The Reserve Bank of India has launched the second cohort of its enhanced regulatory sandbox framework, now branded as RBI Sandbox 2.0, with 12 fintech companies selected to test innovative financial products under controlled conditions. The cohort spans three thematic areas: cross-border retail payments, microinsurance distribution through digital channels, and AI-driven lending models for underserved segments. Each participant has been granted a 12-month testing window with clearly defined metrics and consumer safeguards.
What Is the Regulatory Sandbox
A regulatory sandbox is a controlled environment in which fintech companies can test new products, services, or business models with real customers under relaxed regulatory requirements, while the regulator monitors the experiment and evaluates outcomes. The RBI launched its first sandbox cohort in 2019, focusing on retail payments. Products that successfully completed the sandbox, including several offline payment solutions and IoT-based payment devices, were granted full regulatory approval for market launch.
The 2.0 version represents a significant upgrade. The application process has been streamlined, the testing window extended from 6 months to 12 months, and the scope expanded to include lending and insurance innovations alongside payments. The RBI has also introduced a dedicated fintech coordination unit within the Department of Regulation to provide ongoing guidance to sandbox participants, addressing a common complaint from the first cohort about regulatory uncertainty during the testing period.
Cross-Border Payment Innovations
Four of the twelve selected companies are testing cross-border payment solutions. These innovations target the large Indian diaspora remittance market, which processes over 120 billion US dollars annually, as well as the growing demand for seamless outward remittances for education, travel, and investments. The solutions being tested include blockchain-based settlement rails that promise to reduce remittance costs from the current average of 4.5% to below 1%, and real-time currency conversion engines integrated with UPI for incoming remittances from select corridor countries.
One particularly interesting entrant is testing a multi-currency e-wallet that would allow Indian users to hold digital balances in rupees, US dollars, Singapore dollars, and UAE dirhams within a single wallet, with instant conversion at interbank rates. If successful, this could simplify the financial lives of the estimated 1.8 crore Indians who travel internationally each year and the 3.2 crore NRI community that frequently moves money between countries.
Microinsurance Through Digital Channels
Three companies are testing microinsurance products designed for distribution through digital platforms. These products target India's vast uninsured and underinsured population with bite-sized coverage, including daily hospitalisation cover for as little as 5 rupees per day, crop insurance bundled with weather data alerts, and accidental death cover embedded within mobile recharge and bill payment transactions. The products are designed to be purchased with minimal friction, often as add-ons to transactions the customer is already making, removing the traditional barriers of lengthy application forms and medical underwriting.
The IRDAI has issued a complementary notification allowing these sandbox participants to use simplified product structures with reduced disclosure requirements during the testing period. If outcomes are positive, particularly around claims ratios and customer satisfaction, these streamlined product designs could become the template for a new category of mass-market insurance products that reach India's informal economy workers.
AI-Driven Lending Models
Five companies in the cohort are testing AI-based lending models. The innovations range from cash-flow-based lending for gig economy workers, using data from food delivery and ride-hailing platforms to assess creditworthiness, to psychometric scoring models that assess credit behaviour through mobile usage patterns and digital footprints. One company is testing a lending model specifically designed for women micro-entrepreneurs in rural areas, using self-help group repayment data and mobile money transaction histories as the primary underwriting inputs.
The RBI has imposed specific conditions on the AI lending participants. All models must provide explainable outputs, meaning borrowers receive a clear reason if their application is declined. Demographic factors including gender, caste, and religion are explicitly excluded from model inputs. Interest rates offered through AI-driven models cannot exceed the applicable upper bounds set by the RBI for microfinance and personal loans. Participants must also submit monthly reports on approval rates, default rates, and model fairness metrics disaggregated by gender and geography.
Why This Matters for Consumers
The innovations being tested in RBI Sandbox 2.0 address real gaps in India's financial services ecosystem. Cross-border payment costs remain unreasonably high. Insurance penetration stands at just 4.2% of GDP, well below the global average. And formal credit access remains unavailable to a substantial portion of the working population that lacks traditional income documentation. If even a fraction of these sandbox experiments succeed and receive full regulatory approval, the practical benefits for millions of Indians could be significant.
The RBI expects to publish interim results from the cohort by September 2026 and final assessments by March 2027. Successful products will be granted a pathway to full market launch, while those that do not meet performance or consumer protection benchmarks will be required to wind down operations in an orderly manner with full protection of consumer interests.
Source
RBI Regulatory Sandbox Cohort 2 Announcement, RBI Fintech Department