Key Highlights of the RBI Guidelines for Establishment of Digital Banking Units - Credable (2024)

Published on 13 Apr, 2022

AuthorTeam CredAble

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:

  1. Infrastructure:
  • 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.
  1. 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.
  1. 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.
  1. Reporting:
  • 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.
  1. 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.

CredAble plays a crucial role in the BaaS ecosystem as an enabler of scale and faster go-to-market for partner banks. At CredAble, we’ve built an API-based co-branded platform for financial institutions and their customers. By leveraging our embedded credit solutions, banks can propel their digital strategy and set up scalable Digital Banking Units.

CredAble’s comprehensive BaaS stack offerings are already powering leading banks, financial institutions and emerging corporates in providing digital banking services.

Think Working Capital, Think CredAble!

As a seasoned expert in the field of digital banking and financial technology, I can attest to the depth of knowledge required to understand and navigate the intricacies of the subject matter. My expertise spans various aspects of banking technology, regulatory frameworks, and the evolving landscape of digital financial services.

Now, let's delve into the concepts discussed in the provided article:

  1. Introduction of Digital Banking Units (DBUs):

    • The Reserve Bank of India (RBI) announced the establishment of 75 Digital Banking Units (DBUs) across 75 districts, as part of the Budget 2022-2023.
    • The initiative aims to increase the spread of digital banking in the interior regions of the country, fostering financial inclusion.
  2. Guidelines for Establishing DBUs:

    • Recommendations for setting up DBUs are based on the suggestions of a Working Group formed by the RBI, which includes representatives from banks and the Indian Banks’ Association (IBA).
    • The guidelines, effective from April 7th, apply to all domestic scheduled commercial banks, excluding payment banks, regional rural banks, and local area banks.
  3. Definition of Digital Banking Units (DBUs):

    • DBUs are specialized fixed-point business units or hubs with minimum digital infrastructure, aimed at delivering digital banking products and services.
    • These units are treated as separate banking outlets, distinct from existing bank branches.
  4. Infrastructure:

    • DBUs must have distinct physical housing with separate entry and exit provisions.
    • Banks need to upgrade their technology infrastructure to support digital banking, with a focus on building scalable and flexible 'core-independent digital-native technologies.'
    • Banks can choose between in-sourced and out-sourced models for operating digital banking services.
  5. Products and Services:

    • DBUs are required to offer minimum digital banking products and services on both assets and liabilities sides of the balance sheet.
    • The RBI encourages DBUs to use hybrid and high-quality interactive capabilities to migrate to more structured and tailor-made products.
  6. Team and Board of Directors:

    • Each DBU will be headed by a senior executive, preferably Scale III or above for Public Sector Banks (PSBs) or equivalent grades for other banks.
    • The Board of Directors should ensure mechanisms for monitoring, and a committee should periodically review the performance of digital banking services.
  7. Reporting:

    • Banks need to treat business sourced from DBUs separately and report it as a sub-segment within the existing "Retail Banking Segment" in a pre-approved format.
  8. Cybersecurity and Customer Education:

    • Strict cybersecurity measures are required for both physical infrastructure and digital operations of DBUs.
    • Banks must provide tools for hands-on customer education on safe digital banking practices.
  9. Impact on Indian Banking Ecosystem:

    • The introduction of DBUs represents a significant shift in the Indian banking ecosystem, aligning with the government's focus on digital banking for financial inclusion.
    • Traditional banks are expected to adopt digital strategies, fostering innovation and potentially expanding into the corporate segment.
    • The RBI's allowance for FinTechs to assist banks in running DBUs opens the door for neobanks to play a crucial role in the market.
  10. Future of Digital Banking in India:

    • The regulatory tracks for DBUs are expected to lead to the emergence of full-stack digital banks, potentially transforming the banking landscape in India.
    • Neobanks and digital lending partners are likely to thrive as 'Digital Business Facilitators/Business Correspondents.'

In conclusion, these developments set the stage for a promising future in digital banking in India, with implications not only for digital banks but also for Banking-as-a-Service (BaaS) players, like CredAble, facilitating the growth and scalability of digital banking services.

Key Highlights of the RBI Guidelines for Establishment of Digital Banking Units - Credable (2024)

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