Context:
Reserve Bank of India is hesitant to grant NBFC licenses to neo-banks such as PhonePe, Razorpay, BharatPe, OkCredit, and NiYo.
About Neo Banks:
- Banks without any physical location, present entirely online.
- Financial institutions that give customers a cheaper alternative to traditional banks.
- Have a tag of ‘challenger banks’ – Challenges the complex infrastructure and client on-boarding process of traditional banks.
- In India, these firms don’t have a bank licence of their own but rely on bank partners.
- Their products come under 3 financial regulators –
- Reserve Bank of India
- Securities & Exchange Board of India
- Insurance and Regulatory Development Authority of India
- Various operating models of neobanks include –
- Partnership with Conventional Banks: These are non-licensed FinTech firms that collaborate with traditional banks. They offer mobile/web platforms and wrap their partner banks’ products within their services.
- Digital Initiatives by Traditional Banks: Traditional banks themselves adopt digital strategies to modernize their operations and services.
- Licensed Neobanks: These neobanks obtain digital banking licenses, typically in countries where such licenses are permitted. They operate independently with their own licenses.
Digital banks are often the online-only subsidiary of an established and regulated player in the banking sector while neo-banks exist solely online without any physical branches independently or in partnership with traditional banks.
| Aspect | Neo-Banks | Traditional Banks |
| Approach | Leveraging technology and AI for services | Omni-channel approach (physical + digital) |
| Innovation | Powered by innovation for quick features | Relies on established services and systems |
| Customer Base | Retail customers and SMEs | General customer base |
| Market Focus | Underserved retail and SMEs | Broad market coverage |
| Investment Interest | Attracting venture capital and equity | Traditional investment focus |
| Overthrow Potential | Lack funds to overthrow traditional banks | Established but may face slower innovation |
Source: The Hindu
Previous Year Question
With reference to ‘Urban Cooperative Banks’ in India, consider the following statements:
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
[UPSC Civil Services Exam – 2021 Prelims]
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)
