Need: of DIGITAL BANK’S- UPSC Daily Important Topic | 24 July 2022

Need: of DIGITAL BANK’S

∆Credit Gap:

✓The success India has witnessed on the payments front is yet to be replicated in meeting the credit needs of its micro, small and medium businesses.

✓The credit gap reveals a need for leveraging technology effectively to cater to these needs and bring the underserved further within the formal financial fold.

∆Reliance on Digital channels:

Banks and fintech businesses that offer digital banking services rely primarily on digital channels that organically have high-efficiency metrics relative to incumbent commercial banks.

✓This structural feature makes them a potentially effective channel through which policymakers can achieve social goals like empowering the under-banked small businesses, and enhancing trust among retail consumers.

Neo-Bank Models Face Challenges:

✓Existing partnership-based neo-bank models face several challenges, such as revenue generation and viability.

✓Neobanks don’t have a bank license of their own but count on bank partners to provide bank licensed services.

✓They have limited revenue potential, high cost of capital, and offer products of only partner banks.