Digital Banking Units (DBUs)/Strategy for Financial Inclusion (NSFI)

Why in News ? In a landmark initiative marking India’s 75th year of Independence, Prime Minister Narendra Modi, alongside Finance Minister Nirmala Sitharaman and former Reserve Bank of India Governor Shaktikanta Das, inaugurated 75 Digital Banking Units (DBUs) .

Key Points in the News:

Inauguration and Initial Goals:

• In October 2022, 75 DBUs were launched across 75 remote districts to mark India’s 75th year of independence, aiming to enhance financial inclusion by delivering banking services to underserved areas.
• PM Modi emphasized that DBUs would prioritize “last-mile” banking access, reversing the traditional model where the poor had to approach banks.

Limited Expansion:

• • Over two years later, banks have made little progress in expanding DBUs beyond the initial 75 units. For example, State Bank of India (SBI) operates 12 DBUs, Bank of Baroda 18, Punjab National Bank 8, HDFC Bank 4, ICICI Bank 4, and Axis Bank 3, with most established in 2022.

Operational Challenges:

High Costs: Setting up DBUs involves significant expenses due to the need for separate infrastructure (distinct entry/exit points, smart equipment like Interactive Teller Machines, and video KYC apparatus), which increases operational costs, especially in non-metro areas with fewer digital banking users.

Low Business Viability: A senior banker noted that establishing a digital branch does not guarantee business, particularly in Tier-II, Tier-III cities, and smaller towns, where physical presence and customer engagement are critical for deposit accretion.

Logistical Issues: Banks were given only 45 days to set up DBUs in specific geographies, which was challenging due to varying regional needs and infrastructure limitations. A one-size-fits-all model was deemed impractical.

Low Digital Adoption: In non-metro areas, digital banking users are fewer, reducing the effectiveness of fully digitized branches.

RBI Guidelines:

• DBUs must be distinct from existing branches, with specific digital infrastructure (e.g., cash recyclers, self-service card issuance devices) and operate in both self-service and assisted modes.
• Each DBU requires a senior executive (Scale III or above for public sector banks) as Chief Operating Officer, aligning with the bank’s digital banking strategy.
• Banks can use in-sourced or outsourced models but must comply with outsourcing regulations.

Contrast with Expectations:

• Despite the RBI’s push for financial inclusion and digital transformation, the high costs and logistical challenges have dampened banks’ enthusiasm for opening new DBUs, raising questions about the scalability of the initiative.
• The RBI’s broader digital initiatives, such as the Unified Lending Interface (ULI) and the upcoming National Strategy for Financial Inclusion (NSFI) 2025–30, highlight the need for better infrastructure and literacy to support DBUs.

About Digital Banking Units (DBUs):

• A DBU is a specialized fixed-point business unit or hub equipped with minimum digital infrastructure to deliver digital banking products and services, as well as service existing financial products digitally, in both self-service and assisted modes.
• It aims to provide cost-effective, convenient, paperless, and secure banking access, available 24/7, particularly in underserved areas.

 Objectives:

• Financial Inclusion: Extend banking services to remote and rural areas, reducing the need for physical branch visits.
• Digital Transformation: Promote paperless banking, leveraging technologies like mobile banking, internet banking, and AI-driven solutions.
• Enhanced Customer Experience: Offer end-to-end digital solutions for account opening, deposits, loans, and grievance redressal, with minimal infrastructure.

Features:

• Infrastructure: Includes smart equipment like Interactive Teller Machines, cash recyclers, self-service card issuance devices, and video KYC facilities.
• Services: Covers digital account opening, fixed/recurring deposits, retail/MSME loan applications, and cash transactions via ATMs/cash deposit machines (no physical cash counters).
• Governance: Each DBU is led by a senior executive and aligned with the bank’s digital banking strategy, with regular monitoring by the bank’s board.
• Outreach: Banks can engage digital business facilitators or correspondents to expand the virtual footprint of DBUs.

RBI Guidelines (April 2022):

• Applicable to scheduled commercial banks (excluding Regional Rural Banks, Payments Banks, and Local Area Banks) with digital banking experience.

• DBUs can be opened in Tier 1 to Tier 6 centers without prior RBI approval.
• Must offer minimum digital banking products on both assets (loans) and liabilities (deposits) sides, with real-time customer support mechanisms.

Current Status :

• Only 84 DBUs are operational, far below expectations for nationwide expansion.
• Major banks like SBI, Bank of Baroda, and Punjab National Bank lead, but private banks like HDFC and ICICI have fewer units.
• Challenges include high setup costs, low digital literacy in rural areas, poor internet connectivity, and limited business generation in smaller towns.

India’s National Strategy for Financial Inclusion (NSFI) 2019-2024:

• India’s NSFI, released by the Reserve Bank of India (RBI) on January 10, 2020, under the Financial Inclusion Advisory Committee (FIAC), aims to create a financially aware and empowered India. It aligns with global trends and the World Bank’s Universal Financial Access by 2020 vision, while addressing India’s unique socio-economic challenges. The strategy was developed with inputs from the Government of India, financial regulators (SEBI, IRDAI, PFRDA), and stakeholders like NABARD, NPCI, banks, and NGOs.

Key Objectives:

• Universal Access to Financial Services: Ensure every village within a 5-km radius or hamlet of 500 households in hilly areas has banking access by March 2020.
• Basic Bouquet of Financial Services: Provide banking, insurance, pension, and credit services.
• Access to Livelihood and Skill Development: Link financial inclusion with programs like NRLM, NULM, and PMKVY.

Financial Literacy and Education: Develop targeted modules for children, entrepreneurs, and seniors, expanding financial literacy centers to every block by March 2024.

Customer Protection and Grievance Redressal: Strengthen mechanisms for fair practices and complaint resolution.

Effective Coordination: Foster collaboration among stakeholders, including banks, NGOs, and local governments.

Key Targets and Timelines

By March 2020: Enroll every willing and eligible adult under PMJDY in insurance (e.g., PMJJBY, PMSBY) and pension schemes (e.g., NPS, APY).

By March 2022: Strengthen digital financial services in Tier-II to Tier-VI centers to promote a less-cash society and operationalize the Public Credit Registry (PCR).

By March 2024: Ensure every adult has access to a financial service provider via mobile devices.

Ongoing: Enhance banking outreach, improve digital transaction infrastructure, and increase awareness of digital modes.