Fintechs Want Better Fund Flow, Lower GST and Regulations in Cryptos
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The ‘never before’ like Union Budget, as promised by finance minister Nirmala Sitharaman, is here and expectations across industries seem to be running high.
Almost one year into the unprecedented economic crisis caused by the COVID-19 led disruptions, startups across sectors are pinning their hopes on the Union Budget 2021, set to be announced on February 1, to introduce measures that can help them tide the crisis.
“We expect the upcoming budget to ease eligibility for DPIIT approvals, relax eligibility under section 80IAC, reduce compliances required with tax and other laws for small startups in the first three years of incorporation,” says Archit Gupta, CEO and founder, Cleartax.
The financial technology (fintech) space, in particular, is expecting a differentiated treatment in the upcoming Budget, and rightly so.
As the outbreak of COVID-19 virus last year locked up everyone in their homes, the fintech sector rose to the occasion. From retail users switching to digital payments for all their small and big transactions to businesses adopting technology enabled services to manage their day-to-day business finances, the sector came to everyone’s rescue.
Already a hot sector among investors, in the last one year the industry has seen large capital inflows from venture capitalists and even added three unicorns—Razorpay, a b2b payments services company; Pine Labs, a merchant financing and payments platform; and online brokerage platform Zerodha—to its kitty owing to the key role the space has played in keeping things afloat amid the pandemic.
Here’s a rundown of what the fintech industry expects from the Budget 2021.
Boost credit demand
The unanimous call from most industry experts is to boost consumption in order to pull the economy back on track.
“The foremost expectation from the Union Budget 2021 is to boost consumption and revive the economy. The fintech sector can provide momentum to economic activity through efficient consumer-friendly lending and transaction enablement,” says Raj Khosla, founder and CEO, MyMoneyMantra.com, a loan marketplace.
Alok Mittal, CEO and founder, Indifi Technologies adds: “The economy is currently in a rebuild mode, and hence, sectoral incentives that allow MSMEs to recover, play a pivotal role. Although different sectors have been hit differently, large sectors like transportation, logistics and hospitality come under the worst-hit category.”
Apart from introducing incentives and allocating special packages, making credit available to micro, small and medium enterprises (MSMEs) for their business needs will play a major role in boosting economic growth.
Due to income disruptions caused by COVID-19, lenders have tightened the noose on high-risk borrowers, making credit inaccessible to them. “The heightened risk averseness among lenders has reduced access to institutional credit for new-to-credit (NTC) consumers and those in lower income groups. The Budget 2021 should announce steps to improve credit access to these segments,” says Naveen Kukreja, CEO and co-founder, Paisabazaar.
“One of the ways to achieve this can be by including unsecured loans to NTC and lower income applicants in the priority sector lending target of banks,” he adds.
Ease liquidity and improve fund flow
Lack of liquidity and capital crunch continue to be major issues that fintech players focussed on MSMEs face.
Industry experts say that the focus of the upcoming Budget should be to ease liquidity and improve fund flow for non-banking financial companies (NBFCs) which have been exacerbated by COVID-19.
“COVID-19 pandemic has highlighted the gaps in wholesale funding transmission to smaller NBFC and innovative fintech lenders, which are instrumental in expanding credit access through use of technology,” says Mittal. “Due to their smaller size and younger vintage, these lenders are often rated in BBB or A family, and unable to get advantage of liquidity through capital markets, public sector and large private sector banks.”
“Liquidity infusion with ample measures to ensure it flows to the intended segments of the economy on ground will be the key expectation from this budget,” says Manish Lunia, co-founder, Flexiloans. “Despite 400 bps (basis points) reduction in policy rates, young NBFCs are not passed on the benefits of the rate cut, which in turn fail to pass it to the end consumer.”
The budget should announce dedicated channels for such lenders to ensure that these innovations are able to find their way to marginalized consumers and MSMEs, adds Mittal.
Mandate co-lending with fintechs
New-age NBFCs mainly cater to those segments that banks and large financial institutions (FIs) have steered clear of so far. However, lack of funds has left these digital lenders high and dry, and borrowers cash starved.
Rohit Garg, co-founder and CEO, SmartCoin, says the FM through the Budget 2021 should promote more banks and larger NBFCs to partner with new age fintech firms. “Partnerships between established banks, NBFCs and fintech players will create an environment receptive towards initiatives such as Sahmati - account aggregator, OCEN (Open Credit Enablement Network) etc.”
Further, the industry expects more clarity on the co-lending model (CLM) introduced by the Reserve Bank of India in November 2020 under which banks can provide loans along with NBFCs to priority sector borrowers based on a prior agreement.
“The Budget should give clarity on data sharing by and amongst fintech and banks/NBFCs to enable co-origination and co-lending,” says Khosla.
Lunia says co-origination with fintech firms must be mandated to state owned banks given the muted response by the latter so far.
Harshvardhan Lunia, MD and CEO of Lendingkart, concurs and says "Large PSU banks should be asked to mandatorily partner with digital lenders under a risk sharing co-lending model to leverage the former's already developed digital originations, alternate underwriting and delivery capabilities."
Lower GST on financial products
Rationalizing or altogether removing the GST for financial services will help boost digital payments adoption and penetration of financial products.
“Reduction in GST for financial services will benefit consumers by lowering the overall cost of such transactions, accelerate the penetration of financial services and encourage SMEs to adopt digital payments,” said Seshadri Kulkarni, CEO, DigitSecure.
Currently, 18 per cent GST is applicable on financial transactions such as late credit card payments, online funds transfer, ATM transactions, loan processing fee, prepayment of loan and premiums of insurance policies.
Khosla of MyMoneyMantra says there should be a total exemption if the fee or premiums are below a certain threshold. “At the very least, the FM could offer GST relief for the banking correspondent (BC) network, thereby drastically cutting the cost of reaching out to unbanked customers and encouraging financial inclusion.”
Similarly, GST on insurance products should be rationalized to boost penetration, says Prashant Tripathy, managing director and CEO, Max Life Insurance. “There is scope to moderate the existing GST rate of 18 per cent on term plans to a more reasonable 5 per cent. It will also be beneficial to incentivize the adoption of pension/annuity plans by eliminating GST on these products offered by life insurance companies.”
Kulkarni says the regulator believes zero merchant discount rate (MDR) on debit will result in greater merchant acceptance of debit cards and FIs can generate adequate revenues from debit cardholders' CASA accounts to offset the revenue loss from zero MDR.
“While it may be true for banks, the non-banking institutions that also acquire merchants are at a disadvantage because they do not have consumer relationships,” he explains. “The authorities should allow non-banks to charge MDR as the economics are not viable for payment service providers.”
Increased FDI limit and tax sops in insurance
To boost foreign inflows in the insurance sector, the industry expects the FM to raise the foreign direct investment (FDI) cap of 49 per cent on insurance companies.
“The government should increase the FDI in insurance companies to 74 per cent while keeping the management control with Indians, in line with the policy for private banks,” says Parimal Heda, chief investment officer, Digit Insurance. “FDI inflow would also benefit the PSU insurance companies, in which the government is looking to sell its stake.”
In February 2020, the government had amended the FDI policy to allow 100 per cent foreign investment in insurance intermediaries such as agents, Web aggregators of policies and brokers but the FDI cap on insurance companies remained at 49 per cent.
Apart from supporting long-term growth capital, increased interest from foreign investors will also give access to the partner’s technology that the insurance company can use for innovating products and claim processes, adds Heda.
Further, COVID-19 has brought home the importance of a safety net in the form of an insurance cover so the industry expects tax sops for end users to deepen insurance penetration in the country.
Mayank Bathwal, MD & CEO, Aditya Birla Health Insurance, says “We expect the limits defined for mediclaim premium tax deduction under section 80D of the Income Tax Act to be increased to INR1 lakh.”
As Bitcoin, the most popular cryptocurrency, yet again gains ground among investors due to a surge in its prices, the industry wants the FM to regulate the space.
“In the absence of regulation, banks are still hesitant in providing services to exchanges and have been blocking transactions related to cryptocurrencies, which is impacting investors,” says Monark Modi, founder, Bitex.
The major concern is lack of clarity on taxation of gains made from investment in cryptocurrencies. Avinash Shekhar, chief operating officer, ZebPay, suggests, “Cryptos should be put under the capital asset class to avail the capital gains tax rate. The government should restrain from charging a high tax rate as it would discourage investors and could drive them to less accountable trading venues, which becomes counterproductive to the goal of collecting tax revenue while also allowing for growth.”
“Another aspect that requires government’s approval is crypto mining, since presently, exchanges have to depend on the import of cryptocurrency by remitting funds,” adds Modi. “The government must consider practices in the upcoming budget that protect the interest of Indian cryptocurrency exchanges and help funds remain within the country.”