The Union Budget 2023-24 assumes critical importance at a time when fintech, which has transformed how financial services are transacted, is expected to reach Rs 9.2 billion at a CAGR of 24.96 per cent between 2022 and 2027. Fintech companies are paving the country's path to financial inclusion as a robust tech stack coupled with a strong distribution network has made it easier for Indians to access financial products and services.
However, this sector is beset by several challenges, including crashing valuations and an ongoing funding winter. This is in addition to the constantly changing guidelines in the digital lending space.
According to Pankaj Gupta, chief executive officer (CEO) of Mufin Green Finance, many fintechs are also riding on the coattails of non-banking financing companies' (NBFC) books.
"When we talk about implementing new changes, the technology or system at the grassroots level is absent. It would take time to come up with the right solution and build a technology platform to alleviate policy-related or regulatory challenges," he said.
Easing The Load
Several fintech companies are batting for policies that will ease the financial burden on the sector, such as risk mitigation measures to the First Loss Default Guarantee (FLDG) models, as well as government interventions to infuse more capital into the sector. Moreover, liberalisation of the tax regime, along with providing additional depreciation on fixed assets used by them, will help the companies save taxes.
"The Union Budget 2023 should also look at having policies that strengthen the digital lending infrastructure and provide a seamless linkage for Indian fintech companies to global financial ecosystems," said Ram Kewalramani, managing director (MD) and co-founder at CredAble.
Industry stakeholders are looking at Finance Minister Nirmala Sitharaman to offer them tax benefits and mitigate regulatory policies that will help them build legally compliant businesses without worrying about running foul of authorities.
They hope the government would consider providing tax breaks or incentives, such as reducing the corporate tax rate for small businesses or offering deductions for business expenses. Another expectation is creating a new fund or enhancing the existing Fund of Funds for start-up financing to encourage investors to back these companies. They can also support franchisee businesses by providing initial franchisee capital via anchor corporates.
GST Reprieve
Anand Kumar Bajaj, founder and CEO of PayNearby, is hopeful for a GST subsidy, even in a small percentage, as it will encourage companies in the financial inclusion space to build innovative technologies to make financial services more accessible to everyone.
"Today, over 90 per cent of our business correspondent (BC) network is operating in tier II regions, serving as banking hubs in locations with limited financial infrastructure," he added. "To allow this network to offer uninterrupted services across the country, we hope that in this Budget, the GST and TDS for financial inclusion services at BC outlets is waived off or at least reduced. This will ensure sustainable growth and inspire more last-mile retail banking agents to offer seamless banking services from their stores to all citizens in India."
Deepak Kothari, co-founder of ftcash is hoping for rationalisation of GST input credit framework in co-lending arrangements. He pointed out that fintechs today collaborate with other financial services players and invariably, in such arrangements, there's a potential loss of input credit in the current GST framework. "Ensuring that the input credit is fully provided for will go a long way in making sure that revenue leakages are avoided and benefits can be consequently passed on to the end consumer," he clarified.
The fintech industry anticipates additional government assistance for better relationships with banks to reinforce the current paradigm. This can be done by designating NBFCs and digital lenders as priority sectors for banks to create a domino of positive impact.
Sudha Rangarajan, chief strategy officer at Yubi, believes this would increase co-lending deals between banks and NBFCs as well as digital lenders. With this increase, the cost of capital would be reduced significantly, enabling the latter to give out loans at more affordable rates.
"Moreover, with an additional capital push, NBFCs and digital lenders can broaden their lending horizons to go to tier II cities and beyond and serve the underserved segments more effectively," she noted.
Tapping MSMEs
The upcoming Budget also needs to address the financial challenges facing the micro, small, and medium enterprises (MSME) sector. Many small business owners need help to succeed, including difficulties in accessing credit, which often limits the sector's growth.
Avinash Ramesh Godkhindi, managing director and CEO of Zaggle suggested that one way of overcoming this issue is by promoting digital payments and encouraging companies to adopt digital transactions across the economic diaspora. The adoption of technology integrated services in B2B transactions will not only bring ease in doing business but will also reduce costs and increase financial independency. "The government must encourage investments in automation in spend management to enable cross audits and ensure suitable and high compliance with corporate spend regulations," he added.
The government can further support the MSME sector by increasing lending to these businesses through dedicated lending programs, providing guarantees or subsidies on loans, or expanding the availability of government-backed financing. It could also set up a fund to subsidise the interest rates on MSME loans, making it more affordable for these businesses to borrow.
Ritesh Jain, co-founder of Flexiloans.com recommends enhancing the scope of the guarantee program for MSME loans to provide government guarantees on a portion of MSME loans, thus reducing the risk for lenders and making it easier for these businesses to access credit. "The coverage of current schemes as a percentage of overall MSME lending is minimal. The administration needs to take steps to extend the existing schemes to NBFCs by removing interest rate and credit rating restrictions in CGTSME and Mudra loans," he added.
Alok Mittal, CEO, Indifi Technologies too agrees that the current credit guarantee programmes like CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) and CGFMU (Credit Guarantee Fund for Micro Units) are limited either by an interest rate cap of 18 per cent, or by a minimum BBB+ rating for the underlying lender. These criteria tend to filter out the inclusion-driven younger digital lending NBFCs.
"Designing programs to suit the inclusion objectives will enable millions of micro and small businesses to avail growth financing. Similarly, most public sector banks have partner entity rating criteria for co-lending, whereas relaxing these entity rating criteria in underlying MSME will allow PSBs to partner more strongly in the MSME credit inclusion opportunity," he pointed out.
With many start-ups struggling to raise capital, Hemant Tathod, COO of Bimaplan, hopes that the Finance Minister will announce some initiatives that will ensure that funding finds its way to those entities with impactful ideas and high executional skills. "Higher valuation cannot be the objective to approach the administration. Instead, access to market for testing out the product, specifically in underserved segments, is the area of opportunity for administration and start-ups to work together," he added.
The government could also ease the flow of debt capital and the associated burden by subsidising the interest component, since most start-ups have a very high cost of debt. Moreover, it can announce dedicated start-up parks in key metros, offering rent-free spaces to companies above a certain revenue threshold.
The asks are many, so are the hopes. The fintech sector is hoping that 1st February will give them cause for celebration by reducing red tapism and regulatory burdens, providing tax incentives or breaks, and infrastructure support that will help them thrive.
