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The Reserve Bank of India (RBI) has unveiled plans to establish a specialized “On Tap” cohort focused on climate change risks and sustainable finance as part of its Regulatory Sandbox initiative. This move aims to foster innovation in addressing environmental challenges within the financial sector.
“As we all are aware, technology and finance have a critical role in the transition towards a low-carbon economy. There is a need to build innovative solutions and capabilities in these areas,” said newly appointed RBI Governor Sanjay Malhotra. He was speaking at the Policy Seminar on Climate Change Risks and Finance organized by the central bank.
“The Reserve Bank has been encouraging and facilitating innovations through its Regulatory Sandbox and Hackathon initiatives in the Fintech space. We propose to set up a dedicated “On Tap” cohort on climate change risks and sustainable finance under RBI’s Regulatory Sandbox initiative. We are also planning to conduct a special “Greenathon” on climate change and related aspects,” Malhotra added.
The central bank’s regulatory sandbox is aimed at fintech companies, including startups. It is essentially a structured framework that allows market participants to test new products, services, or business models in a live environment with real customers while ensuring appropriate safeguards and oversight are in place. The financial services introduced within the sandbox incorporate innovative or emerging technologies or leverage existing technologies in novel ways. These services aim to solve specific problems and provide tangible benefits to consumers.
RBI’s sandbox is designed to run several cohorts, each involving a select group of entities that test their products over a defined period. These cohorts are organized around specific themes, such as financial inclusion, payments and lending, and digital Know Your Customer (KYC) processes. Each cohort is expected to last for a certain period, usually within seven months.
To promote ongoing innovation within closed themes, RBI also offers the flexibility of “On Tap” applications, allowing entities to submit proposals for testing in areas that are typically not open to new entrants. This initiative ensures that innovation can continue even within established thematic areas.
“As a Central Bank, the Reserve Bank is mindful of its role in addressing and mitigating risks to the financial system from climate change. In this context, our endeavour has been to play the role of a facilitator–including supporting capacity building and fostering a conducive regulatory framework for promoting green and sustainable finance,” Malhotra said.
“One important aspect of green financing/lending for sustainable finance is the higher credit risk due to borrowers’ use of new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness. [RBI’s] Regulated Entities, therefore, need to develop suitable capacity and technical know-how to better appraise risks in financing projects which use such green technologies,” Malhotra added.
Lack of reliable data
The governor emphasized that modeling financial risks associated with climate change requires significant data. However, there is a shortage of reliable data to accurately assess the financial impacts of climate change. Additionally, there is a noticeable absence of sector-specific transition pathways and country-specific carbon emission databases. These challenges hinder RBI’s capacity to carry out a thorough evaluation of climate-related risks. Moreover, these data gaps prevent meaningful comparisons of financial impacts, as each regulated entity may rely on its own assumptions and models to analyze climate-related data.
“To address such constraints, we had in October last year announced the creation of a repository called the Reserve Bank – Climate Risk Information System (RB-CRIS). The repository is intended to bridge data gaps by providing standardised datasets,” Malhotra pointed out.
“These datasets include hazard data, vulnerability data and exposure data related to physical risk assessment, sectoral transition pathways and carbon emission intensity database related to transition risk assessment. Work on this repository is underway and we expect to launch it later this year,” Malhotra added.
RBI’s sandbox for financial innovations
In July 2016, the RBI formed an inter-regulatory Working Group (WG) to examine fintech developments and their regulatory implications. The WG’s report, released for public comment on February 8, 2018, recommended establishing a regulatory sandbox to allow live testing of financial innovations within a controlled environment, providing regulatory guidance to improve efficiency, manage risks, and create opportunities for consumers.
“The RBI has undertaken several initiatives to support the development of digital public infrastructure and establish robust institutional frameworks, complemented by various policy measures aimed at enhancing the financial sector,” RBI Deputy Governor Swaminathan Janakiraman said in September 2024.
“In 2019, the RBI introduced the ‘Regulatory Sandbox’ framework to provide a controlled environment for testing new financial products, services, or business models with real customers under regulatory oversight. This initiative facilitates collaboration among regulators, innovators, and financial service providers to assess the benefits and risks of emerging technologies,” Janakiraman explained.
“Since its inception, five cohorts of the sandbox have evaluated various ideas, with some proving to be feasible. To address situations where a product or service might fall under multiple financial sector regulators, an interoperable regulatory sandbox mechanism was introduced in 2022,” he added.
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