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Singapore's decision to issue new digital bank licenses to non-banking companies will adversely affect smaller banks in the sector, said ratings agency Moody's.
Last week, the Monetary Authority of Singapore, said it will issue up to five new digital bank licenses to non-banks.
The central bank and regulator said it will distribute up to two digital full bank licenses, allowing non-banking firms to take deposits from retail customers. It will also issue up to three digital wholesale bank licenses for companies to serve small and medium-sized enterprises and other non-retail segments.
"The announcement by the MAS that it will issue up to five new digital bank licences is credit negative for small foreign-owned incumbent banks in Singapore," Simon Chen, vice president for financial institutions group at Moody's Investors Service, said in a note on Tuesday, indicating that their credit ratings may suffer as a result.
"Their modest domestic franchises will face the greatest disruption risk from digital bank entrants," he added in a statement.
Moody's explained that the new digital licenses "open the door" for fintech companies to use advanced technology and data analytics to offer better banking services at a relatively lower cost.
Fintech, or financial technology, refers to firms that use various technologies to provide financial services such as digital payments.
It is expected to shake up the banking sector in the city-state, which is dominated by three large domestic players — DBS Group, Oversea-Chinese Banking Corp and United Overseas Bank. Those firms have "led digitisation efforts" in Southeast Asia and have the technology to "defend their dormant positions against the new fintechs," Moody's said.
Many foreign banks are also making progress in digitization, but their Singapore operations remain small and less strategically important to the overall business, the ratings agency said. "This means they are unlikely to benefit from ready access to new digital investment."
Cross-border payments start-up InstaReM is preparing to apply for a digital banking license in Singapore, according to reports this week. Gaming hardware manufacturer Razer is also reportedly considering it.
A digital banking license could also appeal to one of Southeast Asia's top start-ups Grab. While the company started off as a ride-hailing business, it has a portfolio of financial services available across the region, including digital payments, lending and insurance.
Last month, before the MAS decision, Reuters reported that Grab was exploring a move into Singapore banking.
Grab Financial Group's senior managing director, Reuben Lai, told CNBC on Wednesday that the company will "study the digibank licensing requirements closely."
He also said the company will keep an "open mind as we assess how best to pursue this, including whether to work with suitable partners."
Hong Kong has a similar framework for digital bank licenses. In recent months, the Hong Kong Monetary Authority began granting digital-only banking licenses to firms that are backed by the likes of Standard Chartered, Tencent and Alibaba-affiliate Ant Financial, among others.