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RBI norms for regulatory sandbox GS: 3 ECONOMY EMPOWERIAS

RBI norms for regulatory sandbox

Mains Questions:

 

Q) Recently, the Reserve Bank of India (RBI) has released the final framework for setting up a regulatory sandbox to enable innovations in financial technology. In this context, Discuss the meaning of Regulatory sandbox and how they will help in achieving financial inclusion in an developing country like India?

 

 

Table of Content

  • In news
  • Meaning-Regulatory Sandbox
  • Eligibility criteria for Regulatory Sandbox
  • Significance of move
  • RBI’s recent draft guidelines
  • How does the approach works?
  • Examples
  • Regulatory Sandbox and Financial Inclusion
  • Steps needed to regulate regulatory sandbox
  • Risk associated with Regulatory sandbox
  • Conclusion

 

 

In news:

  • The Reserve Bank of India (RBI) has released the final framework for setting up a regulatory sandbox to enable innovations in financial technology. 

 

What is Regulatory Sandbox?

  • A sandbox is a safe zone where regulators facilitate small-scale roll-outs of new products to real customers without serious risks to consumers or financial stability
  • RS refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain relaxations for the limited purpose of the testing.
  • The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen
  • The panel, which submitted its report in November 2017, had called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
  • The RS allows the regulator, innovators, financial service providers and customers to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.
  • These sandboxes may help usher in improvements in financial inclusion through innovations.
  • The first regulatory sandbox was launched in 2015 in the UK.
  • At the beginning of 2018, there were more than 20 regulators implementing or exploring the concept in countries such as Australia, Malaysia, Singapore and the UK.

 

Eligibility criteria for RS

  • Fintech companies including startups , banks, financial institutions and any other company partnering with or providing support to financial services businesses 

 

How does the approach work?

  • As per the UN, the concept of the regulatory sandbox keeps evolving into distinct models determined by several factors.
  • It facilitates the necessary dialogue between market participants and regulators to inform regulatory actions that strike the right balance between facilitating innovation and mitigating risks. 

 

Are there any examples?

  • In May 2017, a London-based remittance service provider WorldRemit and three other fintech firms were permitted to test their product for remote customer identification in the Malaysian regulator’s sandbox.
  • WorldRemit’s technology allowed customers to submit identification via mobile phone through photos posing along with their official IDs.
  •  The Malaysian regulatory authority, which had not permitted this method for customer identification prior to the testing, allowed WorldRemit to implement the innovative product.
  • The authority drafted e-KYC guidelines that allow other providers to implement similar technology and compete with WorldRemit. 

 

 

Significance of this move:

  • 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 move will allow fintechs to test their applications in a flexible regulatory environment before introducing them to consumers.
  • RBI will join the league of other central banks in the world that have set up regulatory sandbox to encourage the development of new technological applications in banking.
  • Fintech companies can explore areas like retail payments, money transfer, digital Know Your Customer (KYC), smart contracts, financial inclusion and cybersecurity among others.
  • Fintechs can use mobile technology, data analytics, Application Program Interface (API), blockchain, artificial intelligence and machine learning.
  • RBI may relax liquidity requirement, board composition, management experience, financial soundness and track record to enable higher participation
  • RBI will launch the sandbox with a few numbers of selected entities that meet the ‘fit & proper’ criteria. Bank accounts and credit history of the entities and their promoters or directors will also be under the scanner to qualify for admission.
  • Encourage innovations intended for use in the Indian market in areas where there is absence of governing regulations 

 

How Regulatory Sandboxes will  help financial inclusion? 

  • In an emerging economy like India, such approaches also help financial inclusion. 
  • These sandboxes may help improvements in financial inclusion through innovations.
  •  Examples include biometric ID, alternative credit scoring, e-KYC, blockchain-based remittances, and new business models serving marginalised clients.
  • It creates a conducive and contained space where new players experiment with innovations at the edge or even outside of the existing regulatory framework.
  • A regulatory sandbox brings the cost of innovation down, reduces barriers to entry, and allows regulators to collect important insights before deciding if further regulatory action is necessary.
  • Regulatory sandboxes may open space for improvements in financial inclusion through innovations—for example, biometric ID, alternative credit scoring, e-KYC, blockchain-based remittances, and new business models serving marginalized clients.
  • This is important because the success of financial inclusion largely hinges on the capacity of the financial sector to innovate. Innovation can address traditional barriers to financial inclusion such as legal.

 

 

What do the RBI’s recent draft guidelines say? 

  • As per the draft guidelines, any Indian startup worth more than Rs 50 lakh is eligible to apply for the regulatory sandbox, provided that it is offering a fresh solution for an “existing gap” in the financial ecosystem.
  • The RBI in its first phase of testing will select 10-12 startups working in spaces such as digital payments, lending, remittance services, KYC testing, cyber security etc.
  • However, startups with crypto-currency or credit registry solutions will not be considered by the regulators.

 

Steps needed to Regulate Sandbox:

  • Running the RS in a time-bound manner at each stage can mitigate this risk. 
  • Temporarily ease regulations for enabling the proposed innovation. 
  • The RS shall be based on thematic cohorts focussing on financial inclusion, payments and lending, digital KYC. 
  • Regulators need to keep pace with the brand-new business models that are rapidly emerging. 
  • Adequate human and financial resources to select proposals, provide guidance,
  • Oversee experiments and evaluate innovations. 
  • The test-and-learn approach  can be followed which enables a regulator to craft an ad hoc framework within which an innovator tests a new idea in a live environment, with safeguards and key performance indicators in place.
  • A wait-and-see approach allows a regulator to observe how an innovation evolves before intervening (e.g., person-to-person lending in China). 
  • . When considering a regulatory sandbox, regulators should clearly define the objectives and the challenges that need to be addressed. They also need to dedicate sufficient resources to support implementation. It is crucial to engage the industry early in the process to get its perspective and secure buy-in

 

Risks and Limitations associated with Regulatory Sandbox:

  • 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 judgements
  • The RBI or its RS cannot provide any legal waivers.
  • Post-sandbox testing, a successful experimenter may still require regulatory approvals before the product/services/technology can be permitted for wider application.
  • Regulators can face some legal issues, such as those relating to consumer losses in case of failed experimentation or from competitors who are outside the RS, especially those whose applications have been/may be rejected.

Conclusion:

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. Fintech or financial technology companies use technology to provide financial services such as payments, peer-to-peer lending and crowdfunding, among others. 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.

Source)

 

thehindu.com/business/rbi-issues-final-norms-for-regulatory-sandbox/article29086487