The full form of VDBS is Vertically Differentiated Banking System

The Committee had advocated a two pronged system for financial inclusion in the country. These included the Horizontally Differentiated Banking System (HDBS) and Vertically Differentiated Banking System (VDBS) differently focused on the three building blocks of banking system: payments, credit and deposits. The HDBS was expected to be a full fledged bank with all the three building blocks under a single roof while the VDBS was expected to see niche or specialized banks focused on one or two of the building blocks of the banking system. While the HDBS was expected to continue to do more of the same and thus contribute to the inclusion agenda through more branches in unbanked areas, the VDBS was designed to be the mainstay of the financial inclusion program.

Through the VDBS banking system is expected to attain a degree of flexibility, hitherto missing, in designing products and services in a meaningful and sustainable way focusing on the poorer sections of the society in non-urban centers. These VDBS players are expected to be unhindered by the legacy systems that influence performance of the HDBS on the financial inclusion front. Specialization driven by expertise and rooted in sustainable business models will be key for making the VDBS providers agents for financial inclusion in the country.