Digital Banking

The genesis of digital banking in India can be traced to the 1980s and 1990s when the RBI set up committees that deliberated upon ideas such as setting up of ATMs at strategic locations, establishment of internet network for intra and inter-bank applications, setting up of Electronic Funds Transfer (ETF) to facilitate high-value inter-bank transactions, etc. The liberalisation of the economy provided further impetus for banks in the public and private sector to compete for efficiency and innovation as a result of which the sector saw rapid adoption of new digital technology.  

In 2001, the RBI introduced the Internet Banking in India- Guidelines in pursuance of the recommendations of the Working Group on Internet Banking. These guidelines related to- (a) Technology and Security Standards (designating a network and security administrator, need to have a security policy approved by Board of Directors, enforcement of physical access controls, etc.), (b) Legal Issues (legal means of authenticating e-records, need to institute adequate risk control measures, etc.), (c) Regulatory and Supervisory Issues (only licensed and supervised banks with physical presence to be permitted to offer internet banking products, services to only include local currency products, etc.)  

In 2003, the RBI introduced the Special Electronic Funds Transfer (SEFT) Scheme for enabling safe, secure and quick electronic transfer of funds across bank branches. Some of the salient features of the Scheme include- (a) providing for same day inter-bank transfer of funds with three settlement cycles on weekdays (at 12:00 noon, 2:00 p.m. and 4:00 p.m.) and two settlements on Saturday (at 12:00 noon and 2:00 p.m.), (b) Inter-bank settlement to be done at Mumbai with the processing being done at the National Clearing Cell, RBI, etc.  

In 2004, RBI introduced the Real Time Gross Settlement (RTGS) System. Initially open to providing real-time online settlement for inter-bank transactions, it was later extended to settlement of customer transactions.  

In 2005, National Electronic Funds Transfer (NEFT) went live and in 2011, the NEFT Procedural Guidelines was released by the RBI. The stated objectives of the NEFT system were- (1) to establish an Electronic Funds Transfer System to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer and clearing in the banking sector; (2) to relieve the stress on the existing paper-based funds transfer and clearing system.    

In 2008, RBI released Operative Guidelines on Mobile Banking transactions with focus on regulatory and supervisory issues, customer registration, inter-operability, transactions limits, etc.   

In 2010, the Immediate Payment Service was launched by the National Payment Corporation of India. As previous inter-bank mode of electronic transfer like NEFT and RTGS were only available during bank hours, IMPS fulfilled the pressing business requirement for a seamless 24x7x365 service.   

In 2018, Report of the Inter-Regulatory Working Group on FinTech and Digital Banking was released. The RBI had set up the Working Group to study regulatory issues pertaining to fintech and digital banking in India. It recommended setting up appropriate regulatory framework for setting up regulatory sandbox/innovation hub, multi-stakeholder partnership with regulators, industry players, etc., assessment of skillset for evaluating fintech innovations, possible use of RegTech technologies, etc.  

In 2021, in the backdrop of spurt in digital lending activities and the consequent concerns pertaining to consumer protection, the RBI released Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps, which made several recommendations such as establishment of baseline technology standards and compliance for DLAs, monitoring promotion of unverified digital lending apps for appropriate action, code of conduct on the use of unsolicited commercial communications for digital loans, etc. 

In 2022, the Union Budget of the Ministry of Finance included a proposal for setting up of 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks. In April, 2022, the RBI released Guidelines for Establishment of Digital Banking Units covering aspects of permissibility of opening DBUs, infrastructural requirements, cybersecurity, scope of provision of products and services, customer education, etc. The same year, Niti Ayog in its report Digital Banks: A Proposal for Licensing & Regulatory Regime for India suggested the establishment of digital banks with its own regulatory regime, that would primarily rely on internet and other proximate channels for delivery of banking services in contrast to physical branches. Neo-banks, defined similarly to digital banks, do not have separate regulations, but are covered under the RBI’s Guidelines on Digital Lending, 2022, placing the onus on regulated entities to comply with guidelines on collection, sharing and usage of data, among others, while engaging with such digital platforms.  

In 2023, the RBI notified Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices detailing measures that must be adopted by regulated entities- such as implementation of IT governance framework, guidelines for infrastructure and services management for ensuring operational efficiency of IT systems and various security risk management measures such as vulnerability assessment, management of cybersecurity response and recovery, etc.  

Further, in 2023, the RBI issued the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 among which included directions for NBFCs engaging with digital platforms for lending, to adhere to certain fair practices such as a) transparent disclosure of name of digital lending platforms engaged as agents on behalf of an NBFC on the latter’s website, b) effective oversight and monitoring of digital lending platforms c) creating awareness on grievance redressal mechanisms, etc.