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Union Budget 2021 Fintech Sector

The digital lending sector comprising largely of NBFCs has faced a severe liquidity crisis and will be looking for continued credit support from the government to be able to access capital at affordable rates.

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COVID-19 HAS fundamentally changed the way we live and work, including the way we access financial products. FinTech in India was well-positioned to deliver financial products and services in a contactless and non- face-to-face format, thus solved one of the key risks of Covid-19. Digital payments saw a big growth in 2020 when consumers were trying to minimise the handling of cash. The switch that many consumers have made to digital payments will to a large extent be a permanent one given the ease and convenience of transacting digitally. Digital lending products have focussed primarily on the retail, SME and MSME sectors giving credit and liquidity to many of these borrowers facing stress on account of disruptions in businesses and income. Digital loan platforms use technology and tools including artificial intelligence and big data analytics to understand and price credit risk. Budget 2021 is expected to stress on the importance of technology for delivery of financial services. FinTech is ready for its next phase of growth and is looking towards the Budget for the incentives and support that is needed to power this growth. Key budget expectations are: 

a) Investment in digital infrastructure: consumers only need a smartphone and good mobile connectivity to be able to transact and access digital financial products. Continued government investments in internet infrastructure and mobile connectivity particularly in Tier-II and Tier-III cities will increase the reach of FinTech products. 

b) Financial and digital literacy: as digital products become more accessible, FinTech platforms will need to invest in financial and digital literacy programs to be able to on-board customers in more remote locations. The government should consider public-private partnership models for such schemes and also look at giving tax breaks and other incentives to FinTech platforms that invest in financial and digital literacy initiatives. 

c) GST on financial Services: there is an expectation for lower GST rates on financial services. 

c) NBFC liquidity: the digital lending sector comprising largely of NBFCs has faced a severe liquidity crisis and will be looking for continued credit support from the government to be able to access capital at affordable rates. These NBFCS then onward lend to retail and MSME borrowers, many of whom are not able to access bank credit. 

d) KYC: high customer on-boarding costs has been one of the biggest challenges facing FinTech over the last few years. There is a big expectation from the sector that digital payment platforms and FinTech NBFCs be allowed to utilise Aadhaar based e-KYC to on-board customers. The government should also push to operationalise the centralised KYC database that will allow financial institutions to access customer KYC records from a common database which will significantly lower costs of operation. 

e) Data Privacy: The Personal Data Protection Bill 2019 is pending its final government approval, and once passed, it will form the foundation for a data protection framework within which FinTech can operate. While preventing unauthorised use of personal data is critical, it is equally important to allow the FinTech sector to analyse data to be able to innovate and customise delivery of financial products. Looking forward, a favourable Budget 2021 can be a game-changer for the sector and help push FinTech into its next phase of growth.  

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Shilpa Mankar Ahluwalia

Partner Head Of FinTech Group at Shardul Amarchand Mangaldas & Co

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