI Recommendation to modify The recommendation is not accepted for

sequence for grant of DB licence the reason that it goes against the principle
to scaled neo-banks of promoting competition. As the section
on factors comprising the Index reveals,
competitive neutrality is one of the key
pillars informing the present proposal. Hard
coding a particular category of applicant
over others violates it.
23 IAMAI Min. cap should be in the range of The Report in its first version already
INR 50- 100 Cr recommends INR 100 Cr upon the licensee
graduating from a regulatory sandbox, to
being a full-scale bank.
Please see p.46
The lesser thresholds of min. cap. in the
regulatory sandbox “restricted” phase, are
fully supported by the data evidenced by
the Index created in the Report - majority
of the jurisdictions comprising the Index
have adopted lower thresholds in the
sandbox phase.
Please see p.40
Furthermore, note that the licence is
“restricted” and hence licensees will
operate with entity-level asset/ liability /
customers served limitations. As such, a
lower threshold of capital in the regulatory
sandbox is reasonable.
24 IAMAI Greater clarity on the Timelines This recommendation is not accepted in

and the metrics path from the final version because of the reasons
“restricted” to “full-scale” offered in the final version of the paper.
Please see p.45
25 NASSCOM Reg. Sandbox is not necessarily This suggestion does not stand legal
needed to “domicile” this scrutiny.
innovation The Reg. Sandbox framework notified by
the RBI offers the legal basis for the RBI to
prescribe proportionately lower minimum
capital requirements for the licensee(s)
during the “restricted” phase.
The RBI is itself bound by laws and
regulations already enacted. As such,
relaxations outside of the reg. sandbox
framework are legally untenable.
The recent example of NARCL where the
RBI declined approving the initial structure
proposed because the SARFAESI did not
recognize it, is a case in point. As such,
routing this innovation through a reg.
sandbox is important.
Absent relaxation on minimum capital and
other compliances allowable under the reg.
sandbox framework, the policy reform will
not achieve the intended goal of attracting
a deep and competitive pool of applicants
for the Digital bank licence
Annexure-I 47
26 NASSCOM Clearly distinguish between “full- This issue is not current anymore in the
stack Digital Business Bank and final version of the Report.
“full-stack Digital Universal bank” Taking into account feedback to consider
recommending a framework for retail
consumer, the final version of the Report
recommends two regimes respectively,
towards Digital Business bank and Digital
Consumer bank.
The rationale and data supporting the
reasons for a Digital Consumer Bank
licensing regime is offered in the final
version of the Report.
Please see pp.19, 20.
For the sequence for bringing in, and the
features of the Digital Consumer bank,
Please see pp. 51, 52 et al
Finally, the expression, “full-stack” that
can potentially be confusing is changed
to, “full-scale” to describe a Digital bank
that graduates from the reg. sandbox and
commences operations.
27 NASSCOM Prescribe the Min. Capital (As already pointed out above), the
thresholds clearly for all stages minimum capital recommendation in the
previous version of the Report is retained
in the final version for reasons elucidated.
Please see p.45
28 NASSCOM Minimum. the threshold for The lesser thresholds of min. cap. in the
participation in “restricted” phase regulatory sandbox “restricted” phase, are
should be raised. fully supported by the data evidenced by
the Index created in the Report - majority
of the jurisdictions comprising the Index
have adopted lower thresholds in the
sandbox phase.
Please see p.40
Furthermore, note that the licence is
“restricted” and hence licensees will
operate with entity-level asset/ liability /
customers served limitations. As such, a
lower threshold of capital in the regulatory
sandbox is reasonable.
29 NASSCOM Offer greater clarity on existing The Report highlights the limitations of
neo-banking arrangements existing neo-banks as context for making a
case for a Digital bank licensing framework
in India.
As such, existing neo-bank partnerships
may continue at present as also later when
India enacts a Digital Bank framework,
subject to RBI outsourcing guidelines and
related regulations.
Commercially, a license is merely one way
for organizing and operating a business.
For any eligible applicants, their respective
boards will take the commercial decision
on whether to partner with incumbent
banks and operate a B2B2C business, or
go for the licence and create their own
balance sheet.
30 NASSCOM Priority sector Guidelines will Taking into account this (and other)
require a fresh look feedback, this recommendation is included
in the final version of the Report.
Please see p.56 and following pages.
31 NASSCOM Engage more directly with Taking this feedback into account, and
challenges of consumer protection since the issues of consumer protection are
(that Digital Banks throw up) wide and encompass banking and finance
in general, it is proposed to create another
research project on “Digital Literacy” and
related issues and zoom in narrowly on
how public policy may be reformed to
mitigate the risks.
32 Revolut Players meeting a defined (For the reasons stated above), this
stringent qualifying criteria should recommendation was not accepted.
be directly granted a “full-scale” To reiterate: The recommendation goes
Digital Bank licence while others against the principle of promoting
should take the reg. sandbox competitive neutrality.
route to get the regulator’s
As the section on factors comprising the
confidence
Index reveals, competitive neutrality is one
of the key pillars informing the present
proposal. Hard coding a particular category
of applicant over others violates it.
Furthermore, it may be noted that if a given
category of applicant is already experienced
and has a track record of operating as a
regulated entity, the regulatory sandbox
framework timelines recommended in the
Report are malleable and could be tailored
to a particular licensee.
Please see p. 45
Annexure-I 49
33 Revolut Digital Banks should be able to This recommendation is reflected in the

offer all types of products to all final version of the Report in terms of
types of users the liability products a Digital Business
Consumer bank may offer.
Accordingly both types of Digital Banks may
issue deposits to a wide set of customers.
This is aimed to enable the licensees to
moderate the weighted average cost of
deposits.
Please see pp. 51-53
Given India has since 2014, pivoted towards
a differentiated banking licence regime,
end-users of credit products (asset-
side products for banks) for both Digital
Business bank / Digital Consumer Bank
are however tailored on the basis of target
group identified.
34 Revolut Access to Open banking/ power The recommendation regarding power to

to issue credit cards issue credit cards is accepted and included
in the final version of the Report
Please see p.51, 53
The previous version of the Report has
already recommended access to AA
framework- India’s version of Open Banking
during the sandbox phase.
Please see p.48
Moreover, Under the regulation as it
stands, Digital Banks, when they are duly
licensed and operational, will qualify under
“Financial Information User” category and
as such would be eligible to participate in
AA ecosystem.
35 ORF Ownership structures of Fintechs As pointed out in the Report, Digital Banks
are diversified and some of them will be “bank” as understood in the BR Act,
may not be controlled by Indian 1949.
residents, as required by RBI As such, the extant FDI policy applicable to
the banking sector would be applicable to
Digital Banks, as they would be applicable
to all banks.
In light of this, applicants that are fintechs
and desirous of seeking a Digital Bank
licence will have to re-engineer their cap
table (capital structure) to comply with the
sectoral ownership rules prescribed by the
RBI.
This is also consistent with the regulatory
parity principle embraced by the Report.
36 ORF The Report should consider how This recommendation is accepted and
priority sector guidelines can implemented in the final version of the
be incorporated in regulatory Report.
framework for Digital Banks Please see p. 56
37 ORF A potential template for Digital This recommendation is accepted and
Retail Bank licensing may also be implemented in the final version of the
created Report.
Please see p. 51, 52 and following pages.
38 ORF Minimum criteria on applicant The Report, both in the first and final
pool- the need to ensure these do version, is committed to mitigate all
not operate as a entry barrier potential entry barriers and promote
competition by widening the applicant
pool consistent with the need to ensure
only serious entities having expertise in
relevant areas and understanding of risks
in the digital domain.
The minimum criteria recommended
balances this tension, and is supported by
the data revealed by the Global regulatory
Index created under the Report.
39 PayU Expand the scope of the deposits This recommendation is adopted in the
to TGs other than MSMEs, for final version of the Report.
Digital Banks Accordingly both types of Digital Banks -
Business and Consumer- may issue
deposits to a wide set of customers. This is
aimed to enable the licensees to moderate
the weighted average cost of deposits.
Please see pp. 51-53
40 PayU Entities that already have lending This recommendation is not accepted for
experience (NBFC, PPI licence) the following reasons:
should be directly issued a full- The recommendation is inconsistent with
scale licence the principle of promoting competitive
neutrality.
As the section on factors comprising the
Index reveals, competitive neutrality is one
of the key pillars informing the present
proposal. Hard coding preference for a
particular category of applicant over others
is inconsistent with the principle.
Furthermore, it may be noted that if a given
category of applicant is already experienced
and has a track record of operating as a
regulated entity, the regulatory sandbox
framework timelines recommended in the
Report are malleable and could be tailored
to a particular licensee.
Please see p. 45
While NBFCs do have experience with
operating the credit book, most NBFCs
in India are non-deposi-taking and do not
have a track record of issuing and growing
a CASA franchise. (PPIs are even more
irrelevant to the argument as they have
neither and are merely PSPs).
Annexure-I 51
41 PayU Clarify the PSL requirements This recommendation is accepted and

implemented in the final version of the
Report.
Please see p. 56
42 CRED A regulatory and licensing The recommendation is included in the

template for Digital Retail bank final version of the Report.
may be added Please see p. 51, 52 and following pages.
43 CRED A specific section dealing how This recommendation is accepted and

Digital Banks will engage with implemented in the final version of the
PSL obligations will be ideal to be Report.
included. Please see p. 56
44 PwC The Report should include The final version of the The final version
nuanced licences (such as of the Report has incorporated a parallel
Digital Retail Bank) and that an reg. and licensing framework for Digital
identically phase-wise approach Consumer banks.
should be followed for Digital Please see p.42, pp 51, 53 et al
Retail bank.
45 PwC The applicant pool should include The final version of the Report clarifies
Fintechs as well as other players by way of abundant caution that the
specified categories of potential applicants
mentioned are illustrative, not exhaustive
and that Fintechs are included.
Please see p. 47
46 PwC Additional VAS The categories of VAS mentioned are

illustrative.
As the Report recommends, Central Govt
in consultation with RBI may notify a
exhaustive list of NFBs that the Digital
banks may engage in (along with a
exclusion list)
Please see p.61
47 PwC ESG / Audit The subject of ESG’s application to the

banking sector is subject matter of global
debate as of today and matters are in a
flux. Moreover, it is a banking sector-wide
issue and not specific to Digital banks.
As such, the final version of the Report
does not include this recommendation.
Finally, as the Report highlights at the
outset, Digital banks are banks, as
understood under the BR Act. As such,
the existing auditing and compliance
requirements applicable to commercial
banks would apply to these banks when
they are operational.
Given that the proposal is only in
ideation phase, Any specific auditing and
compliance requirements specific to Digital
banks should at least await greater traction
to the framework proposed in the Report.
48 Uttarakhand Several cybersecurity – specific Incorporated the relevant ones to the

Police recommendations and inputs Report in a separate box.
(through Please see pp, 55-56 of the final version of
authorized the Report.
representative)
49 Niti Aayog Financial literacy enablers/ Incorporated the recommendations and

challenges way forward in a seprate section.
Please see 57, 58 of the final version of the
Report.
50 CIPP Submissions regarding specialized Incorporated the points highlighted in a

banking license in context of box.
Custodians Please see p.30 of the final version of the
Report.
51 Deloitte Several submissions touching The RBI has recognized and implemented
upon the scope of the Digital a differentiated bank licensing policy
Bank license and operational since adoption of the Mor Committee
requirements. recommendations in 2014. The
Salient suggestions: differentiation proposed in the Report is
consistent with that differentiated banking
-Introduce a consolidated
policy.
Digital Bank license (rather than
differentiated licenses for MSMEs Furthermore, taking feedback received
and retail separately. during consultation phase, The final draft
of the Report recommends that the RBI
-Digital Banks should also be
issue the relevant licenses and test the
subject to the deposit insurance
performance of qualified licensees in the
requirement and limits
sandbox, across both small business and
consumer categories.
Regarding deposit insurance, the Report
already incorporats that requirement by
explicitly stating that licensees under this
proposed framework are “Banks” as we
understand them in B R Act. It bolsters
that by explicitly stating regulatory parity
between incumbents and Digital banks
as a necessary principle of the proposed
framework.
52 Dvara Expressed scepticism Digital Promoting competition in the banking

Research Banks will move the needle for sector is one of the express motivations for
financial inclusion. this Proposal.
However, submission was positive Please see p.25, and p.37, 38 of the
about the potential of Digital Discussion paper (where this rationale is
Banks for promoting competition. explicitly charted out).
It recognized that incumbents
have not leveraged technology to
offer customized products to their
consumers.
In Conclusion, Dvara sees merit in
licensing Digital Banks to promote
competition in the banking sector.
Annexure-I 53
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DIGITAL BANKS

A Proposal for Licensing & Regulatory

India has emerged as a global leader when it comes to fintech

This Report offers a template and roadmap for a Digital bank

While the Digital India revolution catalysed by PMJDY, e-KYC

IV. Digital Banks: A New Kid In Town 14

V. Challenges With the Existing “Partnership-Based” Neo-Bank Model 20

VI. A Digital Bank Global Regulatory Index 24

VII. Digital Bank Regulatory Framework for India: A Template 29

The Nachiket Mor Committee Report (“Committee”), released in 2014 marks an

6 See MSME Annual Report, 2020-21 available at MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf p. 23

Figure I: Supply Side constraints in traditional brick and mortar banking

11 See Estimation of Debt, supra footnote 8 p.62

Lack of corporate buyer incentive:

15 See https://www.bajajfinserv.in/fy21-bajaj-finance-q3-investor-presentation.pdf available at, p.6

Shallow pools of financing capital:

To summarize, there is an opportunity for public policy intervention in terms of banking

Digital Banks In Pandemic: Evidence from China

Several marketing expressions like “challenger banks”, “neo-banks” in addition to “digital

24 Proximate channels will cover technologies like NFC for e.g.

Digital Banks: The Promise They Hold for India

26 See RBI Circular on DBUs available at, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12285&Mode=0 (Clause 3.1)

Digital Banks: A New Kid In Town 15

The Secret Sauce to Profitability: Starling bank Case Study32

Illustrative Use-Cases Enabled by Digital Banks

B-a-a-S essentially will involve a DB white-labelling its banking technology stack to

Digital Banks: A New Kid In Town 17

For background, in India at present, custodial services are regulated by SEBI.

This is another illustration of why regulatory innovation through the fashioning of

A thematic sketch of the extant neo-banking model looks as follows.39

39 See https://www.outlookindia.com/outlookmoney/fintech/rise-of-neobanks-in-india-6862 (for the origin of thematic

Challenge #2: Potential Obsolescence of the Partner Bank Core

Challenge #3: High Cost of Capital & No Entry Barrier

40 See, Rising Challenges for Indian Neo-Banks at https://bfsi.economictimes.indiatimes.com/news/fintech/rising-chal-

Challenges With the Existing “Partnership-Based” Neo-Bank Model 21

A. Description of the Index

A Digital Bank Global Regulatory Index 25

Index Variable Looking Under the Hood

Are minimum capital

Is the track record eligibility

(If there are others), Are the

Do Digital banks have equal

Do Digital banks have equal

Equal access to revenue

Are there any restrictions on

Are there any restrictions

A Digital Bank Global Regulatory Index 27

Digital Bank Regulatory Framework for India: A Template 29

Step 3: Contingent on satisfactory performance of the Licensee in the sandbox,

Digital Bank Regulatory Framework for India: A Template 31

Digital Bank Regulatory Framework for India: A Template 33

Technology Risks: A Deeper Dive & Mitigation

The aforementioned threats posed by technological risks primarily are pervasive in

Given the fast-paced changing landscape of the regulatory templates, it will be

SupTech: The application of emerging technologies to help regulators automate their

RegTech: The application of emerging technologies to help financial institutions meet

Digital Bank Regulatory Framework for India: A Template 35

59 See first bi-monthly Monetary Policy Statement available at, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.

Digital Bank Regulatory Framework for India: A Template 37