Daily Mains Newsletter for UPSC 17 Dec 2021

Daily Mains Newsletter For UPSC
| RaghukulCS

17 Dec 2021 - Friday

Index

Table of Contents

Neo-bank vs Traditional bank

Why in news?

The Neo-banks are changing the face of fin-tech by bridging the gap between the services that traditional banks offer and the evolving expectations of customers in the digital age.

What are Neo-banks?

  • Neo-banks are financial institutions that give customers a cheaper alternative to traditional banks and these are online-only financial technology (fin-tech) companies that operate solely digitally or via mobile apps.
  • In India, these firms don’t have a bank license of their own, but rely on bank partners to offer licensed services as the RBI doesn’t allow banks to be 100% digital yet (though some foreign banks offer digital-only products through their local units). 

How are they different from other types of banks?

  • Neo-bank vs Traditional bank– Neo-banks leverage technology and artificial intelligence (AI) to offer a range of personalized services to customers while traditional banks follow an omnichannel approach through both physical (branches and ATMs) and digital banking presence.
  • Neo-banks are powered by innovation to launch features and develop partnerships to serve their customers more quickly than traditional banks.
  • Neo-banks targets to retail customers, and small and medium businesses, which are generally underserved by traditional banks.
  • Venture capital and private equity investors have been taking an increasing interest in them over traditional banks.

Neo-bank vs Digital bank- 

  • A digital bank and a neo-bank aren’t quite the same.
  • Digital banks are often the online-only subsidiary of an established and regulated player in the banking sector while neo-banks exist solely online without any physical branches independently or in partnership with traditional banks.

How are the neo-banks evolving?

  • The term ‘Neo-bank’ started gaining prominence globally in 2017.
  • Neo-banks are also called ‘challenger banks’ as they emerged as a new challenger to the traditional banks in terms of customer engagement, connectivity and reach, and the user experience.
  • Although,“neo-banks” is a relatively new concept in India, the concept has been gaining traction over the last few years and India’s neo-bank startups raised more than $230 million in 2020, according to a report by a fin-tech research firm.
  • There are around a dozen neo-banks in India including Razorpay X, EpiFi, Open, NiYo, Jupiter among others.

What are the pros of neo-banks?

  • Low costs
  • Use of Artificial Intelligence
  • Products are typically inexpensive, with no monthly maintenance fees.
  • Convenience – Banking services through an app.
  • Speed – Neo-banks allow customers to set up accounts quickly and process requests speedily.
  • Those that offer loans may skip the usual time-consuming application processes in favour of innovative strategies for evaluating the credit.

What are the challenges that they face?

  • Digital illiteracy – non-tech-savvy consumers or people in the rural parts of India. 
  • Mobile penetration – As of 2020, India had a smartphone penetration rate of just about 54% which will exclude the rest of the people from neo banks purview. 
  • Limited range of Services offered 
  • Building trust – Unlike traditional banks, neo-banks don’t have a physical presence, so customers cannot literally bank upon them in case of any issues/challenges. 
  • Hence, models such as freemium subscriptions and memberships are common in neo-banking in India, as they allow customers to experience the service before paying for it. 
  • Regulatory hurdles – Neo-banks are yet to be recognized by the RBI. 
  • Due to the absence of enabling regulations, neo-banks cannot accept deposits or offer lending products on their own books. 
  • Dependence on other financial institutions– Some fin-techs have a non-banking financial company (NBFC) as their parent to engage in lending activities while most others partner with banks and financial institutions. 

Conclusion:

Although, with Hassle-free banking services, Soothing user interface, Innovation-first attitude, Advanced security level-banks can complement traditional banks but cannot replace them. 

National Monetisation Pipeline (NMP)

About seven decades back, assets like roads, railways, ports, power, oil & gas pipelines, etc. were placed under the control of state-owned public enterprises (PSEs).

However, In the years since, the PSEs have disappointed and failed to deliver on their financial and social objectives.

The National Monetisation Pipeline (NMP) launched in August 2021, is designed to unlock the value of investments in such brownfield public sector assets by tapping institutional and long-term capital.

National Monetisation Pipeline (NMP)

  • The National Monetisation Pipeline (NMP) envisages an aggregate monetization potential of 6-lakh crore through the leasing of core assets of the Central government in sectors such as roads, railways, power, oil and gas pipelines, telecom, civil aviation, etc., over a four-year period (FY 2022-25).
  • Need for NMP – Failure of Public Sector Enterprises:
    • Cost Overruns: In some cases, project completion time is exceeded, leading to the elevated projcostscost.
    • Overcapitalization: The input-output ratio is not optimum in a majority of government infrastructure projects leading to their overcapitalization.
    • Reluctance to implement labor reforms, 
    • Lack of inter-ministerial/departmental coordination,
    • Poor decision-making, 
    • Ineffective governance and excessive government control
  • Significance of National Monetisation Pipeline:
    • Boost Economy: It is the first-of-its-kind initiative that will boost the economy, generate better employment opportunities and drive competitiveness.
    • Utilizing Underutilised Public Assets: The NMP advocates unlocking idle capital from non-strategic underperforming government-owned assets and reinvesting the funds received, into new infrastructure projects.

Challenges Associated to NMP

  • Issue of Taxpayers’ Money: The taxpayers have already paid for these public assets and, so, why should they pay again to a private party to use them.
  • Cycle of Creating and Monetising Assets: Generate a vicious cycle of creating new assets and then monetizing the same when they become liabilities.
  • Asset-specific Challenges:
  • Low Level of capacity utilization in gas and petroleum pipeline networks, 
  • Regulated tariffs in power sector assets,
  • Low interest among investors and 
  • Multiple stakeholders.
  • Monopolisation: A significant criticism of the NMP is that the transfer would end up creating monopolies, leading to a rise in price because monopolization is inevitable in the case of highways and railway lines.

Way Forward

  • Strengthening Public Enterprises: As India needs to invest about $1.5 trillion on infrastructure development in order to aspire to become a $5 trillion economy by the year 2024-25, public enterprises should be in focus.
  • In order to do it,corporate governance structure should be revamped in order to enhance operational autonomy.
  • Alternative Dispute-Resolution Mechanism: Efficient and effective dispute resolution mechanisms will naturally and automatically accrue to the design and execution.
  • Multi-Stakeholder Approach: The success of the infrastructure expansion plan would depend on other stakeholders playing their due role, this includes State governments and their public sector enterprises and the private sector.
    • High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislation of the Centre and States should be set-up as recommended by 15th Finance Commission.
  • Dealing with Cronyism: People eligible to bid should not be a small in number or predetermined set, and to do this sufficient participation should be ensured by the government.
  • Addressing Systemic Problems and Generating Social Values: Until and unless the systemic problems are addressed, the private sector will find it difficult to harness the full value of the public assets.
    • Private-public investment structures make sense, but they must be modeled to also generate social value. 
    • Sustainable development should also be under consideration.

Conclusion:

  • Streamlining operational modalities, encouraging investor participation, and facilitating commercial efficiency’ could ensure ‘efficient and effective’ outcomes from the monetization drive.
  • More  out-of-the-box policy initiatives are needed to rule out public asset monetization schemes such as the NMP in the future.

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