Discussion paper by NITI Aayog provides roadmap for these Digital Banks along with norms for licensing and regulatory mechanism.
NITI Aayog on Wednesday released a discussion paper titled ‘Digital Banks’ to recommend establishing a new financial entity named ‘Digital Bank’. A Digital bank will provide a fast, reliable, and friendly source of finance to MSMEs in India who are deprived of the formal source of finances.
The discussion paper also provides a framework for regulatory regimes and licensing. The paper says Infrastructural enablers for Digital banks like National ID, Data protection architecture, and Account aggregators, a Unified payment interface is also available.
According to the discussion paper, Digital banks will provide banking services like deposits, loans, and other myriad functions permitted under Banking Regulation Act, 1949. Digital banks will function using the internet and other related mediums to provide various services and will not have any physical branch as such.
Deposit and lending activities will become simple with the arrival of Digital banks. Madan Sabnavis, Chief Economist at Care Ratings said, “Digital banks will expand the reach of the banking sector, it will attract tech-savvy people on deposit side and for lending, they will compete with conventional financial institutions” Digital banks will be subjected to prudential and regulatory requirements laid down by Reserve Bank of India.
Micro, Small, and Medium Enterprises (MSME) in India suffer from various issues. Non-availability of credit and working capital, absence of formalization (impedes aid from the government), delayed payments by customers (affects liquidity), many times MSMEs fail to repay the loan taken.
Availability of credit influences the overall performance of MSME. From procurement of raw material, wages, marketing, transport, etc functions depend on credit convenience. Currently, MSME’s sector depends on Conventional Banks, NBFC, and other Informal sources of financing.
According to IFC, the total addressable credit gap in MSMEs in India is around Rs. 25 Trillion. Growing demand for credit, increasing interest rate, surging Non-performing assets (NPA’s) at banks make it difficult for MSME to avail funds from them.
Brick and Mortar (Conventional) banks fulfill only 15% credit need of MSME in India. Micro and Small businesses mostly rely on the informal source of financing which makes them vulnerable to higher interest rates and inhumane recoveries. Digital banks are also proved to be cost-efficient. Per account operation cost for a digital bank is around Rs. 35, whereas for conventional banks it is 15 to 20 times higher.
Government in recent years, especially after covid have taken slew measures to infuse liquidity in MSME. Micro Unit Development and Refinance Authority (MUDRA) provides refinance facilities to financial institutions which provides credit to MSME.
During covid, the Government introduced Emergency Credit Line Guarantee Scheme, where the government provides 100% guarantee coverage to banks to provide collateral-free loans up to Rs. 3 Lakh crore enabling them to provide credit to businesses affected by the Covid pandemic.
RBI and Government increased Priority sector lending (w.r.t. MSME’s) targets for banks. The government through its Government E-Marketplace (GeM) portal prioritizes MSMEs while procurement of goods and services offered by them. Composition scheme (company having turnover up to 1.5 cr can choose to pay GST at fixed of turnover) will infuse a decent amount of liquidity.
Removing impediments for MSMEs holds immense significance. There are 6 crores MSMEs functional in India. The sector provides approximately 11 crore jobs (mostly in rural India), which is important for inclusive growth.
MSME sector as a whole contributes to 30% of Gross domestic product and 50% of exports. For better functioning of MSME’s reliable and formal source of finances is requisite. The idea of a Digital bank is important given the increased use of digital technologies.
