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Reserve Bank of India

In a bid to enable technological innovations and boost the FinTech ecosystem in the country, the Reserve Bank of India (RBI), has finally released a framework for setting up a regulatory sandbox (RS). The regulator, had in April this year, had released a draft framework for setting up a regulatory sandbox (RS) or live testing of products or services that can be used FinTech startups in a controlled environment before a commercial launch.

Besides, the RS helps in containing the risk associated with a new financial innovations and also provide a structured avenue for the regulator to engage with the ecosystem and to develop innovative and relevant low-cost financial products.

According to the RS framework, the areas that can potentially benefit include micro-finance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments along with cybersecurity, blockchain and smart contracts among others.

However, the RBI has maintained its stance on the crypto assets and has maintained that technology, products or services related to crypto currency/assets, trading/investing/settling in crypto assets, Initial Coin Offerings, or any other products banned by the regulators or government cannot be a part of the framework. The apex bank has also kept credit registry and credit information related services out of the RS framework.

“The entities may not be suitable for the RS if the proposed financial service is similar to those that are already being offered in India unless the applicants can show that either a different technology is being gainfully applied or the same technology is being applied in a more efficient and effective manner,” the RBI said on the list of barred technologies.

In a statement, the RBI said that while placing the draft ‘Enabling Framework for Regulatory Sandbox’ on its website on April 18 this year, it had invited stakeholders to offer their comments/feedback. “A total of 381 para-wise comments/feedback from 69 stakeholders, including FinTech entities, banks, multilateral agencies, industry associations, payment aggregators, audit and legal firms, government departments, individuals etc. on the various aspects of the framework, were received,” it added.

The proposal to set up an RS in the country dates back to July 2016, when the RBI set up an inter-regulatory Working Group (WG) to look into and report on the granular aspects of FinTech and its implications so as to review the regulatory framework and respond to the dynamics of the rapidly evolving FinTech scenario.

“The objective of the RS is to foster responsible innovation in financial services, promote efficiency and bring benefit to consumers,” the RBI said in a document highlighting the pros and cons of a RS and added that the proposed financial service to be launched under the RS should include new or emerging technology, or use of existing technology in an innovative way and should address a problem and bring benefits to consumers.

Highlighting some of the benefits of RS, the RBI said that the incumbent financial service providers, including banks, also improve their understanding of how new financial technologies might work, which helps them to appropriately integrate such new technologies with their business plans. Innovators and FinTech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly.

Second, the users of an RS can test the product’s viability without the need for a larger and more expensive roll-out. Third, FinTechs provide solutions that can further financial inclusion in a significant way.
“The RS can go a long way in not only improving the pace of innovation and technology absorption but also in financial inclusion and in improving financial reach. Areas that can potentially get a thrust from the RS include microfinance, innovative small savings, remittances, mobile banking and other digital payments,” it added.
However, there are flip side to the RS as well. Innovators might some flexibility and time in going through the sandbox process. However, running the RS in a time-bound manner at each stage can mitigate this risk and that the RBI or its RS will not provide any legal waivers.

Besides, a successful experimenter on RS might still require regulatory approvals before the product/services/technology can be permitted for wider application.

On eligibility, the RBI said that only companies incorporated and registered in India or banks licensed to operate in India can apply for the RS and the applicants should have shall have a minimum net worth of Rs 25 lakh as per its latest audited balance sheet. Besides, the entities must be compliant with the existing regulations/laws on consumer data protection and privacy, should have structure and managerial resources, should have a solution highlighting an existing gap in the financial ecosystem and the proposal should demonstrate how it would address the problem.

The applicants are also required to share the results of Proof of Concept including any relevant prior experiences before getting admission into RS for testing, the framework states.

 

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by Priyanka Pani
Senior Regional Correspondent, Middle East and Asia
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