- 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 turn into the crucial element for preserving and expanding the enterprise for classic banking institutions, there is an additional term that is quick gaining reputation – neobank. In layman terms, neobank refers to a one hundred per cent digital bank with no physical presence on the ground.
Neobanks are reshaping and rewriting the banking story about the world and have the prospective to positively disrupt the established guidelines of classic banking. They offer you all the classic banking options and services with the crucial focus on the client practical experience. Historically, banking with classic banking institutions has been a lengthy and time-consuming approach — from opening a bank account to availing a credit facility from a classic banking institution. Every step needs comprehensive paperwork, and numerous levels of verification, references, and approvals, and in case of financing, an comprehensive approach for evaluation of collateral and the books of the borrower.
These processes are typically performed as per predetermined requirements, with small scope for customization. Customization and tailor-made services are only accessible for prospects who bring the quantum or the volume of transactions. Small enterprise owners and prospects requiring typical banking goods typically get caught in the lengthy processes and get a raw deal. Due to the cumbersome approach, compact enterprise owners typically rely on informal routes to fulfill their banking wants and finish up accepting usurious and unfavourable terms for their economic wants
This is the gap neobanks are attempting to fulfill. They guarantee to serve the underbanked communities, by redesigning and simplifying the banking services, with the certain focus on robust grievance resolution, and continuous guidance for the prospects all through their banking journey. These banks are concentrating on giving seamless banking services to every single of their prospects, by constructing user-friendly banking portals with the support of technologies. In addition to simplifying the approach for classic banking services, neobanks are also giving numerous technologies-driven tools to their prospects for preserving books (like economic 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 neighborhood of compact firms. This is becoming accomplished with no compromising on the sanctity of the approach and making certain that suitable tools are supplied to ease up the approach and facilitate compliance. Neobanks are capable to provide on such promises due to the fact of the reset of their priorities and utilization of all their sources towards attaining this target.
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In India, there is a expanding misconception that fintech providers are one and the exact same as neobanks. The important distinction is that fintech providers do not have their personal banking license and they provide on the web banking services in collaboration with classic banking partners. Neobanks will have the potential to lend and will meet the objective of economic inclusion.
The current regulatory regime wants some evolution for licensing and operating a neobank in India. Although the Reserve Bank of India (RBI) has not issued recommendations on the topic of operating a neobank, its numerous current recommendations for operating banking institutions reflect the mindset of classic banking institutions, that is, requirement on physical branches. In order to facilitate the fast development in the digital banking infrastructure and to supervise and regulate the foray of new entrants into a sensitive banking business, it is important that the RBI considers issuing recommendations for the operation of a neobank in India. This can almost certainly operate beneath the ‘Regulatory Sandbox’ model as the next cohort.
It would be fascinating to witness how a neobank in India (with no leveraging on the brand name of its classic banking companion) is capable to serve underbanked locations with no any physical presence. Serving underbanked locations will not only call for behavioural alter but will also call for a alter in the mindset of the prospects, specially these who are habituated to a symbolic presence of a constructing to repose their trust and who do not have access to the online or are unable to trust the online for their economic dealings. Given that alter is certainly the only continuous, it is almost certainly time that neobanks turn into a reality and there may perhaps not be a improved 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’ personal.