Further to the announcement made in the Budget 2022-2023 of setting up 75 Digital Banking Units (DBUs) in 75 districts, the Reserve Bank of India (RBI) recently unveiled the guidelines for commercial banks to establish DBUs.
The guidelines to set up DBUs by commercial banks were released on the basis of recommendations of a Working Group, formed by the RBI which includes representatives of banks and the Indian Banks’ Association (IBA).
With the primary objective of increasing the spread of digital banking modes across the interiors of the nation, RBI introduced norms for banks to set up Digital Banking Units along with the minimum services that a DBU must provide.
These guidelines have come into effect from the date the circular was issued by the RBI (April 7th) and are applicable to all domestic scheduled commercial banks (excluding payment banks, regional rural banks and local area banks).
Before we take a look at the key guidelines introduced for setting up DBUs, let’s understand more about Digital Banking Units.
What are DBUs?
The Digital Banking Units were introduced by the RBI with the primary objective of widening the reach of digital financial services and promoting financial inclusion in the country.
Digital banking has been quite an obsession for banks and FinTechs in recent times. With DBUs, banks have the opportunity to deliver a whole gamut of digital banking services
According to the RBI, a Digital Banking Unit is a specialised fixed point business unit/hub housing certain minimum digital infrastructure for delivering digital banking products & services. These DBUs need to be treated as banking outlets separated from the existing outlets of the banks.
As per the guidelines, scheduled commercial banks that have past digital banking experience are allowed to set up DBUs in Tier 1 to Tier 6 centres without having the need to take prior permission from RBI.
What are the guidelines that banks need to follow while establishing DBUs?
The RBI is very clear on how banks need to scale up their digital infrastructure. The guidelines laid down by the RBI cover the entire scope of setting up DBUs.
Let’s run by the key points that banks need to focus on while establishing DBUs. To break it down, we have classified the norms under five broad categories:
- According to the digital banking guidelines by the RBI, each DBU will need to be housed distinctly with separate provisions for entry and exit.
- Banks are required to rebuild their entire technology infrastructure to support this transition. RBI has pointed out that banks should have the capabilities of building ‘core-independent digital-native technologies’ that are scalable and flexible. Banks need to have a technology infrastructure that can support digital banking including API integration.
- However, banks are allowed to opt for either an in-sourced or out-sourced model to operate their digital banking services. That said, the outsourced model must be in compliance with the relevant regulatory guidelines.
- The RBI also stated that the plan to set up DBUs must be part of the digital strategy of the bank.
- When it comes to the operational governance and the administrative structure of the DBUs — they need to be aligned with that of the Digital banking segment of the bank.
- Products and services:
- According to the RBI, every DBU must provide certain minimum digital banking products and services.
- Furthermore, these products offered by the DBUs must be there on both the assets and the liabilities side of the balance sheet of the respective digital banking segment.
- By using its hybrid and high-quality interactive capabilities, DBUs are also required to migrate to more structured and tailor-made products from their standard offerings.
- The products and services that can be provided at a Digital Banking Unit include cash withdrawal and deposit, the opening of accounts, updating KYC, lodging of grievance and transfer of funds, among other services.
- Team and the role of the Board of Directors:
- Each DBU will be headed by a senior executive of the bank, preferably Scale III or above for PSBs or equivalent grades for other banks. These experienced and senior executives must be those who can eventually be designated as the Chief Operating Officer (COO) of the DBU.
- To expand the virtual footprint of DBUs, banks can appoint a digital business facilitator or a business correspondent in adherence to the relevant regulations.
- Considering the operational flexibility given to banks in this domain, the Board of Directors should ensure mechanisms for regular on-site and off-site monitoring, covering every aspect laid out in the guidelines
- Either the Board of Directors or a Committee of the Board should periodically review the performance of the digital banking services offered and the progress made by the respective DBU with time. They should take into consideration both the revenue and the risk aspect of every segment.
- As per the guidelines, RBI wants the banks to treat the business sourced from DBUs separately.
- The banks are required to report the business from the Digital Banking Units as a sub-segment within the existing “Retail Banking Segment” in a pre-approved format.
- Other key points:
- In addition to ensuring the security of the physical infrastructure of the DBUs, banks will also need to have stringent cyber security measures in place for the DBUs.
- In order to induct customers into self-service digital banking services, banks must offer tools to enable hands-on customer education on safe digital banking products and practices.
- RBI also clearly stated the need to have a digital mechanism in place that will offer real-time assistance to address the customer grievances that arise from the services provided by the DBUs.
How will these new norms impact the Indian banking ecosystem?
With these guidelines for DBUs, the RBI has brought about a massive shift in the Indian banking ecosystem. The RBI on its part has taken a big step forward in accelerating the digital banking initiatives in the country and improving the availability of the infrastructure for digital banking services.
The digital banking licenses are expected to be issued in the market over the next 12 to 24 months. With the release of these guidelines, RBI has given banks a head start before the introduction of special licenses for digital banks.
These norms will prompt banks, even the traditional ones, to adopt a digital strategy under the direct review of the board. More and more banks will be looking to roll out products and services that support their digital business. This would further improve innovation levels within the country.
To add to that, banks will also look to go beyond their retail segment and would be keen on tapping into opportunities in the corporate segment. It’s only a matter of time for the traditional banks to take notice and rethink their current strategy.
What’s interesting is that the RBI has allowed FinTechs to assist banks in running the DBUs.
Neobanks and digital lending partners of the bank can be regarded as ‘Digital Business Facilitators/Business Correspondents’ and banks can partner with them in offering these digital banking services. With this move, in the coming months, we are sure to witness a boom of neobanks in the market.
The future of digital banking in India
The government today has recognized the potential of digital banking as a key strategy for financial inclusion. With the rise of the likes of neobanks and the API-driven disruption, traditional branch-based banking has taken a back seat.
These significant steps taken by the RBI to introduce regulatory tracks for DBUs will be a major boost to the rise of full-stack digital banks in the country.
Come to think of it, these developments ensure a promising future not only for digital banks but also for Banking-as-a-Service (BaaS) players.
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