Budget 2024: Will the Finance Ministry address the many challenges plaguing India’s fintech sector?

Now that the dust has settled on the election battlefield, and the BJP government has retained its throne, the focus has shifted from the polls to the much-awaited Union Budget for the financial year 2024-25. One industry in particular that is keeping a close eye on this year’s budget is the fintech industry. The fintech market has witnessed a rapid decline in investments in recent times, and much of that has largely been due to either regulatory uncertainties or stringent legal restrictions. 

India Inc will thus be hopeful that this year’s budget offers them the much-needed ammunition to combat several challenges that have plagued the fintech market and that can boost investor sentiments surrounding fintechs in India. We have tried to identify and briefly highlight some key measures that we believe if adopted by the government, can truly resurrect the fintech market.

Increasing credit access to MSMEs 

While the interim budget earlier this year recognised the need for timely and adequate credit, technology and appropriate training for the Micro, Small and Medium Enterprises (MSME) to grow, MSMEs today still do not have access to adequate credit and financial service offerings, especially in smaller towns and rural areas. Ensuring better reach of credit to MSMEs can significantly boost the economy and measures in this regard should be on the top of the government’s agenda during this budget.

Promoting digital public infrastructure in smaller towns 

The RBI initiated ‘Payments Infrastructure Development Fund’ has played a key role in catering to digital payments infrastructure in smaller towns, however, more incentives and actions will need to be implemented to increase the reach of new age fintech product offerings to such jurisdictions. For this, businesses and customers in smaller towns need access to sound digital public infrastructure. Open network infrastructures like ONDC (Open Network for Digital Commerce) and OCEN (Open Credit Enablement Network) can be optimized to drive cost efficiencies. Further, offering incentives to participants to onboard on platforms like ONDC can enable businesses, individuals and MSMEs to greater access to credit and financial product offerings. Initiatives such as incentives for collaboration, marketing, education and additional financing for use of digital infrastructure can propel and boost the fintech market significantly.

Financial literacy for financial inclusion

Development of digital infrastructure and funding alone will not be sufficient to boost financial inclusion in smaller cities and towns. A survey by the National Centre for Financial Education revealed that only 27% of the Indian population fall into the category of ‘financially literate’. Thus, it becomes important that the Indian masses are educated about digital payment infrastructures and the various financial product offerings that are available in the market. While the commissioning of the National Digital library, pursuant to last years budget was a great step taken by the government to boost financial literacy, more focussed initiatives on financial literacy in smaller towns can help deliver financial inclusion.

Streamlining KYC processes

Adopting stringent and differing KYC norms has often been voiced as a major challenge by several fintechs and regulated entities in India. The plethora of regulations across regulators governing KYC often makes it cumbersome for businesses and customers. Thus, while the importance of KYC cannot be undermined, it is hoped that some amount of consolidation across legislations or streamlining in processes can be achieved, to ensure that businesses can thrive and yet be compliant.

Striking a balance between innovation and regulation

While the absence or lack of regulations surrounding emerging technologies like blockchain, virtual digital assets and artificial intelligence, has led to reservations and several ambiguities amongst consumers and investors, over-regulating any financial product or services can never be the answer either. It is important that the government is able to strike a balance between innovation and regulation so as to ensure that law does not act as a barrier in the development or usage of technology and similarly, any development or use of technology does not violate the law. Striking this balance becomes even more important especially when customer’s personal or financial information is concerned. The expectation accordingly is that some clarity on regulation be introduced this financial year around emerging technologies that are not currently regulated and similarly, the government revisits and relaxes any excessive regulations that have become a hindrance to undertaking business. In other cases, where it is felt that due to lack of clarity, knowledge or need, a regulator need not regulate a technology, it is hoped that the government can either set up/expand existing sandbox frameworks to encourage unregulated businesses to test and operate technologies within a regulator’s ambit and with its blessings or implement self-regulatory measures.

Reviving Account Aggregator framework

It has been over three years since the account aggregator framework was released. However, due to various factors including lack of awareness and education, data privacy concerns, lack of participation amongst others, the Account Aggregator (AA) framework has failed to take off in the manner expected. Introducing incentives for collaboration, promoting more use cases, educating masses on AA and a larger participation can boost the AA framework and use.

New Cyber Fraud agency

With the advent of technology and AI, the number of ransomware attacks, online frauds and other cyber security incidents witnessed, and given the volume of sensitive personal and financial data at the disposal of fintech companies, it is in the interest of fintechs, borrowers and lenders that a robust cyber fraud agency is set up by the government. In the backdrop of the new data protection law and proposed notification of the impending rules, such measures could be implemented in collaboration with the data protection board. 

Initiatives in GIFT City 

Increasing incentives, removing or relaxing regulatory barriers and promoting innovation and new age product offerings can make Gift City a more attractive destination for investors and businesses and make it a hub for global businesses. By this, we mean promoting beyond just traditional financial, payments and securities offerings and extending newer fintech offerings like digital gold, crypto and virtual digital assets, tokens amongst others.

In addition to the above, tax waivers and cuts for emerging technologies, increasing the use cases of Central Bank Digital Currencies and promotion of Trade Receivables Discounting System can serve as other measures that can boost the market. Overall, there is a lot to look forward to in this years budget. Even if some of these actions are implemented, it will be seen as a win for the industry.

The authors are with INDUSLAW. Views expressed are personal.