Business desk, ETV Bharat: RBI on Tuesday allowed two entities — Natural Support Consultancy Services Pvt Ltd and Nucleus Software Exports Ltd — to start testing their products from November 16 under the first cohort of its regulatory sandbox; here’s a look at what this means
With an aim to spur innovation in the digital payments space, the Reserve Bank of India (RBI) earlier this month announced the opening of the first cohort under the Regulatory Sandbox (RS) with ‘Retail Payments’ as its theme.
The central bank invited entities for live-testing of new products or services in order to offer payment services to the underserved segment of the population.
On Tuesday, RBI said that two entities — Natural Support Consultancy Services Pvt Ltd and Nucleus Software Exports Ltd — have started testing of their products from November 16 under its first cohort.
In order to understand what exactly is RBI’s Regulatory Sandbox and its cohorts, read ahead:
What is a regulatory sandbox?
A regulatory sandbox is a framework that allows for live-testing of new products or services in a controlled environment for which regulators may permit certain regulatory relaxations before a wider-scale launch.
The proposed financial product/service to be launched under the regulatory sandbox should include new or emerging technology, or use of existing technology in an innovative way and should address a problem, or bring benefits to consumers.
Such a sandbox allows RBI, the innovators, the financial service providers and the customers to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.
Users of the regulatory sandbox can test the product’s viability without the need for a larger and more expensive roll-out. If the product appears to have the potential to be successful, the product might then be authorized and brought to the broader market more quickly. If any concerns arise during the sandbox period, appropriate modifications can be made before the product is launched in the broader market.
What are cohorts?
RBI’s regulatory sandbox has adopted a thematic approach to pursue a specific policy objective, like financial inclusion, payments, lending, etc, instead of promoting a broad scope of innovation. Each such theme is called a cohort.
A limited number of entities in each cohort will test their products during a stipulated period. The cohorts may run for varying time periods but should ordinarily be completed within six months.
For its first cohort called ‘Retail Payments’, RBI in November invited entities to test products that deal with retail payments and were engaged in mobile payments, offline payment solutions and contactless payments.
In future, RBI said it will accept “innovative products/services” in the domains of money transfer services, marketplace lending, digital KYC, financial advisory services, wealth management services, digital identification services, smart contracts, financial inclusion products and cybersecurity products.
The central bank will also accept ‘innovative technologies’ such as mobile applications, data analytics, API services, applications under blockchain technology, artificial intelligence and machine learning.
However, RBI has explicitly stated that it will not accept start-ups engaged in the creation of credit registry; credit information services; cryptocurrency or crypto assets; trading, investing and settling in crypto assets; initial coin offerings (ICOs); chain marketing services; and any product or service that has been banned by other regulators and the Indian government.
What is the entry criterion?
Entities applying for the RBI’s regulatory sandbox to test new products must have a net worth of Rs 25 lakh as per their latest audited balance sheets and must be incorporated and registered in India or licensed to operate in India.
What is the sandbox process?
Each cohort of the regulatory sandbox have the following five stages and timeline:
- Preliminary Screening: In this phase, applications are received and evaluated to shortlist entities meeting the eligibility criteria. This phase may last for 4 weeks from the closure of the application window.
- Test Design: In this phase, the test design is finalized through an iterative engagement with the applicant and outcome metrics are identified for evaluating evidence of benefits and risks. This phase may also last for 4 weeks
- Application Assessment: Under this phase, the test design is vetted and regulatory modifications, if any, are proposed. This phase may last for 3 weeks.
- Testing: In this phase, empirical evidence is generated to assess the tests by close monitoring. This phase may last for a maximum of 12 weeks.
- Evaluation: In this phase, the final outcome of the testing of products/services/technology as per the expected parameters including viability/ acceptability under the regulatory sandbox shall be confirmed by RBI. This phase may last for 4 weeks.
