Budget 2023: Funding support, liberal tax regime and other things fintechs expect from the government

• Industry estimates show that the Indian fintech industry is likely to reach the $1 trillion mark in throughput and $200 billion in revenue by 2030.
  
• If the world enters a full-blown recession over the next few quarters, funding to Indian fintechs could be significantly impacted, constricting their growth.
  
• The future of banking is going to be branchless -the branch would mostly take care of customer interactions and all transactions would go digital.

The Indian fintech industry is growing into one of the most important sectors in the country’s economy, as more and more people come online and mobile Internet access becomes nearly ubiquitous.

Indian fintech companies have come a long way from the mid-1990s when online banking services were first introduced. The Internet in India was in its infancy back then and hardly anyone had open and free access to the world wide web, as we do now. Cut to 2022, and not only does India have the second-biggest Internet user base in the world, but the country also has one of the most vibrant digital economies.

Industry estimates show that the Indian fintech industry is likely to reach the $1 trillion mark in throughput and $200 billion in revenue by 2030. But these projections will depend on two main factors—on how well Indian fintechs can innovate and adapt to the needs of the clientele and the ability of the evolving technology to offer solutions; and on how well the overall economy performs.

On the first count, there is little doubt that the Indian fintech sector should be able to innovate and keep pace with emerging global technological trends. Indian fintechs like Paytm have evolved their business models from being largely payments-oriented to now geared towards providing credit and other services like digital gold and mutual funds.

The second aspect though may have a greater bearing on the trajectory the Indian fintech sector is likely to take in the months and years ahead. If the world does enter a full-blown recession over the next few quarters, as is being projected, funding to Indian fintechs could be significantly impacted, constricting their growth both in terms of research and development as well as them gaining market share and expanding geographically.

In fact, across the world, and in India, venture capital money has already begun drying up, and the fintech sector too could face a funding crunch in the months to come. Thus, the Government’s role is crucial in ensuring the growth and sustainability of the sector.

Over the last few years, the government has been supportive and various incentives have been provided to the ecosystem for it to flourish. The last budget brought reforms like digital rupee, digital banking units, and financial services center Gift-IFSC. The sector would look forward to continued support from the Government, especially in the current funding environment.

What the industry is looking forward to?

Funding support- an increased allocation towards startup funding by Government could provide a boost to the overall sentiments and incentivize the continuity of growth.

Retaining employees in such a scenario would be the key to sustaining business growth. A tax relief for startup employees to solve for dual taxation & relief the tax burden that ESOPs have on employees would be critical. Currently, the employees need to arrange funds to buy the stocks and also pay around 35% tax on the allotted shares as it's considered a part of CTC.

Also, a more liberal tax and transparent policy regime would be a welcome move. The revised digital lending guidelines restricting the FLDG model have caused a lot of disruption for fintech startups. Their business models had to be tweaked and there is still ambiguity on the guidelines. Startups have been trying to seek clarity here. This has caused a funding crunch on the debt side. FLDG stands for first default guarantee and is an arrangement between a fintech company and a regulated entity, where fintech’s compensate regulated entities for any losses that might occur on account of default by the borrowers. Clarity here would help startups establish a long-term business map and work towards sustainable growth. If no clarity emerges- a debt and equity side funding crunch could lead to the death of a few fintechs in the coming future.

Clarity and roadmap for digital banking licenses are important. With an increased demand for consuming financial services digitally- there is a need for such licenses. The future of banking is going to be branchless. The branch would mostly take care of customer interactions and all transactions would go digital. In the wake of this- newer digital-friendly organizations should be issued digital banking licenses.

(Mehekka Oberoi is Fund Manager, IIFL Fintech Fund)

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