RBI’s Regulatory Sandbox Framework

In financial regulation, a Regulatory Sandbox is a controlled framework that allows fintech innovations to be tested in the real market with certain regulatory relaxations and oversight. It is essentially a “safe space” for experimentation, where startups and financial institutions can pilot new products or technologies with live customers but on a limited scale and with regulatory guidance.

The goal is to foster innovation in financial services while containing risks – companies get to prove their concepts without needing full regulatory approval upfront, and regulators can observe and learn about novel solutions to inform appropriate rules.

RBI’s Sandbox framework

The Reserve Bank of India launched its regulatory sandbox program in 2019. Since then, RBI has conducted several thematic cohorts (batches) of the sandbox.

Each cohort focuses on a specific theme or problem area in fintech, inviting applicants to test relevant innovative products. As of the mid-2020s, RBI has completed four cohorts and initiated a fifth:

• Cohort 1 – Retail Payments (2019-20): Focused on innovations in payments for retail users. For example, solutions admitted included offline payment systems for feature phones, NFC-based contactless payments, voice-based UPI payments, and other new payment interfaces. Six entities successfully completed this cohort, demonstrating use-cases like card-less offline payments via SIM overlays.
• Cohort 2 – Cross-Border Payments (2020): Aimed at improving remittances and international payments. Eight entities were selected, working on ideas such as blockchain-based cross-border transfer platforms, digital process automation for forex transactions, and aggregation services for cheaper remittances.
• Cohort 3 – MSME Lending (2021): Targeted innovations to ease credit for Micro, Small & Medium Enterprises. This included digital lending platforms for MSMEs, cash-flow based lending models, etc. (The cohort was announced and applications invited in late 2021).
• Cohort 4 – Prevention of Financial Frauds (2022): Announced by RBI to develop tools that enhance fraud governance in digital payments and lending. Solutions here could include AI-based fraud detection systems, cybersecurity innovations, etc. (By 2023, some products like advanced fraud analytics tools were tested under this cohort).

Beyond these, in 2023 RBI introduced an “On-Tap, Theme-Neutral” sandbox (sometimes referred to as a fifth cohort). In a theme-neutral sandbox, innovators can propose any fintech solution (not restricted to a predefined theme) for testing.

For example, under the 5th cohort launched in 2024, five entities were selected (from 22 applicants) to test varied solutions ranging from AI risk assessment models to digital KYC for NRIs. This indicates RBI’s sandbox is evolving to be more flexible and continuously open for applications (an “on-tap” sandbox) to support innovation beyond set themes.

How the sandbox works?

Companies (startup or established) apply to RBI with their innovative product idea when a sandbox cohort is announced. The product should be genuinely innovative, beneficial (e.g. promote financial inclusion, efficiency, or consumer benefit), and ready to test but might be impeded by existing regulations. The sandbox process involves several stages:

1. Application & Screening: RBI screens applications to ensure only eligible and genuinely novel projects are admitted. Participants must have proper customer safeguards in place (data security, fair practices) even during testing.
2. Test Design: The selected entities, in consultation with RBI, agree on a test plan – defining the scope (number of customers, transaction limits), duration (often a few months), and metrics of success. RBI may grant temporary regulatory relaxations if needed (for example, exemption from a specific reporting requirement or KYC norm) but only within the sandbox scope.
3. Testing Phase: The companies launch their product to a limited user base. Real customers use the service under close monitoring. Risks are contained by limits (e.g., small transaction sizes or a cap on customers). The entities must report to RBI on progress, any issues, and performance data.
4. Evaluation & Graduation: After the test period (typically up to 6 months, though RBI later extended possible duration to 9 months based on experience), results are evaluated. If the product is successful and found safe, the regulator may allow it to exit the sandbox and operate more widely in the market (possibly with appropriate licenses or regulatory approvals thereafter). If not, the product may be discontinued or need revisions.

Benefits of the sandbox

It provides a win-win – innovators get a chance to live-test new financial solutions without fear of immediate regulatory roadblocks or enforcement, and can refine their product with feedback. Regulators get to learn about emerging technologies and their risks in a controlled manner, which aids evidence-based policy making.

Consumers benefit in the long run as successful innovations (like UPI-based products or new lending models) reach the market safely. Moreover, RBI’s sandbox has encouraged collaboration: many cohorts saw startups working alongside banks or NBFC partners, fostering partnerships.

Notable outcomes

Some products that underwent sandbox testing have later launched to public. For instance, innovations in offline digital payments tested in Cohort-1 became crucial in extending digital payments to areas with poor connectivity. Likewise, cross-border payment pilots aligned with RBI’s efforts to reduce remittance costs.

By 2025, RBI indicated that feedback from the first four cohorts was positive and that an Inter-operable Regulatory Sandbox (IoRS) may be explored – potentially allowing multiple financial sector regulators (RBI, SEBI, IRDAI, etc.) to coordinate on sandboxes for products spanning regulatory domains.