The Reserve Bank of India (RBI) has announced the opening of the third regulatory sandbox cohort on September 13 with the topic of ‘MSME lending’. Interested entities can submit applications for the Third Cohort from October 1, 2021, to November 14, 2021.
What is Regulatory Sandbox (RS)?
It is a framework that allows for live-testing of new products or services in a controlled environment. For this regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing.
Further, it can provide a structured avenue for the regulator to engage with the ecosystem. It can also develop innovation that facilitates the delivery of relevant, low-cost financial products. The RS enables the regulator, innovators, financial service providers, and customers (as end-users) to perform field tests. With this, they can gather evidence on the benefits and hazards of new financial innovations while closely monitoring and limiting their risks.
Benefits & Limitations of Regulatory Sandbox
Operating within the sandbox, the regulators (RBI here) can obtain first-hand empirical evidence on the benefits and risks of emerging technologies and their implications. Innovators and fintech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly. Additionally, if any issues arise during the sandbox time, companies can make necessary changes before they release the product to the general public.
No project is one hundred percent full of good things, it has some limitations as well, and so is this Sandbox plan. With this, the innovators may lose some flexibility and time in going through the RS process. Case-by-case bespoke authorizations and regulatory relaxations can involve time and discretional judgments. Further, successful experimenters may still require regulatory approvals before they can be permitted for wider application.
The first two Cohorts
The first regulatory sandbox cohort focused on retail payments. The RBI received 32 applications, with just six being chosen for the test phase. The following six entities have completed the ‘Test Phase’- Nucleus Software Exports Ltd. (Payne), Tap Smart Data Information Services Private Limited (Citycash), Natural Support Consultancy Services Pvt. Ltd. (IND-e-Cash), Naffa Innovations Pvt. Ltd. (ToneTag), Ubona Technologies Pvt. Ltd. (BHIM Voice) and Eroute Technologies Pvt. Ltd. According to the press release dated 13th September 2021 RBI has ended this phase.
In its second cohort under the regulatory sandbox, the RBI had announced ‘Cross-border Payments’ as its theme. In the press release, the RBI has mentioned the relaxed eligibility requirements for sandbox applications. It said, “To stimulate innovation and broaden the eligibility criteria, the enabling framework has been modified by lowering the net worth limit from Rs. 25 Lakh to Rs. 10 Lakh. It also allowed Partnership firms and Limited Liability Partnerships (LLPs) to participate in the Regulatory Sandbox.”