Budget 2023 Wish List for the Digital Lending and FinTech Sector in India

The FinTech sector in India is on the brink of a great upswing. Reports suggest that the country’s FinTech industry is expected to generate a revenue of $200 Bn by 2030. This is attributed to various factors such as the increasing digitisation of the country, favourable demographic dividends, supportive government measures, and technological advancements.

 Digital lending has also become more popular due to the convenience of swifter and simpler digitalised processes and the use of alternate data sources. Additionally, the government has been actively involved in providing the sector with the necessary support, while venture capitalists and investors are providing the influx of investments. 

The growth of the industry is further being fuelled by the proliferation of smartphones and the boom in affordable internet services. As a result, a large number of FinTech startups have emerged in the country, such as CredAble and UpScale, which are leveraging the power of technologies like AI, ML, and Cloud Computing to provide customers with innovative products and services.

With the countdown to the Union Budget 2023-24 underway, FinTech leaders are expecting the government to introduce transformative measures that will accelerate the growth and revenue of this sector. 

Union Budget 2023: Top expectations of the FinTech sector

As India is one of the fastest-growing FinTech hubs in the world, the sector has pinned high hopes on the upcoming budget to introduce support mechanisms and a liberal regulatory framework that will help them fast-track innovation. 

While the Union Budget 2022 brought forth path-breaking reforms such as the introduction of the Digital Rupee, this year, alongside easier tax rules, the biggest ask on the FinTech front is for specific schemes to infuse more liquidity into the system. They are also seeking incentives that will help widen their participation in the country’s financial economy and strengthen their partnerships with banks.

Here are 5 major expectations of the industry from Union Budget 2023:

  1. Reduced taxation

The need of the hour is to reduce the magnitude of the tax burden on the FinTech sector. Along with simplifying taxation, the government should also look into waiving off Goods and Services Tax (GST) for FinTech companies with annual turnover under Rs 10 crore. 

FinTechs have played a vital role in boosting financial inclusion, especially in the rural parts of the country. NBFCs and FinTech companies involved in financial inclusion services will also benefit from GST and Tax Deducted at Source (TDS) subsidies. With a renewed focus on financial inclusion, the industry is expecting the budget to unveil tax reforms that will help them stay focused on their plans of reaching out to the unbanked population in the country.

To save on taxes, the industry is also seeking additional depreciation on the fixed assets used by FinTech companies. The criterion for tax relaxation needs to be extended to employees of FinTech startups as well, especially for those in the nascent stage. The government needs to introduce tax reforms that reduce the burden on taxation of ESOP sales.

2. Make it easier to access low-cost funding.

In a bid to sustain the growth momentum of the FinTech industry, government interventions to reduce the cost of funds and enable better access to capital are needed.

Owing to the increase in repo rates and cost of borrowing, the government needs to consider introducing dedicated debt financing channels for FinTechs in the digital lending space. There is a pressing need to accelerate the progress made in catering to the cohorts that lack access to formal financial services and credit. Dedicated interventions must be provided to support the availability of affordable financing facilities. 

3. A re-look at the FLDG model

With a lot of expectations riding on the upcoming budget, the FinTech leaders are looking to the government to introduce better lending arrangements with banks and Non-Banking Financial Companies (NBFCs). The need to open up more avenues of financing, be it from banks, global lenders, or via infrastructure schemes is also rising to the top as the primary ask of the FinTech sector. Enabling co-lending arrangements with Public Sector Banks will be a step in the right direction to further drive financial inclusion in the country.

That said, policies that simplify the conditions under co-lending models need to be in place. Apart from the liberalisation of the current FLDG model, risk mitigation measures also need to be introduced.

Establishing a reasonable cap on the FLDG model will go a long way in easing the financial burden on the FinTech sector and further enhancing access to funds.

4.  Enhance the digital payment system.

The rapid adoption of UPI payments has helped in strengthening India’s position as a global leader in digital payment transactions. Additionally, the launch of CBDCs has significantly reduced the dependency on cash and further improved the resilience of digital payment systems. 

Measures to reduce the cost of digital transactions and incentivise the development of innovative digital solutions like the UPI need to be introduced.

5. Better collaboration with banks

The upcoming budget should promote key collaboration between banks and FinTech companies. While FinTech companies can tap into the bank’s larger customer base; banks can leverage the tech-enabled solution suite of the new-age FinTech players.

Banks that join forces with last-mile-focused FinTech lenders will be able to boost the liquidity flow. The Union Budget needs to introduce regulations for loan disbursal and put in place policies to ensure sufficient liquidity for the organised gold loan segment to promote such future collaborations.

FinTechs in 2023: A new era of financial inclusion

The FinTech industry has been a significant force in the transformation and expansion of the financial services sector over the years. In India, FinTech has become one of the fastest-growing sectors and has contributed to increasing financial inclusion and digital adoption among citizens. After the RBI legitimised the role of digital lenders, credit penetration is expected to grow in the near future. By providing better access to credit and helping the MSME sector, digital lending FinTechs will continue to be successful and promote greater financial inclusivity. To further accelerate India’s FinTech growth and make it easier for people to access secure credit from digital lenders, Budget 2023 should introduce relevant regulations.