- By Veena Sivaramakrishnan, Partner and Yugal Jain, Senior Associate
Credit and Finance for MSMEs: In the Indian financing space, when integration of robust digital banking has become the key element for maintaining and growing the business for traditional banking institutions, there is another term that is fast gaining popularity – neobank. In layman terms, neobank refers to a 100 per cent digital bank with no physical presence on the ground.
Neobanks are reshaping and rewriting the banking story around the world and have the potential to positively disrupt the established rules of traditional banking. They offer all the traditional banking solutions and services with the key focus on the customer experience. Historically, banking with traditional banking institutions has been a lengthy and time-consuming process — from opening a bank account to availing a credit facility from a traditional banking institution. Every step requires extensive paperwork, and multiple levels of verification, references, and approvals, and in case of financing, an extensive process for review of collateral and the books of the borrower.
These processes are often conducted as per predetermined standards, with little scope for customization. Customization and tailor-made services are only available for customers who bring the quantum or the volume of transactions. Small business owners and customers requiring standard banking products often get caught in the lengthy processes and get a raw deal. Due to the cumbersome process, small business owners often rely on informal routes to fulfill their banking needs and end up accepting usurious and unfavourable terms for their financial needs
This is the gap neobanks are trying to fulfill. They promise to serve the underbanked communities, by redesigning and simplifying the banking services, with the specific focus on robust grievance resolution, and constant guidance for the customers throughout their banking journey. These banks are concentrating on providing seamless banking services to each of their customers, by building user-friendly banking portals with the help of technology. In addition to simplifying the process for traditional banking services, neobanks are also providing various technology-driven tools to their customers for maintaining books (including financial statements), tax filings, invoices, and other relevant services which are requisite in the financing universe.
Neobanks are bringing the banking services to the door of the underbanked community of small businesses. This is being done without compromising on the sanctity of the process and ensuring that appropriate tools are provided to ease up the process and facilitate compliance. Neobanks are able to deliver on such promises because of the reset of their priorities and utilization of all their resources towards achieving this goal.
In India, there is a growing misconception that fintech companies are one and the same as neobanks. The critical difference is that fintech companies do not have their own banking license and they provide online banking services in collaboration with traditional banking partners. Neobanks will have the ability to lend and will meet the objective of financial inclusion.
The existing regulatory regime needs some evolution for licensing and operating a neobank in India. Although the Reserve Bank of India (RBI) has not issued guidelines on the subject of operating a neobank, its various existing guidelines for operating banking institutions reflect the mindset of traditional banking institutions, that is, requirement on physical branches. In order to facilitate the rapid growth in the digital banking infrastructure and to supervise and regulate the foray of new entrants into a sensitive banking industry, it is critical that the RBI considers issuing guidelines for the operation of a neobank in India. This can probably operate under the ‘Regulatory Sandbox’ model as the next cohort.
It would be interesting to witness how a neobank in India (without leveraging on the brand name of its traditional banking partner) is able to serve underbanked areas without any physical presence. Serving underbanked areas will not only require behavioural change but will also require a change in the mindset of the customers, especially those who are habituated to a symbolic presence of a building to repose their trust and who do not have access to the internet or are unable to trust the internet for their financial dealings. Given that change is indeed the only constant, it is probably time that neobanks become a reality and there may not be a better time than the recovery from a pandemic to test the waters.
Veena Sivaramakrishnan is Partner and Yugal Jain is Senior Associate in Banking & Finance practice at Shardul Amarchand Mangaldas & Co. Views expressed are the authors’ own.