With Regulatory Sandbox, RBI Looks To Create Innovation Test Lab For Fintech

India’s fintech space is going through an evolutionary phase. Fintech startups especially in payments, insurance and lending have brought the banking services to every consumer’s mobile.

Acknowledging the recent innovations by fintech startups, the Reserve Bank of India (RBI) has now released a draft ‘Enabling Framework for Regulatory Sandbox’ that will allow fintech startups to test within a regulatory sandbox (RS).

After successful sandbox testing, fintech startups may still need regulatory approvals before their products, services, or technology can be permitted for wider application, according to the draft.

The step has been taken after an inter-regulatory working group submitted its report in February 2018 and suggested to introduce an appropriate framework for a ‘Regulatory Sandbox’ within a well-defined space and duration.

The group consists of members from RBI, SEBI, Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA), National Payments Corporation of India (NPCI), Institute for Development and Research in Banking Technology (IDRBT), select banks and rating agencies which RBI had set up in July 2016.

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

According to the draft, the sandbox will allow regulators, innovators, financial service providers (as potential deployers of the technology) and customers (as end users) to conduct field tests with the objective of collecting evidence on the benefits of new financial innovations, while also carefully monitoring and containing their risks. It can provide a structured path for the regulator to engage with the ecosystem and to develop innovation-enabling and responsive regulations for financial products.

With this RBI looks to provide an environment to fintech startups for limited-scale testing of a new product or service before a wider-scale launch.

Who Can Apply

While the draft ‘Enabling Framework for Regulatory Sandbox’ will be open for comments till May 8, the sandbox will be applicable for all the fintech startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).

According to the draft, the focus of the RS will be to encourage innovations where there is an absence of governing regulations or when there is a need to temporarily ease regulations for enabling the proposed innovation or in cases where the proposed innovation shows promise of easing or effecting delivery of financial services in a significant way.

The applying startups should also have a minimum net worth of INR 50 lakh as per the latest audited balance sheet and should have a satisfactory CIBIL or equivalent credit score of the promoters, directors, or entity.

Such startups will be deemed ‘Fit and Proper criteria for selection of participants in RS’.

Crypto Startups Barred From The Regulatory Sandbox

The draft, however, has clarified that those startups offering crypto solutions and ICOs, will not be allowed to test regulatory sandbox.

According to draft, the entities may not be suitable for sandbox testing if the proposed financial service is similar to those that are already being offered in India unless the applicant 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 products and services that are put on the negative list of RBI are:

• Credit registry
• Credit information
• Cryptocurrency/Crypto assets services
• Trading/investing/settling in crypto assets
• Initial Coin Offerings.
• Chain marketing services, and
• Any product/services which have been banned by the regulators/Government of India

However, RBI will allow blockchain-based innovations other than crypto in certain areas. With the regulatory sandbox, RBI aims to promote innovation in the areas of:

• Retail payments
• Money transfer services
• Marketplace lending
• Digital KYC
• Financial advisory services
• Wealth management services
• Digital identification services
• Smart contracts
• Financial inclusion products
• Cyber security products

10-12 Startups To Be Shortlisted For The First Cohort

To begin with, RBI will shortlist only 10-12 fintech startups through a comprehensive selection process as detailed in the framework under ‘Fit and Proper criteria for selection of participants in RS’. The shortlist could be expanded or reduced based on RBI’s learnings.

The 26-week-long process has been divided into five phases: Preliminary screening, test design, application assessment, testing, and evaluation.

Fintech Startups Welcome The Sandbox

Welcoming the draft, Bhavin Patel, cofounder of LenDenClub said, “We welcome this proposal by RBI which can lead the Indian fintech sector to a new revolution. In Singapore, the finance regulator has used such methods as an opportunity to explore products/services which are not otherwise acceptable to them. If those are proven, makes a way through regulations and available in the open market. This way we will definitely come across new innovations in the financial services domain.”

RupeeCircle founder Ajit Kumar agreed with Patel but added that the draft still needs some refining. “RBI coming up with a Regulatory Sandbox to promote a system of ‘Learning By Doing’ is a step in the right direction for the startup ecosystem and fintech in specific.

RBI embracing blockchain is an innovative step in the right direction. However, there are certain conditions in the draft which are limiting the potential of Regulatory Sandbox. But this is just the first draft and we shall be keeping a close eye on further developments.”

The idea of a regulatory sandbox has been under discussion for the last two years. The draft is currently open for discussion and startups in the fintech sector will have to keep a close eye on its potential if and when it gets implemented.