The Reserve Bank of India (RBI) has unveiled the draft enabling framework for a regulatory sandbox, which would provide fintechs, startups and lenders access to banking systems, enabling them to develop proof of concepts for innovative digital solutions for payments, lending and other financial services.
RBI’s draft framework defines startup as an entity that is less than seven-years old and whose turnover for any of the years has not exceeded Rs 0.25 billion. Further, the entity must be working towards innovation, development or improvement of products or processes or services.
The regulatory sandbox is a concept that allows digital firms to access the banking ecosystem and develop a proof of concept for innovations in digital financial services. The fields where banks and fintechs can test their solutions include retail payments, money transfer services, marketplace lending, digital know-your-customer (KYC), financial advisory, digital identification, wealth management, smart contracts, financial inclusion and cyber security. They can use new technologies such as mobile applications, data analytics, application programme interface services, blockchain, artificial intelligence and machine learning applications for the purpose.
However, access to the regulatory sandbox is extremely restricted, which ensures that failures do not cause loss of any constituents in the banking system. Further, RBI has barred players from developing technology for cryptocurrency, credit information bureau or initial coin offerings.
According to RBI, the focus of the regulatory sandbox should be narrow in terms of areas of innovation and limited in terms of intake. It will begin the testing process with 10-12 selected entities through a comprehensive selection process as detailed in the framework under fit and proper criteria. Under the fit and proper criteria, the participating entity should have a minimum net worth of Rs 5 million and the promoters should not have violated any banking regulations. Applicants need to prove that their products or services are technologically ready for deployment.
Moreover, applicants should demonstrate there is a relevant regulatory barrier that prevents deployment of the product/service at scale, or a genuinely innovative and significantly important solution is proposed for which relevant regulation is necessary but absent, the RBI said.