Budget 2021: What’s there for fintech sector?

Budget 2021: What’s there for fintech sector?

By Shruti Aggarwal

The Union Budget 2021 had a slew of measures aimed at boosting the Indian fintech sector and the most significant policy decision is the move to allocate Rs 1,500 crore to incentivise the adoption of digital payments in India.

“There has been a manifold increase in digital payments in the recent past. To give a further boost to digital transactions, I earmark Rs 1,500 crore for a proposed scheme that will provide financial incentive to promote digital modes of payment”.

Just these words by the Union Finance Minister Nirmala Sitharaman in the Union Budget for 2021-22 led a joint cheer by the Indian fintech sector, even as the sector is expected to gain traction via several direct and indirect measures.

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Indeed, as an ever greater number of Indians are increasingly going digital in myriad ways in their daily transactions, there is a parallel need for the sector’s needs to be addressed – which the budget did fairly comprehensively. Also, given that was the first budget since the pandemic left the global economy reeling, including India’s, the need was to refocus on reviving growth, which again the budget addressed via several initiatives with the overall aim of strengthening Atmanirbhar Bharat.

The most significant policy decision is the government’s move to allocate Rs 1,500 crore to incentivise the adoption of digital payments in India.

The most significant policy decision is the government’s move to allocate Rs 1,500 crore to incentivise the adoption of digital payments in India to develop, promote, and accelerate digital payments in the country. Apart from its expected impact of boosting the growth of a digital economy, it should also lead to a spike in innovations in the sector.

The biggest impact is likely to be on digital payments getting easier for a greater number of Indians, especially in the non-metro parts of the country, where the rates of digital literacy are growing but adoption levels need to rise. It should also lead to further enhancement of digital infrastructure in a move towards a cashless economy and letting consumers feel the ease and convenience of transacting digitally. Continued investments in enhancing internet infrastructure and mobile connectivity across the country, especially in Tier-II and Tier-III cities, is also sure to help fintech products and services reach new customers.

The budget announced that a fintechhub would be set up in Gujarat International Finance Tec (GIFT) City

The budget announced that a fintech hub would be set up in Gujarat International Finance Tec (GIFT) City, a move that indicates the seriousness of the Indian government towards the sector. GIFT City, India’s first operational smart city and international financial services centre, is expected to get a further boost from this move as a fintech hub looks to create around 150,000 new jobs for the youth, according to the finance minister.

Within India’s first International Financial Services Centre (IFSC), the proposed fintech hub could provide greater ease of global engagement with Indian fintech startups, along with partnerships and knowledge sharing on a global level. The move will also help increase the move towards further digitization as it will aid the use of artificial intelligence (AI), machine learning, and other aspects of a digital economy. The hub also has the potential of providing a platform for fintech firms to expand globally, which would put it at the level of other leading fintech hubs around the world.

Budget 2021 proposed setting up of development financial institutions (DFI) with an outlay of Rs 20,000 crore to boost loan access for SMEs and MSMEs working in manufacturing and infrastructure.

The budget also proposed the setting up of development financial institutions (DFI) with an outlay of Rs 20,000 crore to boost loan access for businesses SMEs and MSMEs working in manufacturing and infrastructure building. These DFIs are expected to provide funds for low-capital projects when borrowers are unable to get them from commercial lenders. DFIs are often established and owned by governments or charitable organisations. The fintech sector is expected to be crucial here as unlike in the past, the DFIs are to be professionally managed, according to the budget.

The announcement of the increase in the limit of the foreign direct investment (FDI) in insurance to 74% from 49% is also expected to aid the growing insure-tech space as it will provide a broad range of opportunities to related startups in the future.

An increase in the tax audit limit from Rs 5 crore to Rs 10 crore is expected to aid startups.

The increase in the tax audit limit from Rs 5 crore to Rs 10 crore is expected to aid startups as well, helping fintech as this limit is applicable to organizations that transact 95% through digital payments. It is also expected to nudge small businesses to move towards digital payments.

The budget had a clear emphasis on the banking and insurance sectors, with a slew of measures designed to improve the performance of the sector and stimulate growth. The proposal to set up a ‘bad bank’ under the ARC (asset reconstruction company), AMC (asset management company), and AIF (alternative investment funds) model to acquire, manage, and turnaround bad loans, helping reduce the stress on the banking system is perhaps the most significant as the percentage of non-performing assets (NPAs) is expected to rise from the present 7% to about 15%, according to industry estimates.

Provision of Rs 15,700 crore for the MSMEs in the Budget 2021 will help startups get better access to financing.

Fintech startups are also expected to gain from certain other announcements such as tax holidays for one more year till March 31, 2022and capital gains exemption. The provision of Rs 15,700 crore for the Ministry of Micro, Small, and Medium Enterprises (MSMEs) in the budget will help startups get better access to financing. The finance minister also raised the paid-up capital for small companies from Rs 50 lakh to Rs 2.5 crore, another move expected to aid startups. While some had expected that the fintech sector would be accorded an industry status, that was one expectation belied. Most experts however felt that the entire fintech sector would benefit, whether it be digital payments, lending, automation of financial processes, a collaboration between banks and fintechs, P2P lending, and Neo Banks among others.

The fintech market in India was valued at Rs 1,920.16 billion in 2019 and is expected to reach Rs 6,207.41 billion by 2025, expanding at a compound annual growth rate (CAGR) of 22.7% during the 2020-2025 period according to a ResearchAndMarkets.com report released in May 2020. The pandemic and the resultant extended periods of lockdown, while it may have negatively impacted the economy, did provide a further fillip to delivering financial products and services in a contactless format. Digital payments saw an extensive increase in 2020 as an increasing number of consumers joined the digital platform – a move that is expected to be permanent as a younger demographic generally is faster to adopt changes.

Also Read: How women are empowering the Indian fintech sector and way round

(Shruti Aggarwal is the Co-Founder of StashFin, a FinTech.)

(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)

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