India's Digital Banking Units Are More Direction Than Solution

Launched with significant fanfare and built with the aim of banking for all, digital banking units in India are more likely to signal intent and direction, rather than delivering financial inclusion at scale.

Set up in collaboration with over 20 public and private sector banks, DBUs are essentially brick-and-mortar stores equipped with tablets and internet services to help people and small businesses open accounts, transact and access services like lending and insurance.

Banks which announced the setting up of DBUs include HDFC Bank Ltd., Axis Bank Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd., Canara Bank, Punjab National Bank, Union Bank of India, and Jana Small Finance Bank.

"People living in small towns and villages will find benefits like transferring money to availing loans. Digital banking units are another big step in that direction which is going on in the country to make the life of common man of India easier," Prime Minister Narendra Modi said while launching 75 digital banking units across 75 districts on Oct. 16.

The guidelines governing DBUs were introduced by the Reserve Bank of India in April this year. The rules are applicable to scheduled commercial banks, excluding payments banks, regional rural banks and local area banks, and require such units to at least offer basic services like opening savings accounts, fixed deposits, and onboarding of customers identified for loans.

Commercial banks with experience of digital banking are permitted to open DBUs in Tier 1 to Tier 6 cities, unless otherwise specifically restricted, without having to take permission from RBI in each instance.

While the recent launch of DBUs is a great initiative in terms of its direction and the statement it makes, the units might not work for all types of customers in India, according to Sumita Kale, an advisor at the Indicus Foundation.

Instead of ushering unbanked individuals into the banking system, digital banking units are more likely to enable existing bank's customers interaction with offerings such as loans and insurance, Kale said.

"On the credit delivery front, to start with, the DBUs will provide end-to-end digital processing of small ticket retail and MSME loans, starting from online applications to disbursals. The DBUs will also provide services related to certain identified government sponsored schemes," RBI Governor Shaktikanta Das said in a statement announcing the launch.

According to the RBI's financial inclusion index, India currently scores a 56.4 on a scale of 0 to 100.

While digital payments and banking services have rapidly spread in major urban areas, the spread of digital banking beyond big cities has also been hamstrung by access to high-speed internet and limited awareness about such services.

Digital banking units are "a demonstration of proof of concept. It is a cusp between a branch and a [business correspondent] network," Anand Kumar Bajaj, chief executive officer at PayNearby—a bank business correspondent firm—told BQ Prime.

Business correspondents work as retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM. For example, a local grocery store can act as business correspondent for a bank.

Although digital banking units may help people access services like loans, expanding financial inclusion further is likely to require a more granular understanding of impediments and a further strengthening of the business correspondent network, Kale said.

"The business correspondents, or the agent network, really need to spend a little more time," she added, noting that while the finance ministry has been looking into it, ensuring that the agents are well trained and there is process for grievance redressal would be key to bringing more people into the fold of digital banking.