Reserve Bank of India (RBI) released a draft titled Enabling Framework for RegulatorySandbox, on April 18, with an aim to provide solutions in the space of rapidly evolving fintech companies. As per the guidelines, the central bank has set up a Working Group (WG), to look into the various aspects of the fintech space and its implications. Committed to support the Indian financial sector, WG was required to introduce an appropriate framework for a regulatory sandbox (RS) within a well-defined space and duration where the financial sector regulator will provide the requisite regulatory guidance, in order to increase efficiency and unleash innovation.

A regulatory sandbox will provide a live testing of new products or services in a controlled or test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing. “The sandbox allows the regulator, the innovators, the financial service providers (as potential deployers of the technology) and the customers (as final users) to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks,” stated the RBI draft. This step towards innovative technology in the financial sector would provide a structured avenue for the regulator to engage with the ecosystem and to create a healthy space for innovators, with low-cost financial products.

According to the regulation, the sandbox may run a few cohorts (end-to-end sandbox process), with a limited number of entities in each cohort testing their products during a stipulated period. The regulatory sandbox shall be based on thematic cohorts focusing on financial inclusion, payments and lending and digital KYC. When it comes to the sandbox limitations the WG mentioned that innovators may lose some flexibility and time in going through the sandbox process. However, running the sandbox program in a time-bound manner at each of its stages can also mitigate this risk.

Further regulators can potentially face some legal issues, in case if consumer incurs losses due to failed experimentation or from competitors who are outside the regulatory sandbox, especially those whose applications may have been rejected highlights the circulation: “These, however, may not have much legal ground if the RS framework and processes are transparent and have clear entry and exit criteria. Upfront clarity that liability for customer or business risks shall devolve on the entity entering the RS will be important in this context.”

In the end, according to the framework, the regulatory sandbox would not only improve the pace of innovation and technology absorption but also in financial inclusion and in improving financial reach. Areas such as microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments can potentially be huge beneficiaries from the RS.