Authored by Kritika Krishnamurthy, Partner
An indication of how large a portion of the population has the ability and infrastructure to conduct banking transactions is attributed to the rapid expansion of digital access across the country. The Digital Payments Index ("DPI") released by the Reserve Bank of India ("RBI"), aims to capture the extent of adoption of digital modes of payments and has seen growth of over 46% since the beginning of the pandemic in March 2020. The index takes March 2018 as the base and a denomination of 100 is assigned for that period. From March 2018, to September 2021, DPI increased to 304, which indicates how a large part of Indian population can now undertake banking transactions as effortlessly as the simple task of ordering food and thus associates banking services with operating an application over their smartphones or via the browser. However, the same is not true for a majority of the population that still has to wait in long queues in their banks for basic banking facilities. This is attributable either to the absence of basic financial and technological infrastructure in the country or fear of financial frauds and thefts that make them wary of accessing new banking products and conducting sensitive financial transactions over the internet.
The Government has been constantly trying to ensure that the benefits of digital banking reach every nook and corner of the country, which is reflected in the Budget speech of 2022-23 where Smt. Nirmala Sitharaman, Union Finance Minister of India proposed setting up 75 digital banking units ("DBU") in 75 districts across the country. Subsequent to this event, RBI issued ‘Guidelines for Establishment of Digital Banking Units’ (“Guidelines”) on April 07, 2022 which is applicable to all domestic scheduled commercial banks (“SCB”). Digital banking refers to the digitization of all the traditional banking activities that have historically been only available to customers via physical bank branch mode and includes activities like deposits, transfers, applications for financial products, loan management, account services, etc.
The Guidelines allow SCBs to open and operate DBUs in Tier 1 to Tier 6 cities and shall be treated as banking outlets for the purposes of regulatory compliances. The DBUs shall have to provide certain minimum digital banking products on both the asset and liabilities side of the balance sheet, as prescribed in the Guidelines. Additionally, these units have been conferred the liberty to provide any services digitally that are not barred under the Banking Regulation Act, 1949, and in order to provide these services, they may also be able to deploy third-party service providers, subject to compliance with applicable regulatory statutes and guidelines. Further, in order to bring some skin in the game for the SCBs taking up the option of creating DBUs, a senior and experienced executive of a bank preferably Scale III or above for PSBs or equivalent grades for other banks shall be responsible for heading the DBU as the Chief Operating Officer.
In a move to further promote penetration of digital banking and digital payments, the Union Finance Minister in the Budget speech has also proposed 100% of the 1.5 lakh post offices across the country be brought under the core banking system. The population in Tier II and Tier III cities has been most active in adoption of digital infrastructure for banking services. However, the steps being taken by the Government, make it evident that it is actively pushing towards maximum digitization of the economy and financial services institutions by efficiently using the outreach of age-old framework of post-offices that shall allow post-offices to share the burden of banks usually responsible for creating last-mile connectivity in the remote and rural areas.
The DBUs are envisioned to serve three broad purposes that are customer acquisition, providing digital banking services as well as dissemination of knowledge regarding digital banking and highlighting safety concerns. Further, the DBUs shall allow state-owned SCBs to compete and showcase their digital prowess amid the growing notion that private SCBs are better in respect of offering digital banking and allied services in the country. The urban population has been the first to adopt digital banking and digital payments but there is a need for further penetration in the country. This initiative of setting up fully automated digital banking units offering a garb of services under one roof, shall aid the larger motive of financial inclusion and shows that India is on the path to realize the operational potential of integrating banking services with technology in order to compete with developed nations offering banking as a service more effectively.