RBI Lowers Threshold For Companies To Participate In Regulatory Sandbox
RBI allows more entities to experiment in its regulatory sandbox, eases entry barrier
The Reserve Bank of India today eased the requirements for companies which may participate in the regulatory sandbox it has created.
The regulator released final guidelines for the regulatory sandbox after it sought public comments on the draft framework in April.
While the draft said companies which qualify as “startups” under the Government of India’s definition can participate in the sandbox, it has now broadened the kind of firms which can participate. The RBI said the participating entity can be a company incorporated in India or even a bank licensed to operate in India. Financial institutions constituted under a statute in India would also be eligible. The minimum net worth requirement has been lowered to Rs 25 lakh compared with Rs 50 lakh in the draft.
The central bank also changed the maximum permissible timeline for running a cohort to 27 weeks, instead of 26 week earlier. A cohort is a thematic end-to-end sandbox process where a specific number of entities can participate and focus on a specific theme, such as payments, lending financial inclusion, digital know-your-customer norms, among others. While each cohort may run for varying time periods, it may not extend the maximum time period, the RBI said.
In its draft guidelines the RBI had stipulated a timeline for the five stages of testing a product or solution. In the final guidelines, the regulator kept the timeline mostly untouched, except allowing an extra week for test design.
The regulator also removed the number of maximum permissible entities in a cohort and said it would be decided by the RBI. Earlier, the RBI had said that a maximum of 10-12 entities can participate in a cohort
What Participants Must Do
The entities participating in the regulatory sandbox would still need to demonstrate that the product they want to test in the regulatory sandbox has the technological capability of being introduced in the broader market. The entity must demonstrate arrangements to ensure compliance with the existing regulations and laws on consumer data protection and privacy, the RBI said.
The banking regulator said the entities must build adequate safeguards into its information technology systems to ensure cyber security.
On top of this, the entity participating in the sandbox would have to ensure that the fintech solution they are testing highlights an existing gap in the financial ecosystem and the proposal should demonstrate how it would address the problem, and bring benefits to consumers or the industry and/or perform the same work more efficiently. Alternatively, the entity must demonstrate there’s a regulatory impediment in the development or implementation of a truly innovative product or solution.
Conditions For Exit Or Extension
The RBI said in case the testing of the product or solution in the regulatory sandbox is not likely to be completed within the stipulated period of 27 weeks, the entity is expected to apply for extension of at least a month before the deadline.
Sandbox testing would be discontinued at the RBI’s discretion if the entity doesn’t achieve its intended purpose, as per the schedule mutually agreed to. The regulator may also discontinue the testing if the entity is unable to meet regulatory guidelines and directions or if it has acted in a negligent or malicious manner, and has not kept the best interest of the consumer in mind.
To exit the sandbox voluntarily, the entity would have to inform the RBI at least one month before its exit after ensuring that any existing obligation to its customers of the financial service under experimentation is fully addressed. The draft guidelines had allowed one-week notice.