Reserve Bank of India’s Enabling Framework for Regulatory Sandbox

Posted On - 7 May, 2019 • By - Kulin Dave

Vide a press release, the Reserve Bank of India (“RBI”), on April 18, 2019 released the draft of Enabling Framework for Regulatory Sandbox[1]

Principles and Objectives – Enabling Framework for Regulatory Sandbox

A Regulatory Sandbox (“RS”) usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing. The RS allows the regulator, the innovators, the financial service providers (as potential deployers of the technology) and the customers (as final users) to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks. It can provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling or innovation-responsive regulations that facilitate delivery of relevant, low-cost financial products. The RS is potentially an important tool which enables more dynamic, evidence-based regulatory environments which learn from, and evolve with, emerging technologies. The RS provides an environment to innovative technology-led entities for limited scale testing of a new product or service that may or may not involve some relaxation in a regulatory requirement before a wider-scale launch. The RS is, at its core, a formal regulatory programme for market participants to test new products, services or business models with customers in a live environment, subject to certain safeguards and oversight.

Benefits of Enabling Framework for Regulatory Sandbox

  • The
    RS fosters ‘learning by doing’ on all sides. Regulators obtain first-hand
    empirical evidence on the benefits and risks of emerging technologies and their
    implications, enabling them to take a considered view on the regulatory changes
    or new regulations that may be needed to support useful innovation, while
    containing the attendant risks. Incumbent financial service providers,
    including banks, also improve their understanding of how new financial
    technologies might work, which helps them to appropriately integrate such new
    technologies with their business plans. Innovators and FinTech companies can
    improve their understanding of regulations that govern their offerings and shape
    their products accordingly. Finally, feedback from customers, as end users,
    educates both the regulator and the innovator as to what costs and benefits
    might accrue to customers from these innovations.
  • Users
    of an RS 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.
  • FinTechs
    provide solutions that can further financial inclusion in a significant way.
    The RS can go a long way in not only improving the pace of innovation and
    technology absorption but also in financial inclusion and in improving
    financial reach. Areas that can potentially get a thrust from the RS include
    microfinance, innovative small savings and micro-insurance products,
    remittances, mobile banking and other digital payments.
  • By
    providing a structured and institutionalized environment for evidence based
    regulatory decision-making, the dependence of the regulator on
    industry/stakeholder consultations only is correspondingly reduced.
  • The
    RS could lead to better outcomes for consumers through an increased range of
    products and services, reduced costs and improved access to financial services.

Eligibility Criteria for Participating
in the Sandbox:

The target applicants for entry to the RS are FinTech firms
which meet the eligibility conditions prescribed for start-ups by the
government. The focus of the RS will be to encourage innovations where-

  • there
    is absence of governing regulations;
  • there
    is a need to temporarily ease regulations for enabling the proposed innovation;
  • the
    proposed innovation shows promise of easing/effecting delivery of financial
    services in a significant way

The Sandbox Process and its Stages in
a Regulatory Sandbox:

  1. End-to-End
    Sandbox Process – A detailed end-to-end sandbox process, including the testing
    of the products/innovations by FinTech entities, shall be overseen by the
    FinTech Unit (FTU) at the RBI.
  2. The
    Sandbox Process: Stages and Timelines – Each cohort of the RS shall have the
    following five stages and timeline:
  3. Preliminary Screening (4 weeks) – The
    FTU shall ensure that the applicant clearly understands the objective and
    principles of the sandbox and conforms to it. This phase shall last for 4 weeks
    from the launch of the sandbox, where the applications shall be received by the
    FTU and evaluated to shortlist applicants meeting the eligibility criteria.
  4. Test Design (3 weeks) – This phase may
    last for 3 weeks. The FTU shall finalize the test design through an iterative
    engagement with the applicants and identify outcome metrics for evaluating
    evidence of benefits and risks.
  5. Application Assessment (3 weeks) –
    This phase may last for 3 weeks. The FTU shall vet the test design and propose
    regulatory modifications, if any.
  6. Testing (12 weeks) –
    This phase may last for a maximum of 12 weeks. The FTU shall generate empirical
    evidence to assess the tests by close monitoring.

Evaluation (4 weeks) – This phase may last for 4 weeks. The final outcome of the testing of products/services/technology as per the expected parameters including viability/acceptability under the RS shall be confirmed by the RBI. The FTU shall assess the outcome reports on the test and decide on whether the product/service is viable and acceptable under the RS.

Contributed by – Kulin Dave


King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi
Tel: +91 11 41032969 | Email: