By Srinath Sridharan, The author is a corporate adviser and independent director on corporate boards
In the past two decades, India’s banking system has undergone a profound transformation. Yet today, policymakers and industry evangelists have moved from improving digital banking to fetishising digital-only bank licences, as if a new label by itself will unlock customer-centricity, better competition among banks, credit, inclusion, and growth.
The real issue is not the licensing of a new kind of bank. It is whether our existing institutions, including public sector and cooperative banks, have exhausted their digital potential, and whether digital-only models solve any clearly defined banking problem that technology alone can solve.
Most banks in India are already digital. The physical branch has not vanished, but for millions of customers the everyday interface with their bank is already digital.
Yet the persistent failures of digital customer experience show how unfinished the transformation remains. For example, older processes that are not yet reengineered to be digital-first often become walls rather than bridges. Grievances escalate slowly. Customers still seek human accountability when systems and automated AI chatbots fail. A banking system cannot call itself digitally mature if the customer, at the moment of friction, finds only automation and silence.
The allure of digital-only banks has three main propellers: the siren call of innovation; the desire of investors, tech entrepreneurs and probably even geopolitical stress points as pressure to enter the banking space; and the hope among some policymakers that this will accelerate financial inclusion and credit flows. There is intuitive appeal here. Younger consumers grew up on seamless interfaces and instant onboarding.
They will form the bulk of future banking customers. It is tempting to argue that a licence designed for digital natives will unlock new value and deepen engagement. Fintech innovation is indispensable, but it must remain anchored in the unmet needs of unbanked India.
But good instincts in theory do not automatically translate into sound public policy. One must ask a simple question. Does creating a new licence category address the actual barriers that Indian banking faces today? The answer is no.
First, licensing a digital-only bank presupposes that the core constraint is the licence itself. The regulator’s experience suggests otherwise.
Banking licences are not conferred lightly because banks do not merely offer services, they hold public money. The RBI’s record with newer licence categories such as payments banks and small finance banks has been mixed. Some institutions have struggled to demonstrate durable viability or achieve their intended objectives.
Moreover, the hard obligations of banking, including priority sector lending, cannot be bypassed by digital design and will continue to rest on the balance sheet discipline of regulated institutions. Every new licence is not merely an entry permission, but a permanent supervisory responsibility.
Second, the fundamental challenge for any bank is building a robust liability franchise. Many fintechs can raise equity capital easily but may find it far harder to build low-cost savings accounts and a sticky deposit base. A licence does not create customers. Value proposition and execution do.
Third, the regulatory concerns around cyber risk, data protection, operational resilience, and customer protection are severe. India’s digital ecosystem has made remarkable strides, but systemic vulnerabilities remain. India has witnessed regulatory action even against established banks for persistent deficiencies in digital governance, including restrictions on onboarding when controls were found wanting. Creating an entire class of digital-only banks that promise digital excellence without a demonstrated track record of governance raises serious systemic questions.
In a system as large as India’s, operational resilience is financial stability itself. The RBI’s caution is the discipline of a regulator that understands that banking innovation, without accountability, eventually becomes a public cost.
Fourth, the label “digital-only bank” risks becoming a marketing slogan rather than a substantive differentiator. In India, many so-called neobanks are not banks at all. They are fintech platforms partnering with licensed banks to deliver services. They provide slick interfaces but rely on regulated institutions for core functions.
Banking is already in a period of relentless innovation. The boundaries between banks, payments platforms, fintechs, and embedded finance ecosystems are blurring. Regulatory frameworks must evolve to capture this complexity without losing sight of first principles: financial stability, depositor protection, systemic resilience, and accountability. Fragmenting licence categories may create temporary excitement, but it can also create unnecessary supervisory burdens and new fault lines.
The real priority for India should be to push every bank to become digital-first. It means investing in technology, governance, and talent so that digital interfaces are intuitive, secure, and truly accountable. For millions, the branch remains a reassurance. Digital transformation must therefore enhance trust, not erode it.
The institutional confidence required to introduce a new licence category must rest on prudence, not ideology or narrative-building. Banking failures are never private events, they become public costs, and in that landscape, innovation must remain anchored in caution.
The future of banking in India is unmistakably digital. But it needs digital-first banking done properly, before digital-only.