Union Budget 2022-23: The financial services sector seeks simplification of regulatory compliances and government grants to meet tech costs
In his pre-Budget 2022 interactions with industry leaders, Prime Minister Narendra Modi expressed the vision to see India Inc enter the top five leagues in every sector. In last year’s Budget, the Finance Minister had laid out the vision for Atma Nirbhar Bharat. For achieving the earlier stated vision of making India a $5 trillion economy, the government has committed nearly Rs 1.97 lakh crores under the Production Linked Incentive (PLI) Scheme, spread over five years, starting from current FY 2021-22, in 13 key sectors.
Policy measures taken by the government have contributed to the growth of the economy in FY 2021-22. Growth in real GDP during 2021-22 is estimated at 9.2 percent as compared to the contraction of (-) 7.3 percent in 2020-21.
The Financial Services (FS) sector is the country’s bedrock. Financial, real estate, and professional services contribute the largest to the economy (-) 22 percent of the total gross value added (GVA) at the basic price. It is followed by trade, hotels, transport, communication, and broadcasting services (18.27 percent), manufacturing (17.52 percent), agriculture, forestry and fishing (15.67 percent), and public administration, defence, and other services like education, health, recreation, etc. (13.74 percent).
The FS sector is crucial for the growth potential of the economy and their expectation from Budget 2022 hovers around enablers to get to stable levels and to improve nation-building.
Relaxation in regulations
Regulatory compliances, including new rules and changes in rules, have increased for the financial services sector. The cost of compliance and risk mitigation is a heavy burden. The ask of the industry is for simplification, automation, and standardisation of compliance and risk mitigation procedures, with grants from the government to meet the cost of technology in regulations, especially for small and medium-sized FIs. This is akin to what is followed in Singapore.
The Monetary Authority of Singapore has the Regulatory Technology (‘RegTech’) grant which is part of the Financial Sector Transformation and Innovation (‘FSTI’) scheme. This grant supports financial institutions based in Singapore to enhance their risk management and compliance functions through the use of technological solutions and also supports upskilling of employees.
NBFCs play a significant role in reaching the underserved financial services market, viz. the rural areas, and Tier 3 cities and beyond. They have also been successful in the introduction of many financial sector credit delivery innovations, such as micro-credit and sachetisation of credit. The COVID pandemic has badly hit this sector. In Q1 of FY 2020-21, they faced severe disruptions during the lockdown and a reduction in business. The picture is looking marginally better in FY21-22, with a 17 percent increase for Q2 YOY. However, the sector expects an increase in NPAs especially relating to MSMEs or unsecured loans.
The expectations for the NBFCs from this year’s Budget include increasing lending from banks via the Priority Sector Lending (PSL) window, tax incentive in the form of an increased deduction for NPAs, increase in the period of carry forward of losses due to loss of business/activities during the pandemic.
Innovative last-mile financial service providers – Payment systems
Last-mile connectivity is a major issue in rural India caused mainly due to illiteracy, poor network connectivity, and a general lack of awareness of financial services. Fintechs play a crucial role to move India towards ‘Digital India’ alongside banks and NBFCs. However, several fintechs continue to be unregulated.
To bring in global best practices, India will need to achieve a balance between rules and regulations by providing space and freedom to provide tech-based novel solutions in this area of FS. The players in this sector expect the Budget to provide a liberal framework of regulations, lower tax rate based on volumes of digital lending, concession in the application of lower withholding tax rate not only to overseas foreign currency loans but also to overseas Indian currency loans, clarity on applicability of TDS and administrative compliance burden under section 139A, etc.
In the last six-seven years, India has advanced impressively on ‘digital’ way of consuming financial services, catalyzed by PMJDY, India Stack, e-KYC, and UPI. However, during this transition, the traditional way of banking has remained undisrupted for credit delivery and issuance of demand deposits. The government is evaluating the prospect of ‘Digital Banks’ or DBs which will issue deposits, make loans and offer the full suite of banking services by principally relying on the internet and other proximate channels and not physical branches. A new licensing/regulatory framework is being proposed as regulatory innovation. The FS sector will make giant strides with such unique regulatory measures.
RBI’s ‘Report on Trend and Progress of Banking in India 2020-21’, emphasises that it is necessary to adopt basic models of Central Bank Digital Currency (CBDC) initially and test them comprehensively so that they have minimal impact on monetary policy and the banking system.
In his address to the World Economic Forum (WEF)’s Davos Agenda on 17 January 2022, Prime Minister Modi called for synchronized global action to regulate cryptocurrencies, given the kind of technology that is involved.
The major driver to reach the $5 trillion economy is the manufacturing and agriculture sector, which have to grow exponentially to become part of global supply chains and next-gen technology solutions. The FS sector can do the heavy lifting of providing sustained finance to these sectors and expect incentives, liquidity, guarantees, support for such business.
Bahroze Kamdin is Partner, Deloitte India; Smita Parulkar is Partner, Deloitte India.