NEW DELHI :
Neo banks or the digital-only banking mannequin has the potential to fulfill the financing wants of small companies in a single built-in platform and might increase digitization in addition to formalization of their operations, in line with a brand new report from Vidhi Centre for Authorized Coverage.
Despite the fact that micro, small and medium enterprises (MSMEs) are thought-about key drivers of job creation, using about 111 million folks, entry to formal credit score has been of their greatest problem. Digital banks can cater to the underserved market segments MSMEs, start-ups as entry to credit score from conventional banks have been restricted, as a result of casual nature of enterprise, low turnover and incapacity to offer collateral.
In India, the digital-only banking mannequin features as a partnership between a licensed financial institution and fintech firms, because the regulatory structure in India doesn’t enable digital banks. The non-banks present the tech platform by which banking and worth added companies together with opening and working financial savings or present account with a licensed financial institution, making use of for loans, bill technology, accounting, Items and Providers Tax (GST) compliance, amongst others are accessed.
Such platforms sometimes goal millennials, start-ups in addition to MSMEs. Based on the report, the neo banking sector in India is at a nascent stage and at present, there are 17 neo banking platforms akin to Niyo, RazorpayX, Instantpay, Jupiter, Nupay, amongst others.
Nonetheless, in nations akin to South Korea, China, UK, digital-only banks are licensed by the regulator to offer all banking companies.
“One widespread buyer phase that appears to have gained recognition with such digital-only banking fashions (each in India and globally) banks is the MSME phase. Via their know-how centered operations, these banks are in a position to provide a variety of companies to fulfill the various banking and enterprise wants of such companies,” the report mentioned.
“Whereas India nonetheless experiments with the bank-fintech partnership as one of many types of digital-only banking, licensed digital banks that enable end-to-end banking operations to happen digitally have emerged in sure jurisdictions. Going ahead, the digital-only banking mannequin could play an necessary function in offering essential banking companies and contributing to the expansion of a strong and aggressive banking sector,” it mentioned.
It additionally mentioned there’s a have to leverage the worth proposition of the neo banking market in India that has been increasing at a gentle tempo. As an illustration, instant client safety shortfalls have to addressed, whereas guaranteeing that bank-fintech partnership operates inside the regulatory perimeter. As an illustration, using phrases akin to ‘financial institution’ or ‘banking’ within the title or description of companies can mislead customers.
As part of the long-term suggestions, it mentioned there’s a want for separate licensing framework for neo or digital-only banks to spur innovation and competitors on this house. The licensing framework can embrace prudential necessities much like present industrial banks.
“Given the expertise with cost banks, the core design for digital banks ought to account for the enterprise viability of entities as a way to meaningfully meet the very motivation for its introduction. A phased smart licensing course of could also be thought-about,” it mentioned.