What purpose will the Digital Banking Units serve?

The Reserve Bank of India (RBI) has developed guidelines for establishing Digital Banking Units (DBUs). This is in accordance with the Indian finance minister Nirmala Sitharaman’s announcement in this year’s budget speech that the government was proposing to set up 75 Digital Banking Units (DBUs) in 75 districts by scheduled commercial banks.

“In recent years, digital banking, digital payments, and fintech innovations have proliferated in the country. The government is continuously encouraging these sectors to ensure that the benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner. Taking forward this agenda, and to mark 75 years of our independence, it is proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks,” the FM had said in her Budget speech on 1 February 2022.

The detailed guidelines have come in less than three months after the announcement. The RBI circular says that further to the budget announcement, a ‘committee for the establishment of Digital Banking Units (DBUs)’ was set up by the Central Bank to outline a roadmap for the establishment of DBUs. The guidelines are based on the recommendations of the committee. However, the circular doesn’t provide any more details of the committee or a link to any circular or notification regarding the announcement of committee, a usual practice in RBI circulars. 

The Guidelines

A Digital Banking Unit is essentially a physical front-end facility of a bank. It is a physical banking outlet that houses specific digital infrastructure that will provide existing services (like banking, cash withdrawal, loans) and kiosks for carrying out digital banking or purchasing an insurance/investment product distributed by the bank.

RBI defines a DBU as ‘a specialized fixed point business unit/hub housing specific minimum digital infrastructure for digital banking products & services and digitally servicing existing financial products & services. The benefits could be offered in both self-service and assisted mode to enable customers to have cost-effective/ convenient access and enhanced digital experience to/of such products and services in an efficient, paperless, a secured and connected environment with most services being available in self-service mode, all year round.

Scheduled Commercial Banks (other than RRBs, PBs and LABs) with past digital banking experience are permitted to open DBUs in Tier 1 to Tier 6 centers, unless otherwise specifically restricted, ‘without having the need to take permission from RBI.

RBI mandates each DBU to be housed distinctly, with the separate entry and exit provisions and to be separate from an existing banking outlet. Banks may choose suitable digital infrastructure to provide the services. RBI explicitly mentions that these facilities can be insourced or outsourced while complying with relevant regulatory guidelines. RBI even allows current core banking and other systems for digital banking to be shared with logical separation. RBI allows banks to choose an in-sourced or out-sourced model for the entire operations of the digital banking segment, including DBUs, as long as the outsourced model complies with the relevant regulatory guidelines on outsourcing.

Interestingly, RBI also says that ‘banks can adopt more core-independent digital-native technologies offering better scalability, flexibility in creating new/reusable digital environments through continuous development/software deployment and interconnectivity specifically for this business segment, based on their digital strategy.’ It further mandates that If the digital banking segment of a bank uses an API layer (integration layer) to connect with external third-party application providers, the same should be tested in an isolated/ test environment before being integrated to bank’s core systems backed by a comprehensive risk evaluation and adequate documentation.

RBI also outlines guidelines such as DBUs being aligned with the digital banking strategy of the bank. It also mandates that each DBU—and this is important—to be headed by a Scale III officer or above in a PSU bank and their equivalent in private banks. It also mentions cyber security requirements, balancing between assets and liabilities, and need for customer education and financial reporting structure in the guidelines.

“Expansion of digital financial services and financial inclusion being overarching objectives of DBUs and given the operational flexibility given to banks in this domain, the board should ensure regular on-site and off-site monitoring system covering all aspects of the guidelines,” the guidelines add.

The Impact

The developments have been so fast that even some of the scheduled commercial banks seem unprepared. In the usual deliberation period, banks start planning for the new policies of RBI in advance. However, conversations with IT leaders of two private commercial banks regarding their DBU plans revealed that they are still in wait-and-watch mode.

That is not too surprising considering that both the banks we spoke to are new private sector banks, operating mainly in urban areas, with their customer base already used to online banking. So, it may not be such an enormous value add for them.

So, how will the DBUs take forward the digital banking agenda? The RBI circular talks of ‘cost-effective’ access, ‘convenience’ to customers, ‘enhanced customer experience’, and ‘efficient’ operations of banks.

The DBUs are phygital banking outlets. In the urban areas, there is a significant number of online banking users. The DBUs cannot be more cost-effective than online banking, either from a customer’s viewpoint or a bank’s perspective. While it may be slightly more convenient for a certain section of users, it is not a significant improvement on that account, considering the high density of banks and ATMs in those areas. While by definition, digital banking is more efficient than branch banking, the DBUs may not be significantly better than traditional branches, considering that they have to be built from scratch. Also, with no specific target for individual banks in the guidelines, they will have minimal impact on the overall large operations of many scheduled commercial banks. Customer experience will, of course, depend on how the services are actually provided.

In effect, DBUs will add little to urban banking. They may, however, expand the reach of digital banking in rural areas. And that is anyway the real objective behind the plans. The FM’s speech gives that away when she said that the idea is to ‘ensure that the benefits of digital banking reach every nook and corner of the country’. Even the RBI guidelines talks about ‘expansion of digital financial services and financial inclusion being overarching objectives of DBUs’.

The Other I

While the initial reaction of the private banks may not be that enthusiastic, considering the overarching ‘inclusion’ objective behind DBUs, DBUs may innovation in the long term if used smartly.

This is how.

RBI says banks can adopt more core-independent digital-native technologies offering better scalability and flexibility in creating new/reusable digital environments through continuous development/software deployment and interconnectivity specifically for this business segment. This gives the banks an opportunity to experiment with disruptive technologies on cloud, one thing at a time. With so many innovations happening out there by fintechs, banks do not have to bother about getting them to work with their core banking system, picking up best of breed solutions available on the cloud. The solutions tried and tested (on a production basis) can then be added to the bank’s core banking system. They may build an alternate distributed and the loosely integrated equivalent of the core banking system on the cloud with best of breed solutions. Hopefully, regulators will catch up.

One of the CIOs we spoke to singled out testing of the outsourced model allowed in DBUs as a great opportunity. If that succeeds, more and more banking operations can be outsourced. The banks would have tested them on production scale, under all regulatory compliance norms.

While the immediate gains of the DBUs may only be incremental and remain limited to less-banked areas, they can open up substantial innovation opportunities for banks if they play them smartly.

At this moment, we do not know if the RBI is working to give some quantitative targets on a number of DBUs. Unless that happens, the whole initiative may fizzle out and may remain just a showpiece for building DBUs in just 75 districts. In the huge world of Indian banking, that is like a drop in the ocean.