Budget 2021: Top 10 reforms fintechs want from the finance minister

From a separate regulatory authority to formalisation of cryptocurrency, here’s what fintech startups and companies are expecting from Budget 2021.

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Industries across the board are holding out hope that Finance Minister Nirmala Sitharaman's Union Budget this year will bring them much-needed reprieve from the pain caused by the COVID-19 pandemic and jump-start consumption.

However, the pandemic has been a catalyst for India’s fintech sector, accelerating its overall growth and adoption. The fintech ecosystem now expects the Budget will provide a regulatory push to digitise processes and compliance procedures that would not only help bring more people into the fold of a formal financial system, but also help various financial products to reach underserved sections of the population quickly.

Here’s a look at what the fintech industry wants from Budget 2021:

1.) Regulation of cryptocurrency

Startups have said that it’s high time the government recognises the existence of cryptocurrency and its implications as an investment product. They have been pushing for comprehensive regulations on crypto trading, so that investors may be able to access more information, as well as understand the associated risks.

Cryptocurrency exchanges could be a good starting point for regulators and the Securities and Exchange Board of India could structure their set-up.

2.) Removal of LTCG taxes

An increasing number of people are buying stocks, initial public offerings (IPO), exchange-traded funds, and equities due to the emergence of online trading platforms such as Zerodha, Paytm Money, Groww, and Upstoxx.  However, taxes on long-term capital gains (LTCG) are a big deterrent for low-income groups that want to participate in the market but are put off by taxes eating away at their gains.

Abolition of taxes on LTCG as well as dividends will offer retail investors much-needed relief, boost participation in the markets, and help companies benefit via increased capital.

3.) Relaxation under FEMA 

The Foreign Exchange Management Act (FEMA) was introduced in 1999 to encourage external payments and trades, develop and regulate the foreign exchange market, and regulate Indian financial services offered abroad. It basically intended to de-regularise and create a more liberal economy.

However, due to national security concerns FEMA makes it hard for startups to offer financial services outside India, deterring the fintech industry, one of the most well-developed in the world. Startups across the board are seeking relaxation under FEMA so that they may expand globally, as well as access capital and fundraising without too much red tape and compliance hurdles.

4.) Digitisation and simplification of KYC

Simplification and digitisation of know-your-customer (KYC) norms will help startups offer their services across geographies and cater even to diffused demand due to the inherent anytime-anywhere-accessible nature of online systems. At present, signing up customers is a costly affair for fintechs due to the new KYC forms and expenses related to having people and supporting infrastructure on the ground.

Startups have said they would welcome a move to eliminate the need for separate KYCs for different banking services and make them automatically eligible for participation in various kinds of financial services.

5.) A separate regulator for fintech companies

Fintech startups operate differently from traditional firms. With product offerings spanning various financial services, they have to deal with several different compliances and regulators, which is typically a difficult and costly process.

A specialised government vehicle to regulate fintechs could not only help startups operate efficiently in a more organised manner and meet compliances more easily, but could also give innovation and experimentation a further push.

A regulatory body solely for fintech companies could also nip in the bud illegal practices such as the recent online loan scam. Customers and users too could benefit as they would have a governing body to address issues or complaints.

6.) More collaboration between fintechs and financial institutions

Financial institutions have opened their doors to fintech innovation, increasingly tying up with companies to enable digital banking services. However, fintechs say a lot still needs to be done in terms of digitising banks, especially non-urban and semi-rural operators.

Regional banks have a broad customer base that startups could take advantage of, in lieu of providing their digital services to users, as well as help the banks cross-sell other financial products they offer. This would not only ensure more access for people to such instruments, but also strengthen the banks’ and their balance sheets.

7.) More government spending on technical, financial expertise

The fintech industry needs a lot of technical expertise and innovation that is lacking at present. Given that the government has been propagating digital finance, setting up avenues for advanced technical education could help take its vision further. It will not only create a new income stream for young people, but also lead to more innovation.

8.) More formalisation in the unorganised sector

Especially in rural areas where schemes such as Jan-Dhan Yojana are popular, formalisation can help keep track of investments and capital disbursals, leading to more efficient operations of such initiatives. Also, bringing more people into the fold of the formal financial ecosystem will help raise awareness of existing products and schemes that they can use to their advantage.

9.) Increase of banking sector liquidity

Rolling back Basel norms for some time could free up more capital for banks to give out as loans, which startups could then help facilitate and disburse in partnership with them. More lending will not only benefit banks and fintech startups, but also the economy at large, as spending will increase and, with it, liquidity in the system.

10.) Tax breaks for startups that raise digital awareness

Startups typically self-finance any educational endeavours they undertake to inform people about their offerings, as well as various financial products that could help them in their daily lives. Several big companies such as Paytm conduct classes for people in rural areas to educate them about the advantages of using digital finance systems, besides the instruments they can invest in. Giving tax breaks to startups that help raise digital awareness will not only incentivise them to do more, but also encourage others.

Expert views from the industry

Kunal Shah, CEO and Founder of CRED

The slogan of “vocal for local” should be strengthened with systemic reduction of friction in basic processes associated with setting up businesses. Individuals will invest time, money, and effort in value creation when they trust the system to operate transparently, resolve conflict quickly and enforce regulation effectively. 

Part of creating the right ecosystem begins with addressing mindsets that hold us back.

We need to encourage wealth creation by addressing orthodox views surrounding money and consumption that are reflective of the pre-liberalisation days. Wealth creation and creators must be celebrated and consumption viewed as an investment in oneself.


Archit Gupta, CEO and Founder of ClearTax

The government must continue its focus on making compliance easier for startups. Early-stage startups need to comply with a variety of laws; this must be minimised. The eligibility criteria under Section 80IAC that allows specified startups 100 percent deduction for profits must be expanded. Section 80IAC offers this benefit to startups that have been incorporated before April 1, 2021, so we are hoping this criteria will be extended.

 

We are hoping the government will work towards norms related to personal credit. With a lot of cases around predatory app-based lending coming into the spotlight recently, both industry and the government may want some intervention on behalf of customers.

Kumar Abhishek, CEO and Founder of ToneTag

We are expecting fiscal policies that encourage banks and financial institutions, especially in rural areas, to partner and work closely with fintech companies to expand their digital service suite and integrate fintech to provide end-to-end processing, instead of piecemeal service.

The fintech startup sphere is looking for policies and schemes that make access to credit easier and encourage banks and financial institutions to work closely with their fintech partners. With these amendments put in place, we can expect to see scaling-up and effective operation of a lot of startups.

Harshil Mathur, CEO and Co-founder of Razorpay

While some industries have seen a bit of a turnaround in the past few months, it is essential to have inclusive policies that will enable ease of doing business in this new order, while allowing small businesses to prosper. It would be desirable to have increased loan limits for unsecured loans, thereby helping small businesses have better access to credit and working capital.

I’m hoping that in the upcoming Budget, the government will think of alternatives to the zero merchant discount rate (MDR) policy. One alternative could be providing tax incentives for micro, small, and medium enterprises (MSME) towards accepting digital payments, as that will help promote e-payments and drive significant digital adoption amongst businesses. Initiatives like these will also lead to new innovations in the payments infrastructure, thereby creating solutions and tools that respond to both shifting customer demands and the need for customised solutions for MSMEs.

Seema Prem, CEO and Co-founder of FIA Global

Relaxation of KYC rules comparable to the Jan-Dhan accounts should be implemented for small credit. Graded KYC norms, based on loan type and loan amount, should be implemented. Fintechs are looking forward to video KYC and e-Auth (electronic authentication) being standard acceptable customer onboarding or fulfilment process for all financial services and products including banking, lending, mutual funds, and insurance enrolment.

The government should set targets for banks and fund houses/insurance companies to move towards a completely paperless environment.

Prateek Mehta, Co-founder and CBO of Scripbox

India is endemically underserved in financial services. We are low on literacy, availability, and distribution. The fintech industry needs support for creating newer offerings for specific slivers of the Indian economy.

Startups would need a regulatory sandbox that encourages innovation and experimentation. Startups often transcend regulatory boundaries, so they would also need the support of the Ministry of Finance (MoF) to run offerings across different regulators. A regulatory sandbox under the auspices of the MoF will be very useful and can possibly spur innovation.

Nityanand Sharma, CEO and Co-founder of Simpl

Owing to the convenience offered during the pandemic, fintech has seen large-scale acceptance in the bigger scheme of things as an integral part of the financial services industry. Rather than expecting fiscal sops, given the widening fiscal deficit situation, the fintech industry can anticipate structural policy reforms with the goal of further democratisation of financial services in Budget 2021.

The finance minister had recently reiterated the importance of banks to adopt a co-origination model, whereby banks and fintech players can share the risk. Fintech players can benefit if banks and NBFCs allow access to their customer base. Fintech would gain from the stringent compliance checks and regulatory adherences that banks offer, which would facilitate access to quality customers.

Dilip Modi, CEO and Founder of SpiceMoney 

While encouraging initiatives such as the Payments Infrastructure Development Fund by the Reserve Bank of India have already been announced, in the Union Budget we expect the government to announce a subsidy on MDR and point of sale (PoS) devices. Waivers on MDR and PoS are pertinent to encourage the expansion of these services via the banking correspondent network. Accessibility of financial services is a major gap in financial inclusion and PoS terminals would be more sustainable than ATM infrastructure in semi-urban and rural areas.

Ujjwal Jain, CEO and Founder of WealthDesk

Big tech in financial services is a reality and the government might want to encourage homegrown entities by bringing in holistic regulatory support. 

 

The government might also emphasize the Digital India mission to develop the digital infrastructure needed to drive further innovation in fintech and other sectors. 

 

Renewed focus on technical education and promotion of tech talent might also be a top priority this Budget. The government might set out a new vision for engineering education to make it more industry-relevant. Such a move will help startups across the board in getting the right talent.

Amit Dhakad, Co-founder, CEO, and CTO of Market Pulse

With the government selling stakes of already listed public companies or coming with IPOs of non-listed entities more frequently than in previous years, retail investors have been one of the major market participants absorbing supply of these issues. This makes a case for abolishing the LTCG tax, providing the retail investor some relief. The case for abolishing it is strengthened as currently both securities transaction tax (STT) and LTCG tax are being levied.

Kunal Varma, CBO and Co-founder of MoneyTap

The Budget can focus on boosting the availability of working capital for startups through a mobilized funding framework that would increase the ease of inflow and outflow for foreign investors.

Simultaneously, more emphasis on Make in India and “Vocal for Local” initiatives is crucial to reinforce digitalisation across the country. This would also give more growth opportunities and incentives to indigenous, homegrown brands.

Saumya Shah, Founder of Tarrakki

An upgraded digital infrastructure will help fintech startups onboard the user within seconds and also make the entire user experience seamless.

In 2020, Rs 3,958 crore was allocated to Digital India. I am hoping this will increase three-four times in 2021. This will help create a strong digital infrastructure in cybersecurity, artificial intelligence/machine learning, and blockchain that will be beneficial to fintechs.

Abhinav Sinha, Co-Founder of Eko India Financial Services

By increasing consumer spending; easing credit access for small and medium enterprises, and MSMEs; easing goods and services tax norms; and giving tax breaks to new-age fintech players, we believe the economic recovery can be fast-tracked and investor confidence would rebound much quicker.

To address this, there is an increasing need to empower the country’s new working population, including the blue-collar workforce and gig economy participants, by giving them access to customized financial products.

Anil Pinapala, CEO and Founder of Vivifi India Finance

One of the most pressing needs for fintech — especially lending fintechs — is liquidity, with banks sitting on piles of cash that haven’t made it to the hands of small and mid-sized NBFCs. It would be a great step if the Budget eases norms for getting foreign capital both as debt and equity.

Another thing we hope the government will consider is easing liquidity needs by forcing domestic banks to fund the fintechs. The fintech industry needs liquidity, something that has become more pronounced as banks are shying away from funding NBFCs, barring priority sector lending. The finance ministry shouldn’t shy away from bold moves forcing the hands of the banks to ensure fund flow to NBFCs, especially the small and mid-sized ones. This could ease the flow of funds into the market at large.

For YourStory's multimedia coverage of Budget 2021, visit YourStory's Budget 2021 page or budget.yourstory.com

Edited by Lena Saha

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