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RBI regulatory sandbox

Topics Covered:

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inclusive growth and issues arising from it.

 

RBI regulatory sandbox

 

What to study?

For Prelims and Mains: Regulatory sandbox- meaning, features, need and significance.

 

Context: The Reserve Bank of India (RBI) has issued the final framework for regulatory sandbox in order to enable innovations in the financial technology space.

 

Key facts:

  1. RBI will launch the sandbox for entities that meet the criteria of minimum net worth of ₹25 lakh as per their latest audited balance sheet. 
  2. The entity should either be a company incorporated and registered in the country or banks licensed to operate in India.
  3. While money transfer services, digital know-your customer, financial inclusion and cybersecurity products are included, crypto currency, credit registry and credit information have been left out.

 

What is a regulatory sandbox?

A regulatory sandbox is a safe harbour, where businesses can test innovative products under relaxed regulatory conditions. Typically, participating companies release new products in a controlled environment to a limited number of customers for a limited period of time.

 

Significance and benefits of a regulatory sandbox:

  1. The “regulatory sandbox” will help fintech companies launch innovative products at a lower cost and in less time.
  2. The sandbox will enable fintech companies to conduct live or virtual testing of their new products and services.
  3. These companies will also be able to test the viability of the product without a wider and expensive rollout.
  4. It will help companies to experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.

 

Need:

  1. According to NITI Aayog, India is one of the fastest growing fintech markets globally, and industry research has projected that $1 trillion, or 60% of retail and SME (small and medium sized enterprises) credit, will be digitally disbursed by 2029.
  2. The Indian fintech ecosystem is the third largest in the world, attracting nearly $6 billion in investments since 2014. Fintech or financial technology companies use technology to provide financial services such as payments, peer-to-peer lending and crowdfunding, among others.
  3. Therefore, in order to protect customers and safeguard the interests of all stakeholders, and streamline their influence on the financial system, there is need for a regulatory and supervisory framework for fintech firms.

 

Way ahead:

Regardless of their specific terms, structures or mandates, regulatory sandboxes clearly work. They act as an impetus to innovation, build trust among stakeholders, protect consumers and result in sensible and forward-looking regulations. By introducing a sandbox for payments, the RBI could achieve the much-needed balance between innovation and regulation and help the Indian fintech industry achieve its full potential.

 

Sources: the hindu.