The Reserve Bank of India on Monday said it will issue norms for introduction of a regulatory sandbox in the next two months to promote innovation in the financial sector, which enables conduct of live experiments with limited chances of failure.
At a Fintech conference organised by NITI Aayog here, RBI Governor Shaktikanta Das said the RBI’s working group on fintech and digital banking, in its November 2017 report, suggested the introduction of a ‘regulatory sandbox/innovation hub’ within a well-defined space and duration to experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
“A regulatory sandbox would benefit fintech companies by way of reduced time to launch innovative products at a lower cost. Going forward, the Reserve Bank will set up a regulatory sandbox, for which guidelines will be issued in the next two months,” he said.
The fintech movement, which enables technology-led financial innovations, has the potential to fundamentally transform the financial landscape where consumers will get to choose from a larger set of options at competitive prices and financial institutions could improve efficiency through lower operational costs, Das said. “There are as many as 1,218 fintech firms in India with nearly 52 per cent adoption rate for financial innovation, as per a global survey,” he added. He said the RBI has encouraged banks to explore the possibility of establishing new alliances with fintech firms.
“It is essential that flow of investments to this sector is unimpeded to realise its full potential. It is imperative to create an ecosystem which promotes collaboration while carefully paying attention to the implications that it has for the macro economy,” Das said.
Pointing out some of the challenges, he said risks for fintech products may also arise from cross border legal and regulatory issues. Data confidentiality and customer protection are major areas that also need to be addressed, he said. “The RBI has been encouraging digital payments … and has ensured that it does not remain the domain of only commercial banks, as non-bank entities have been allowed to carry out payment activities. As a result, the total volume of retail electronic payments witnessed about nine-fold increase over the last five years,” Das said.
“Banks have been the traditional gateway to payment services. However, with the fast pace of technological changes, this domain is no longer the monopoly of banks. Non-bank entities are cooperating as well as competing with banks, either as technology service providers to banks or by directly providing retail electronic payment services. The regulatory framework has also encouraged this enhanced participation of non-bank entities in the payments domain,” he said. Das will meet heads of payment banks later this week.
Invoice trading is another nascent area of fintech application in India as it assists MSMEs which often have working capital and cash flow problems due to delayed payments. The RBI has set up the Trade Receivables Discounting System (TReDs), a financing arrangement where technology is leveraged for discounting bills and invoices, Das said.