RBI releases draft framework for regulatory sandbox to help fintech space

The Reserve Bank of India (RBI) on Thursday released a draft ‘Enabling Framework for Regulatory Sandbox’ in order to support the country’s rapidly growing fintech space.

The sandbox will begin the testing process with 10-12 selected entities focusing on financial inclusion, payments and lending, digital KYC, etc. The cohorts (end-to-end sandbox process) may run for varying time periods, but should ordinarily be completed within six months, said the RBI.

A regulatory sandbox usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing.

The regulatory sandbox would be within a well-defined space and duration where the RBI will provide the requisite regulatory guidance, so as to increase efficiency, manage risks, and create new opportunities for consumers.

The draft guidelines highlight the clear principles and role of the proposed regulatory sandbox, its pros and cons, the reasons for setting up the regulatory sandbox and expectations of the RBI from the sandbox. The central bank has invited comments on the draft guidelines from stakeholders by May 8.

The draft framework was released on the recommendation of an inter-regulatory working group set up by the RBI in July 2016 to review the regulatory framework and respond to the dynamics of the rapidly evolving fintech scenario.

The target applicants for entry to the regulatory sandbox are fintech firms which meet the eligibility conditions prescribed for start-ups by the government. The entity also needs to have a minimum net worth of ~50 lakh, according to its latest audited balance sheet.

The RBI said that it shall bear no liability arising from the regulatory sandbox process and any liability arising from the experiment will be borne by the applicant as a sandbox entity.

The focus of the regulatory sandbox will be to encourage innovations where there is absence of governing regulations or a need to temporarily ease regulations for enabling the proposed innovation or the proposed innovation shows promise of easing/effecting delivery of financial services in a significant way.

The applicants should highlight how it would address an existing gap in the financial system through its product/service and demonstrate that there is a relevant regulatory barrier in its deployment.

The guidelines listed out the various entities that can apply for the sandbox process as well as the ones that won’t be eligible for the sandbox.

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