Opinion

Budget 2021-22: How favourable was it for digital lenders?

| Updated on February 17, 2021 Published on February 17, 2021

Fintechs, reaching out to the under-served   -  /iStockphoto

Government support is crucial for fintechs to serve the financial requirements of the unbanked sections of society

While presenting this year’s Budget, the Finance Minister had an onerous responsibility. In the span of a pandemic hit year, India experienced its largest-ever GDP contraction and is also reeling from a severe crisis: both humanitarian and economic.

The whole financial system came to a grinding halt and there were many who were hoping to hear some good news in the Budget.

Fortunately, the reality lived up to the expectations and the Finance Minister was lauded for her bold and growth-oriented Budget. The huge focus on spending especially in critical sectors like Healthcare, where ₹2.23 lakh crore was allocated, infrastructure which got a 26 per cent hike in allocation compared to 2020-21, along with hiking the FDI cap in insurance from 49 per cent to 74 per cent, were received well by the industry. In fact, the Budget also sparked a weeklong rally on the Indian bourses, which are also witnessing one of the highest ever FPI inflows.

Untangling the weeds

The Budget also aimed to incentivise the BFSI sector to help it start operating at the pre-pandemic levels. One such example is the announcement of PLI schemes to boost India’s manufacturing sector. While this is not aimed directly at banks, this move is meant to mobilise the sector, which in turn is expected to inspire confidence amongst banks and financial institutions to resume lending/financing operations for players in the manufacturing sector.

MSMEs were also given special attention by way of a clearer definition of what constitutes an MSME, a separate debt resolution framework and the allocation of ₹15,700 crore to nurture and support the MSME ecosystem within the country. This move is direct evidence of the government’s larger push towards realising its vision of ‘Atmanirbhar Bharat’.

The IL&FS debacle shook the entire financial system and caused a nationwide freeze in lending, which was further exacerbated by the pandemic. To restore trust in the financial system, increase liquidity and to allow banks to recover some of their bad loans, the Finance minister announced the creation of an Asset Reconstruction Company.

Collateral benefits

Most of the Budget proposals were structured to transfer benefits to a wide range of stakeholders. For FinTech companies that have been dotting India’s financial landscape for the past few years, the provisions surrounding the improvement of financial capital were a much-needed boost.

Fintechs were seeking tax reliefs as well as sops for technology and infrastructure spends. This would incentivise investments into technology and to encourage open banking models that would see Fintech and legacy banks working together to unlock value for their customers.

To boost the online lending space, there was anticipation of Budget proposals that would enhance flow of funds into Fintechs.

Liquidity remains a hindrance for growth and the current setup is not particularly friendly for asset-light and novel lending models like ours. The biggest hurdle that companies like ours face is the requirement of collateral for their funding requirements which creates a high entry barrier and discourages emerging Fintech companies and start-ups.

On the bright side, the Budget put out a clear agenda to improve the financial infrastructure by reiterating its commitment to building a global financial hub by kickstarting the GIFT City project. When realised, the GIFT City will compete with other major financial hubs in the world and such a project will see large cash inflows into the country’s Fintech sector.

The Budget proposes to set up a DFI, with a lending portfolio of ₹5 lakh crore for three years. For NBFCs with asset sizes north of ₹100 crore, the minimum loan size eligible for debt recovery has been reduced from ₹50 lakhs to ₹20 lakhs. This reduction was done to improve credit discipline while ensuring that the interests of small-ticket borrowers are protected.

Looming concerns

Despite the Budget’s growth-oriented focus, it had a few shortcomings. For instance, the reintroduction of the MDR (merchant discount rate) would have incentivised a more inclusive payments system and attracted more interest in the Fintech sector.

We feel that the Fintech industry to reach its true potential needs the much required support from the Government in order to drive deeper penetration, especially to the underbanked and underserved sections of the population. For going fully digital and to make India a cashless economy, government support would not only be helpful but also crucial to accelerate the growth of this sector.

The writer is CEO, CASHe

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Published on February 17, 2021
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