Digital delivery

New-age banks will increase inclusion

The Union finance minister’s declaration at the Atlantic Council think tank that the government is planning to set up as many as 75 digital-only banks or non-banking financial companies (NBFCs) gives rise to some intriguing questions. It is not very clear why the government feels the need to expand the ecosystem in this way. The sector regulator, the Reserve Bank of India (RBI), has issued several reports and advisories on the subject. The RBI defined what it called “Digital Banking Units” (DBU) in a recent report, and in November, it released an update on the state of digital lending. A DBU is defined as a business unit, or hub, with the infrastructure for delivering digital banking products and services. At a DBU, everything from customer acquisition, to product delivery, to service provision will be done facelessly and in a paperless manner through digital interfaces.
 

The RBI has suggested scheduled commercial banks can open such DBUs without seeking specific permission. While it has specifically excluded regional rural banks, payments banks, and local area banks from opening DBUs, it is silent on the subject of NBFCs, which can presumably open such outlets in the absence of prohibition. Indeed, many leading NBFCs are seeking to completely, or substantially, digitise processes. The RBI data indicates that “faceless” digital lending has grown exponentially, contributing well over half of all NBFC loans (and around 6 per cent of bank loans). Thus, this is already a competitive space and it is bound to grow in the normal course. Given the sector regulator’s liberal stance, there will be a natural expansion of DBUs. All scheduled commercial banks and NBFCs will enter the DBU space because they must, to remain competitive. Given the convenience of going digital, more retail customers will also shop online for the best terms available across an array of financial products.
 

It was not very clear if the minister was referring to 75 units — if so, this is an underestimate since 35-odd commercial banks and well over a hundred NBFCs are already looking at this space. If instead, she was indicating a desire to establish 75 new digital entities, this appears unnecessary — as the RBI reports indicate, the DBU space is already crowded and likely to become more so. From the customer’s perspective, DBUs reduce the locational hassles of accessing financial services, as well as in increasing the convenience of product comparison. It should no longer matter where the customer and the service provider are physically located, since the entire process is online at a DBU. Customers can easily compare the terms and conditions offered — indeed, they may run into what behavioural scientists like Sheena Iyengar call “choice overload”, given the high levels of competition.
 

The regulator has already taken cognisance of the digital space and issued clear instructions, though more tweaks and fine-tuning may prove necessary. The RBI will, of course, have to oversee DBUs to enforce acceptable levels of interoperability, compatible standards, data protection, and cyber-security. The government’s responsibility should be to ensure the minimisation of red tape in establishing and running DBUs, and even more to ensure the telecom infrastructure is up to the task of handling higher data flows, especially in rural and remote areas. DBUs could transform access to financial services in remote areas where the physical delivery of such services is difficult.