Adoption of digital strategy to boost the Indian banking industry and economy

India has stolen a march on the rest of the world in digital payments. For Indian banking, the next logical step entails setting up of digital banking units, in line with the government’s objective of financial inclusion and a fundamental transformation of the nation’s economy, with digitalization as an enabler.

RBI’s guidelines, issued following an announcement made during this year’s annual budget for establishing 75 Digital Banking Units (DBUs) across 75 districts, offer a roadmap for its regulatory framework in India. It will also facilitate comprehensive development of digital banking. Conceptualized principally as specialised business units, DBUs need to deliver a certain number of digital banking services and products, as an absolute minimum. All scheduled commercial banks (excluding Regional Rural Banks, Payments Banks and Local Area Banks) can set up DBUs in tier 1 (large centres, such as Metros) to tier 6 centres (population of less than 5000). Digital Banking Units need to offer products and services on both sides of the balance sheet – liabilities and assets, with emphasis on retail products keeping in mind the requirements of the common man.

Loans, current and savings account services, mobile and internet banking, debit cards and credit cards, fixed and recurring deposits, besides a host of other services envisaged as self-service or assisted self-service will be rolled out by DBUs. Digital Banking Units are, however, prohibited from offering products and services that scheduled commercial banks are not permitted to offer. These banks are expected to leverage their high-quality interactive capabilities to move to ‘custom made and structured products’.

According to the RBI guidelines, setting up DBUs would be an integral part of the digital banking strategy of banks. The Chief Operating Officer (COO) of a DBU may be picked up from among senior bank executives (scale 3 and above). A DBU shall be deemed open at centres responsible for sourcing substantial business for the bank, actual physical location of the bank notwithstanding. All customers, including new age digital customers will be on-boarded in a fully-digital environment; moreover, banks shall foster customer education and awareness on various digital banking services, products and practices. All such Digital Banking Units will be treated as units separate from the present ‘Banking Outlets’.

DBUs will house interactive teller machines, video KYC, video conferencing and call facilities. So long as these digital banks abide by the pertinent RBI guidelines on outsourcing, DBUs will have the freedom to employ in-sourced or out-sourced models. Guided by their digital strategy, banks can also use core-independent digital-native technologies that offer greater flexibility and better scalability.

Jan Dhan-Aadhaar-Mobile (JAM) trinity, an initiative of the government of India for linking Jan Dhan accounts, Aadhaar cards and mobile numbers, has helped banks tide over the limitations of brick-and-mortar banking, widening and accelerating the reach of digital banking services. Special thrust on digital banking is likely to speed up internal and external processes of banks and boost process automation.

Digital banking in India has emerged as the preferred banking channel. However, challenges facing expansion of banks’ digital footprint in India are formidable. India, with an unbanked population in the order of 190 million adults, has a staggering number of people without access to credit. Technological and financial constraints of a daily wage earner receiving his remunerations in cash do not exactly square with the proclivities of a regular digital banking consumer. A well thought out strategy may have to devised to overcome this challenge. Validating data and documents (such as bank passbooks) of people on the margins of the society have always been a big challenge for lending institutions operating in small towns and rural areas. Moreover, scaling up banking services across diverse geographies will likely involve considerable security risks, with a multitude of new attack vectors — besides phishing and other scams of old standing — thrown in for good measure.

Although India is ahead of the pack, digital banks in advanced economies, such as Singapore, the UK and the US started operations much earlier — around 2014. In developed nations, digital banks have ushered in considerable efficiencies, reduced costs and significantly transformed many areas of old-world banking. In like manner, India needs to push the envelope; it is one of the largest markets for digital consumers and mobile telephony in the country is amongst the most inexpensive in the world.

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