The FinTech firms and NBFCs have been pouring in money to the Indian economy alongside the conventional banks, in a bid to keep the ecosystem on its wheels. However, there are challenges as well. What will drive the sector in the coming days?
The Indian FinTech sector has been driving the Government of India’s ambition to make cashless society in the country, which was floated by the Narendra Modi government during demonetisation of November 2016. Besides the conventional banking system which comes with an array of archaic procedures, these tech-driven companies offer a swift lending procedure to the borrowers, channelling funds to the economy.
Valued at Rs 1,920.16 billion in 2019, India accounts for the highest FinTech adoption rate among the emerging markets in the world at 87%, alongside China. On the other hand, the global average rate of adoption for these companies is 64%. According to a study, the Indian FinTech market is expected to grow at a CAGR of 22.7% to 6,207.41 billion. According to NASSCOM, currently, more than 400 such companies are operating in India.
No wonder, these companies have accelerated digitalisation in the Indian economy. But, lately, the economic crisis and Coronavirus pandemic has brought massive disruption in the sector. So far, the non-banking financial companies (NBFC) and FinTech firms are playing a crucial role in keeping the Indian economy on its wheels.
We spoke to Raj N Phani, Chairman and Founder of Zaggle, a FinTech solution provider company, to learn about the multidimensional ecosystem and its challenges, what’s the way forward.
Edited excerpts below.
Q. 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 CAGR of around 22.7% during the 2020-2025 period. How the Covid-19 pandemic has impacted this growth projection?
I believe India, as compared to the USA, is significantly underpenetrated as the Fintech market and there is a lot of catch up. Human beings have evolved and invented and prospered more in times of crisis. Demonetization has fueled the growth of FinTech’s in India, and we all know that it has even created Unicorns.
Similarly, Covid -19 has accelerated the growth of FinTechs. You can see this by looking at how IT stocks have outperformed and have peaked beyond pre-Covid highs. And the Nifty financial services sector is almost back to pre-Covid highs. I believe the future is bright for FinTech’s in India and we should be able to see even better-accelerated growth with suitable liberal policies of the Govt and the Central Bank.
Q. How is the FDI helping Indian FinTech sector?
As you are already aware in the year 2016, the government liberalized FDI norms for FinTechs. Essentially, earlier the automatic route was allowed for only certain companies falling in the list of 18 categories, and companies falling out of this said list needed to obtain prior approval of FIPB for any foreign investment. Whereas the government has liberalized this to say that all entities which are regulated either by SEBI/RBI etc can opt for the automatic route.
This move has definitely benefited Indian FinTech market in a big way. It has moved India’s rank to 3 on global rankings. According to a report, in the year 2019 investments in Indian FinTech’s have doubled to $3.7 bn.
Such a liberal FDI policy makes access to capital very easy and provides ample scope for entrepreneurs/businesses to focus more on innovation and growth.
Q. Is the Indian government and financial regulatory authority’s stance adequate for the NBFC sector’s revival? What should be the government’s stance to make the sector future-proof in case similar situations arise?
While a lot has been done and the government continues to support the sector in every way possible, more policy liberalization and additional tax breaks and exemptions on long term equity capital gains would help the sector to attract better investments.
The government has announced good packages for certain sections in the NBFC space including home finance which should now be extended to other sections too.
Q. What is the way forward for the Indian FinTech sector, especially in light of the devastating Coronavirus impact?
In my view, future FinTech growth of the decade will come from digital payments/Ed-tech/insure tech. Currently, the number of such companies is skewed and will need consolidation to have a better capital base and become competitive.
Q. There are several key trends that are changing the FinTech sector. How is the Indian FinTech industry trying to take the leverage from it?
India has the highest FinTech adoption rate globally. Further in India, Aadhar, high level of banking penetration (through Jan Dhan), high smartphone penetration rate coupled with Indian stack along with tremors of Demonetization has acted as a tailwind for the sector. And the industry has leveraged it appropriately.
Companies with online platforms for e-commerce and cab aggregator are trying to operate on the model of financial technology companies as a feature. Even though this is yet to see some eyebrow-raising results yet, companies with large capital and talent are banking on FinTech to ensure that they are not left behind in this race.