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RBI will allow companies in MSME lending to live test regulations

The first two cohorts under the RBI’s sandbox pertained to regulations on other issues like retail payments.

The Third Cohort under the Regulatory Sandbox (RS) of the Reserve Bank of India (RBI) will start accepting applications from October 1, 2021, RBI said in a statementThe focus of the Third Cohort will revolve around MSME (Micro, Small, and Medium Enterprises) Lending, the RBI had revealed in December last year. The last date for sending applications is November 14, 2021.

The Indian central bank had also toned down eligibility norms for applications under sandbox by reducing the net worth requirement from Rs. 25 lakh to Rs. 10 lakh back while releasing the theme for the third cohort.  

It is well known that India’s bureaucratic hurdles are baked into its regulatory environment. Stakeholders from the trade and commerce industry believe red tape deters innovation; it is what the regulatory sandbox attempts to address with its relaxations. The sandbox is like a Special Economic Zone (SEZ) for conducting financial experiments. If successful, the scheme could produce an increased range of products and services, reduce costs, and improve access to financial services.

What is the Regulatory Sandbox? 

Regulatory sandbox involves live testing of new products or services in a controlled environment in which participating entities can take advantage of relaxed regulatory requirements, Moneycontrol explained.

“The sandbox allows regulators, innovators, financial services providers and customers to conduct field tests to collect evidence on benefits and risks of new financial innovations while carefully monitoring and containing risks,” the business website elaborated in its report. 

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The regulatory sandbox framework was rolled out by the RBI in August 2019.

Fintech companies, including startups, banks, financial institutions, Limited Liability Partnership (LLP) and partnership firms providing support to the financial services business, are considered target applicants for entry into the RS, as per Business Standard

Key details about the First and Second Cohort of RS

The first cohort for regulatory sandbox carried the theme of retail payments in which 32 applications were received by the RBI, out of which it selected only six applicants for the test phase, according to a Hindu Business Line report

Six entities permitted to conduct the test phase were: 

  • Nucleus Software Exports (PaySe), 
  • Tap Smart Data Information Services (Citycash), 
  • Natural Support Consultancy Services (IND-e-Cash), 
  • Naffa Innovations (ToneTag), 
  • Ubona Technologies (BHIM Voice) 
  • Eroute Technologies.

The regulatory sandbox’s second cohort dealt with cross-border payments, RBI notified last year. The bank received 27 applications from 26 entities during the application from December 21, 2020, to February 15, 2021, the Hindu Business Line reported.  

Eight entities have been selected for the test phase of the second cohort. The RBI disclosed that testing of products will commence from the third week of September 2021, the report added. 

  • Book My Forex, 
  • Cashfree Payments, 
  • Fairex Solutions, 
  • Flyremit, 
  • Nearby Technologies, 
  • Open Financial Technologies, 
  • SoCash India, 
  • Wall Street Finance.

RBI has also given a green light to the adoption of products found acceptable under this cohort if the regulated entities comply with applicable regulatory requirements. 

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