What is meant by Neo banks? Do you think that India must consider the introduction of digital-only bank licenses? Explain (200 Words)
Refer - Financial Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 4 years
KEY POINTS
· Even as Covid-19 takes a toll on the economy, it is catalysing the digital transformation of businesses. The financial sector is no exception, with policymakers emphasising on the digital delivery of financial services.
· This will have far-reaching implications for the future of the financial sector, including banking. It also provides a unique opportunity for reaching out to traditionally underserved segments such as MSMEs.
· The digital banking model operates as partnerships between licensed banks and non-banks, popularly referred to as ‘neobanks’. Interestingly, MSMEs have emerged as a popular customer segment for such models.
· While policy initiatives tend to focus on MSME financing, such businesses often struggle with other financial and business needs throughout their lifecycle for which they have to depend on different players.
· Despite its value propositions, existing practices of these consumer-facing platforms give rise to consumer protection risks. Many platforms use terms like ‘bank’ or ‘banking’ to describe their services. This risks the violation of the Banking Regulation Act, 1949, which permits only licensed banks to use these terms.
· This coupled with the failure of many platforms to disclose their partner banks may misled consumers into thinking that these ‘neobanks’ are authorised and are regulated as licensed banks, when, in fact, their operations are carried out only through partnership with licensed banks.
· While an outsourcing arrangement may be relevant for a nascent industry, going forward as bank-fintech partnerships evolve, it will be a challenge for regulators to strike a balance between prudential risk management and promotion of innovation.
· This calls for a framework that can account for the complexities of bank-fintech partnerships and facilitate the evolution of such models into full licensing framework for digital banks. As a long-term measure, India should consider leveraging the regulatory sandbox testing model for the launch of digital-only banks.
