FinTech and the 2020 Budget: Expectations Vs. Reality

Blog by CredAble | Budget 2020 and FinTech Industry

Over the last few years, India’s policies – like Digital India and Financial Inclusion – have organically favoured its FinTech sector. The industry was first mentioned in the 2016 national Budget, and every year since, it has had a bigger mention in how the country plans its annual finances. In 2020, as the sector settled into its role as a key driver of financial growth and inclusion, it had a specific set of expectations from this year’s budget. Let’s see how these expectations have panned out.

1. Expanding Infrastructure

Expectations: Their most fundamental demand was to expand digital infrastructure to tier 2, tier 3 cities, rural towns and villages across the country. According to Nalin Agarwal, co-founder at Snapmint, smaller towns and cities contribute to over 50% of e-commerce, even with limited connectivity. If digital infrastructure got a boost, the FinTech sector could grow exponentially. Considering the cost of setting up local data centres is the biggest challenge to regional expansion, FinTech companies wanted the government to incentivise this part of the process.

FinTech also expected to avail e-KYC or video KYC services. Currently, only regulated entities can use these, while FinTech companies rely on the tiresome process of offline verification. These services will make it easier for companies to acquire new customers and tap into rural markets.

Reality: The Budget announcement proposed a new policy that incentivises the building of data centre parks. The government also announced a Rs. 6,000 crore fund for the Bharat Net programme to provide fibre to home connections to gram panchayats across the country. These changes should help FinTech companies expand their businesses into the hinterlands, which would drive up economic inclusion.

However, the budget did not address the e-KYC and video-KYC issue. So, for now, FinTech companies will have to make do with offline KYC for their KYC needs.

2. Improving Liquidity

Expectations: Access to credit has been a major concern for both NBFCs (Non-Banking Financial Companies) and MSMEs. For the NBFCs, the government introduced credit guarantee schemes and refinancing facilities, but few FinTech companies benefitted from them. New policies were expected that would allow smaller FinTech companies to function without facing a liquidity crunch.

MSMEs are facing a similar problem. Of nearly 50 million MSMEs, only about 15% have access to formal credit. The rest are shunned from traditional financial services for being ‘too risky’. As a result, we have a $1 trillion debt-financing gap, which could be filled by FinTech companies like CredAble, who provide trade financing and supply chain financing to SMEs. The government could share GST data with FinTech companies, who would use it to determine the credit worthiness of a MSME, and provide them with the working capital they need to survive.

Reality: With the 2020 Budget, smaller NBFCs are now eligible for debt recovery under the SARFAESI Act and can benefit from the government’s Partial Credit Guarantee Scheme. This means they can resolve their temporary liquidity issues and continue contributing to credit creation and cash flow of MSMEs. The Budget also enables NBFCs to extend invoice financing to MSMEs by amending the Factoring Regulation Act. So, essentially, the government is strengthening FinTech companies in the lending space so that they can in turn, strengthen MSMEs by providing services like supply chain financing and invoice financing. This is a big win for many B2B FinTech companies.

There were no announcements, however, about sharing GST data.

3. Reducing the Tax Burden

Expectations: Decreasing consumer spending and saving is affecting the growth of FinTech companies too – those who provide transactional services as well as those who provide investment and saving options. The government was expected to frame policy to combat this trend.

The sector also expected the government to address the Zero MDR issue. MDR stands for ‘Merchant Discount Rate’, a fee levied by banks and NBFCs on merchants for providing them with payment infrastructure like point-of-sale machines. Recently, the government announced that MDR would no longer be levied on transactions like UPI, Aadhaar Pay, Debit Cards, NEFT, etc. This was a big blow for many FinTech companies, who used this fee to expand their businesses. These companies expected the government to compensate them for their loss.

Reality: This budget was big on tax cuts, which is likely to increase consumer spending and increase business for many FinTech companies. Now, everyone with an income of under Rs. 5 lakh is exempt from paying income tax and those in the Rs. 5 – 7.5 lakh bracket will pay only 10%, instead of the earlier 20%. Corporate tax was also cut from 28% to 22%.

For the zero MDR proposal however, instead of issuing a clarification, the government only solidified its resolve to abolish this fee. By removing the burden of this fee from the merchants and consumers, the government hopes that the usage of these payment methods will increase, bringing us a step closer to becoming a cashless economy.

Additional Benefits for Start Ups

The Government also announced plans to encourage start-ups that will benefit the FinTech sector too. The government announced a change in Employee Stock Option Plans (ESOPs). ESOPs allow employees to own stock of their employing company. Previously, employees had to pay a tax on the stock when acquiring it, creating a cash flow problem for the employees that held their jobs for a long time. Now, employees can defer the tax payment by 5 years or till they leave the company. This change will help FinTech start-ups attract and retain more talented employees.

The government also abolished the Dividend Distribution Tax, an additional tax of 20.56% that companies paid when distributing profits to shareholders. Apart from not having to pay this additional tax, foreign investors can now claim credit on their investments in their home countries. Plus, the investment limit of foreign portfolio investors in corporate bonds has increased from 9% to 15%. This will drive more global investors to India’s start-ups. While many people in the FinTech space have called for the government to take a more active role in regulating the industry, the government is still to make any major moves in creating regulatory policy for the companies operating in this space. However, going by the 2020 Budget, it seems that government policy continues to encourage the FinTech ecosystem in the country, as it has since 2016. Not only is it meeting most expectations, it is also making more nuanced changes to existing policy to accommodate an industry that is growing at an exponential pace.