New Delhi:- “At 2030, almost two billion people will be using day-to-day banking services, independent of banks”-Brett King, author of the book “Breaking Banks.”
Full Stacked Digital Banking (DB) is the need of the hour. It moves the last mile credit aspirant nearer to banking systems. It is a cost-effective shift from traditional banking activities to a virtual one where consumers access banking services online through hand-held gadgets. Digital Bank drives the financial industry towards innovativeness and agility, making processes faster. The quicker the money rolls digitally, the higher is the GDP.
A Full-Stack Digital Bank (DB) is an entity that operates as a fully functional bank regulated by the banking regulator. It accepts deposits and makes loans on its balance sheet.
India is a teeming confluence of diversities where disparate views co-exist, cementing varied ethos and cultures. With the largest pool of youngsters, the country skillfully ornates the exuberance of youth with the experience of elders blending wisdom with knowledge. The contradictions and similarities are harnessed deftly for the way forward. India’s Banking reflects a new middle approach, with phygital and digital products catered simultaneously from a standard pedestal. With the ever-increasing need for credit, this model is yielding negative returns and is now due for switchover from Phygital to Digital.
Aspirational India finds the model as a stumbling block to actualizing the true potential of banking. Few cosmetic ostentations delivered in the shape of Internet Banking and glamourous Payment models are inadequate to accomplish a $ 5.0 trillion economy. Need-based credit delivery dispensed digitally with tenacious ease makes baking contemporary to redeem its carving a prosperous India.
Still cutting teeth in Digital Banking, Banks must deliver an easy-to-navigate, seamless digital platform that delights the customer meeting its credit needs. Few surreptitious Chinese lending sites smelt this urge and cheated millions with rosy promises of quick loans by vanishing overnight. Indian banks should use Digital tools to deliver credit to the MSME and Agriculture sector, similar to how they render the NEFT and RTGS services. Banks must provide tangible digital services to create wealth to transform into Digital Banks from Phygital Banks truly.CEO Niti Aayog stated that the powerful JAM trinity of Jan Dhan Bank Accounts, the biometric Aadhar Card, & mobile phones, made financial inclusion a reality for the citizens of India.
The Unified Payments Interface (UPI) has recorded 4.2 billion transactions worth over ₹ 7.7 trillion in October 2021, enabling payments with mobile phone clicks at retail outlets, redefining how money travels between seller and buyer. Financial inclusion has resulted in Direct Benefit Transfer through financial apps to usher prosperity.
Somehow, India’s success on the retail payments and credit front has failed to replicate when it comes to the credit needs of its small businesses. A significant credit gap persists among various segments, essentially the MSMEs. The current credit gap reveals a need for leveraging technology to serve the needs of this segment. “By partnering with fintech startups, banks will give their account holders the right measure of security and speed. Account holders can know that their money is safe, and they can enjoy the latest financial technology.This is the way to become a digital bank.” says Chris Skinner, author of the book, Digital Bank. Installation of a new type of regulated entity – a full-stack digital bank, in India is therefore imperative now.
The Differentiated Banks policy recommended by the Nachiket Mor Committee in 2014 promoted benefits of narrow specialization along a given dimension rather than having every bank do everything and pursue every opportunity on both sides of its balance sheet. RBI permitted the establishment of Payments Banks (PBs) and Small Finance Banks (SFBs) based on this vision to digitally help MSME and the Agricultural segment and established Payment Banks and Small Finance Banks. There are 6 Payment Banks, Airtel Payment Bank, India Post Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank, and Jio Payment Bank.
RBI added 12 Small Finance banks for focussed lending to the priority sector. These are AU Small Finance Bank, Capital Small Finance Bank, Equitas Small Finance Bank, ESAF Small Finance Bank, Fincare Small Finance Bank, Jana Small Finance Bank, Suryoday Small Finance Bank, Ujjivan Small Finance Bank, Utkarsh Small Finance Bank & North East Small Finance Bank. The country still has large segments that have not befitted from this digital revolution. Traditional brick and mortar banks face business constraints in evaluating credit risks of small ticket sizes. Says, Arvind Sankaran of Crayon Data, “We’re witnessing the creative destruction of financial services, rearranging itself around the consumer. Who does this in the most relevant, exciting way using data and digital, wins!. Opening Small Finance Banks and Payment Banks is a step in the right customer centric direction.
Six reasons why Digital must replace Phygital are :
1. Reaching the Last Mile Borrower :
As per MSME Annual Report, 2020-21, despite the focus on financial inclusion, the small business financing has not reached the deserving beneficiaries, as domestic banks do not have the human resources to assess small tickets loans. Digital Banks will be available on mobile phones in the deepest villages with speed, superior user experience relative to traditional banks, and a low-cost, transparent cost structure with quick response time. The credit gap in the MSME segment is at ₹ 25.8 trillion and growing at a CAGR of 37%. Digital banks can fill this gap.
2. Reduction in Cost of Financing:
Digital banks have high cost-efficiency. They incur a per-account operation cost of Rs.2/- compared to traditional banks, which may come up to 10-20 times higher. The low income to cost ratio of Digital Banks with no physical premises and few employees will incur low overheads to drastically bring down the cost of transactions for micro and small businesses. Digital banks’ business model cuts down cost-to-serve, enabling them to enhance coverage than commercial banks. The digital auto assessment, compliance, and monitoring of credit needs of smaller ticket loans shall further save costs to bring down the cost of financing.
3. Supporting Job Creation:
Computerization in banks faced opposition for fear of a reduction in jobs. But the reverse happened.MSMEs have been creating north of 110 million jobs. Making banks fully digital will generate millions of IT-related employment across the country. It will also bring in skilled manufacturers to create support components for the seamless operation of Digital banking platforms. Multiple after-sale contracts would further provide employment.
4. Reduction in Frauds:
Maintaining physical registers and having part of operations on computers and partly done manually carries huge operational risks. Non-reconciliation of data throws poor MIS, resulting in flawed decision-making by the supervisors. The banking system is bleeding in multiple frauds due to ill-equipped software with penetrable firewalls. A fully Digital Bank will address such pitfalls to reduce fraud.
5. All-Weather Banks:
Being non-physical banks, Digital banks are user-friendly in pandemic type situations, being accessible remotely from homes. The recent pandemic also brought the financing gap for MSMEs in the informal sector into sharp relief. The recent whistleblower complaint against IndusInd Bank of its rural lending subsidiary skipping KYC norms in 84000 small loans shows the limitation of Brick and Mortar banks. The Corona carnage, restricted the coverage of these banks to “banked” MSMEs only. Digital Banks easily add new compliant customers during pandemic times.
6. Enhancing GDP :
India has 6.39 crore unincorporated MSMEs; almost 99% (6.35 crore) are in the “micro” bucket. The share of MSME gross value added in the national GDP for 2019-20 is 30%.The quick response digital banking shall percolate and further rotate the money faster in the farthest corners of the country. The brick-and-mortar banking averaging one branch for 11000 people has not yet been delivering due to expansion constraints. Digital Banks will have a mobile phone as a delivery branch.
The present generation banks have a restricted reach to serve the poor customers due to the high cost of due diligence and monitoring. There is a need for licensed entities that leverage technology to moderate finance costs and benefit from access to low-cost deposits to supply credit to the MSME and Agriculture sectors remotely.
“Digital Banks” shall accept deposits as enjoined in the Banking Regulation Act, 1949, make loans and offer non-fund banking services. Using the internet and proximate channels with no physical branches would bring down the cost of financing. The banks would be subject to prudential and liquidity norms at par with the commercial banks. The Digital Banks will be new game changers and a ladder to scale the pinnacles of a $5.0 trillion economy.
Rightly says a Banker: “Yesterday I was clever, so I wanted to change the world. Today I am wise, so I am changing myself”.
hargovindsachdev@gmail.com
About author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occu-pied senior positions in UCO Bank, United Bank of India,State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt,Germany from 2006 to 2011 covering 15 countries of Central Europe.Has undergone International Banking Training from Asian Institute of Management, Manila, Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange,Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit,Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner , Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker hav-ing conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Inde-pendent Director & consultant to various big entities in corporate sector at present.
