Introduction

In a nation where banking is a lifeline for millions and digital innovation in finance is in high gear, the age-old rivalry between Traditional Banking and decentralised finance (DeFi) is piquing interest. Traditional Banking, with physical branches and an RBI-regulated system, has been an essential part of the Indian economy. DeFi, a blockchain-backed option, offers a world where finance is decentralised, transparent, and requires no intermediary. What are the implications for the investor, saver and borrower in India? Let’s look at the differences, opportunities, and future of DeFi in India.

Open Demat Account and Start Trading!

Understanding Traditional Banking

Traditional banking generally refers to banks in India like SBI, HDFC Bank, and ICICI Bank that provide services such as savings accounts, loans, fixed deposits and credit cards. These banks are regulated by the Reserve Bank of India (RBI), and while this is good for the stability of Indian banking and economy, it can also be a constraint. For example, in most cases in India, if you want to open a bank account, the bank requires KYC documents to solidify your claim to the account. If applying for a loan, especially as a small business or rural customer, you will experience delays with your approvals. Costs such as transaction fees in the case of NEFT or RTGS can add up. Moreover, the interest rate paid on savings accounts (3-4%) tends to be well below inflation.

With the growth of technology empowered by an expansive internet-based society, there is much to be said for the absence of a bank intermediary in financial services. India's economy is powered by traditional banks and their products, with nearly 150 crore bank accounts in India expected by 2024, due mainly to many public sector schemes such as Jan Dhan Yojana. Most Indians equate banks with security, such as insured deposits and the reliability of their services. In addition, there is a comfort in not having to manage the words of the creditors and their bank.

What is DeFi?

Decentralised finance (DeFi) is a service that is provided on a blockchain network like Ethereum or Polygon (co-founded by Indian entrepreneurs), and financial services are provided through smart contracts, enabling the lending of cryptos and providing a high level of access with low to no costs. With DeFi, you can lend money to anyone in the world or earn interest on your savings through an app on your smartphone. In principle, any economic transaction, lending, borrowing or trading can be done without a bank.

Platforms for DeFi lending, like AAVE and Compound, allow users to lend or borrow money by locking funds in a smart contract, where borrowers must provide collateral, usually with cryptocurrency like Ethereum, and lenders can usually earn interest rates between 5% and 15%, much higher than savings accounts with banks. While Uniswap facilitates peer-to-peer trading, other platforms enable yield farming, allowing users to earn rewards for staking owned assets. In India, the draw of DeFi is its accessibility, as anyone with an internet connection and a crypto wallet (like Trust Wallet) can access the space without needing KYC.

Comparing DeFi and Traditional Banking

Accessibility

Traditional banking requires an expansive footprint (the bank branch or available mobile app) and includes KYC checks, restricting access for many rural or undocumented users. DeFi, in contrast, is permissionless. A farmer in Bihar can lend crypto via Aave or trade crypto at PancakeSwap with the touch of a button and zero paperwork. This sparks interest in the Indian government's promotion of DeFi using blockchain, as UPI also handles 1.5 billion transactions monthly.

Control and Transparency

Banks often control your money; it's theirs. In addition, transactions frequently occur in opaque transactions between banks and centralised exchanges. By contrast, records recorded on the blockchain are publicly accessible, meaning that transparency is assured. Accountability through records incentivises lenders to pay, but they will not rely on intermediaries to execute smart contract deals. For investors wary of hidden bank fees, DeFi’s openness is a game-changer.

Costs

Banking involves fees, ATM charges, loan processing costs, and minimum balance penalties. DeFi transactions incur “gas fees” (blockchain processing costs), which can be high on Ethereum but lower on Polygon.

Risk

In traditional banking, stability comes into play, with the RBI's deposit insurance covering up to ₹5 lakh. DeFi, conversely, is riskier as smart contract bugs, hacks (e.g., Poly Network hack for $600 million in 2021), and crypto volatility all put funds at risk. In addition, with a flat 30% tax on crypto coins plus 1% TDS, it will be challenging to realise a profit on DeFi either.

Innovation

Due to regulatory constraints, Innovation happens slowly in the bank (in India). DeFi is incredibly innovative, and new protocols are launched weekly. DeFi is exciting for India's younger and tech-savvy citizens; however, it can be highly experimental (think yield farming and tokenised assets), so caution is warranted.

The Future of DeFi in India

The future of decentralised finance in India relies upon the delicate balance of adopting innovation and regulations. With 10 crore crypto users by 2024, India is a spot for crypto, but the conservative outlook by the RBI and taxation policy present roadblocks. DeFi could make resources available for the unbanked, e.g. small vendors from microloans, or higher yield savings for low-income families. Projects like Polygon's low-cost blockchain have already begun making DeFi scalable for the masses in India.

Conclusion

Traditional banking is India's foundational source of finance, providing trust and stability. DeFi presents an exciting alternative in a world where inclusion and innovation are taken very seriously, but it is not a substitute, at least not yet. For investors, looking at DeFi and banks as a practical hybrid approach makes sense: banks should be used as safe harbours for savings, while DeFi can be used as innovative experimentation with any excess proceeds. Don't chase yields; start small, use platforms like Aave, and keep updating your knowledge. With India's digital economy transforming, there is an opportunity for DeFi to redefine how finance operates, but it will need the trust of regulators and users.