Neo Banking Will Galvanize New Businesses and Spur Credit Growth: Former Finance Secy

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Neo Banking has underlined the big necessity for digitalisation of banking and has added tremendous value to the credit side, said former finance secretary Subhash Chandra Garg at an ASSOCHAM National e-Conclave on Neo Banking - The Next Banking Revolution.

Addressing a panel of fintech entrepreneurs and policymakers, Garg welcomed neo-banking as a positive development for smart digital-savvy entrepreneurs to set up businesses and encourage better credit growth. “Neo banks are tying up with licensed regulatory banks to create digital banks for the future. They are impacting MSMEs by arranging crucial credit for them in a speedy manner through digitalization."

He further said, “Neo banks have brought tremendous value to the table. Based on the digitisation of the core business function of MSMEs, they facilitate better and faster credit assessment. This enables better assessment of future creditworthiness and future ability to ascertain whether the customer will repay or default. This is why credit scores allow banks to lend not based on collateral but on the assessment of the business potential and repayment.”

Stating that while only 10% of MSMEs secure credit from banks and non-banks, Garg pointed out that neo-banking was able to reach out to many more entrepreneurs and on higher levels of credit. “The next policy question to be raised is - are we going to allow the credit side to be digital? In our country, there's a reluctance to offer full-fledged credit in digital banking. We have fragmented banking on the credit side. We need to think through these constraints in the digital space,” he added.

Emphasising the need for strict legislation to define and regulate credit, Mr Garg said that declaring RBI as the regulator would bring a system of regulation of neo banks as fintech partners. “Neo banks are pioneers and should be encouraged. Only then we'll be serving India and the credit growth of the country,” he concluded.

In his special address, Ajit Pai, distinguished expert - economics and finance, NITI Aayog spoke about the macro situation in the country and expressed optimism about the strong fundamentals of the Indian economy being the digital financial inclusion and business models on the back of it.

Neo-Banking Is Expected To Galvanize New Businesses In India
“Neo banks are meeting an unmet need in the Indian market where there's credit starvation. The overall banking system has to be harnessed because banking deposits have been growing in double digits since the pandemic. Overall, we have Big Data, AI, fintech’s, real-time payment info, etc. Why are they coming right now? It is because the foundations are laid and the timing is right. It is the time of neo banks to spot the trends fastest and get the money into the system faster. Regulatory aspects will follow because putting in too many controls at an early stage is not helpful. At this stage, with foundations laid there is a big runway for growth. Small finance banks saw 340 per cent growth in 2018; we need a similar growth rate,” Ajit Pai surmised.

Sreedhar Vegesna, partner, PwC stated that there were three types of challenger banks we need to take cognisance of. “The traditional incumbent banks which are providing digital-only bank model, neo banks leveraging a large tech platform and brand-new capabilities, and the adjacent expanders which provide an ecosystem, which leverages different capabilities like a mortgage from one bank, payments capability from someone else, and e-commerce from another party,” he explained.

Elaborating their importance to various segments of customer base, Vegesna said, “Gen Z aggregate through the online world but they don’t start with a universal type of bank. In the MSME marketplace, 29-30 million MSMEs do not start their journey with a bank. They look at product supply chain difficulties, how to deal with digital payments and look for a new way of getting credit. The challenge for traditional banks is how to reach these segments. It is important to note that post-COVID there has been a spike in the number of neo banks. Earlier there were 20-odd annually, now 70 plus neo banks have a presence in the marketplace.”

Shachindra Nath, Executive Chairman and MD, UGRO Capital Limited said that he did not consider neo banks as banks because there was no regulatory framework in India for them. “If you are not licensed as a bank, no term as 'bank' should be attached to an entity. The force of digitisation is here to stay. Most importantly, for digital platforms partnership is first. There has to be a superior regulatory framework so that anything related to payments, payment system, lending, etc has to be under regulatory supervision or else public trust can be compromised,” he shared.

Ketan Doshi, MD, Pay Point India Network Pvt. Ltd referred to how the RBI had introduced the Business Correspondent model (BC) in 2005. “Today 50-55 per cent of the Indian population has bank accounts in place. It's all already built into our banking system and neo banking is just old wine in a new bottle,” he stated. "The other segment which is digital-only is a neo bank. To me the BC is offering services at the front end with a new experience for customers is a neo bank or co-lending fintech partner with a bank,” he added.

About Gen Z being on the Internet for 35 hours a week, Praveen Khanna, vice-president, ScoreMe Solutions Pvt Ltd pointed out that neo banks will make the banking journey more personalised, more digital and more relatable to the new generation. “Speed is of the essence and is the currency of the young generation. Messaging banking is a new way. Collaboration between fintech and traditional banks will be the driver forward,” he explained.

Kannan Murali, head – products and data engineering technology, M2P Fintech was of the opinion that there is scope for neo banks because of the pockets of unbanked or underserved customer needs. “The challenges are not with one segment. If you are an MSME your needs are different from a millennial. Each of these neo banks is trying to cater to a niche customer group,” he shared.

Gautam Sinha, VP, Technology, LoanTap Financial Technologies said that security issues existed in the traditional banking system too. “In Neobanks we'll have a number of security issues such as data localisation, hacking, etc. We still have a long way to go in the neo banking space,” he added.

Charan Singh, chairman, ASSOCHAM national council for banking, who chaired the session, delivered the welcome address and also the vote of thanks, signed off by stating that brick and mortar banks were going to shrink and fintech will bring in a revolution. “I see technology come in a big way and change the contours of banking 25 years from now,” he shared.

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