Budget 2024: Fintechs seek regulatory clarity, improved licensing, tax reforms

Clarity on regulatory, licensing norms

As the fintech industry looks to deepen their presence, they seek a clearer regulatory framework that establishes legal recognition, licensing procedures and supervision which will help level the field with traditional lenders. 

Raj Narayanam, founder of Zaggle Prepaid Ocean Services Ltd, stated that a well-defined regulatory framework will only bridge the gap between the two and will foster financial inclusion for consumers.

Gautam Patel, founder and managing partner of Z3Partners, an early to growth stage venture capital firm highlighted the current lack of clarity in the licensing processes for fintechs that disrupts new-age players with limited time and resources.

With RBI license approvals that are a core area of concern for many fintechs, the lack of transparency in the process adds another layer of complexity in getting the necessary permits. “Fintechs struggle with understanding how long the approval will take. They end up following up repeatedly with different officers, which makes the process cumbersome. A transparent and regular process, where people understand the timeline and steps involved, would greatly improve the experience," Patel added.

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This comes against the backdrop of fintech startups having to apply for various licenses for the kind of services that they want to offer which includes payment aggregator license, small bank license, or a change in promoter at an non-banking financial company (NBFC). 

Relief on cost structures, subsidies

Fintechs with a majority of customers in Tier II and other smaller markets are seeking tax benefits on total expenditure and a subsidy on goods and services tax (GST). It would be beneficial for those serving as banking hubs in areas with limited financial infrastructure, founders and experts believe.

“The journey towards a $5-trillion economy hinges on the transformation of rural areas, driven by groundbreaking financial and digital solutions provided by leading fintech players," PayNearby CEO’s Anand Kumar Bajaj said. 

Other fintech startups such as Niyo, Tide, Zaggle, M1xchange and Veefin also expressed similar sentiments. Online invoice discounting and factoring solutions provider M1xchange’s director Sundeep Mohindru emphasised that growth of the micro, small & medium enterprises (MSMEs) are often hindered by limited access to bank credit, which leaves a $2.5-trillion gap in financing. 

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“Incentives for MSME registrations on Udyam, fiscal support for banks and NBFCs to prioritise MSME working capital loans, and reduced compliance burdens and borrowing costs will eventually boost their contribution," Mohindru said, adding that most of these enterprises are not traditionally credit-ready and banks lack the infrastructure needed to reach them.“Therefore, stronger digital methods of credit assessment can bridge the credit gap. This, in turn, would enable MSMEs to access the finance needed for their working capital requirements."

Z3Partners' Patel agreed that there is a need for a GST subsidy for such players and said that it might help creating competitiveness in the hands of the consumer on lower ticket sizes. "Once you move to tier 2, tier 3, and rural areas, the ticket size is reduced. So, providing a GST subsidy for that helps the ability for a first-time customer to take on a product," he said.

Meanwhile, neobanks such as Niyo that also facilitate international transactions for users, also wish for specific incentives. With rise in inflation, an increase in the liberalized remittance scheme’s (LRS) limit to $500,000 would be beneficial for cross-border transactions, Bhaskar said. The scheme, which was last revised in 2015, was created to facilitate hassle-free foreign exchange and allows an Indian resident to transfer funds up to $250,000 in a financial year outside India. 

Bank-fintech synergy, UPI concerns

Easy Pay’s Nilay Patel also stressed on the importance of strengthening ties with traditional banks to enhance financial inclusion in rural and underserved areas. He expects the budget to address this by providing incentives for fintechs to develop and offer financial products in these areas. 

Further to this, Patel expects continued support from the government in supporting the growth of the digital payments’ ecosystem through allocations for initiatives that promote digital wallets, Unified Payments Interface (UPI) transactions and other digital payment methods. 

Within UPI, investors believe the rising fraud cases are turning out to be a cause of concern. They expect relief on this issue with the introduction of fraud analytics on UPI. "To support the FinTech infrastructure, we need fraud analytics, which will provide more transparency, with the help of data insights from NPCI (National Payments Corporation of India)," Z3Partners' Patel added.

Niyo’s chief strategy officer Swapnil Bhaskar said special policies for credit providers, streamlined credit approval process and partnerships with fintechs may foster a more accessible credit ecosystem within the UPI network. Niyo is among the first few neobanks or a bank with a digital-first approach without physical branches. 

Startup ecosystem's wish list

Angel tax is a common element that continues to haunt the startups industry as it creates a significant financial burden and uncertainty for companies already grappling with high cash burn rates. The lack of clear guidelines and the complexity in valuation adds another layer of challenge for startups that have hence asked for the removal of angel tax. 

Meanwhile, the industry broadly expects a more favourable tax framework with exemptions and incentives that can help reduce capital costs and improve overall profitability. They have also sought measures for rationalising employee stock ownership plan (Esop) taxation. 

"Deferring tax liability for startup Esops until exit is expected to benefit employees by delaying the tax burden until they realise gains," Niyo's Bhaskar said. Taxing Esops at the point of sale will help make them attractive again and create employee wealth while ensuring that they are paid only when the employee makes money instead of hinging on notional values.