Union Budget 2022-2023: Financial services industry seeks to simplify regulatory compliance and government subsidies to meet technology 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 Minister of Finance laid out the vision of Atma Nirbhar Bharat. To achieve the previously declared vision of making India a $5 trillion economy, the government has committed almost Rs 1.97 lakh crore under the Production Linked Incentives (PLI) scheme, spread over five years, starting in the current fiscal year 2021-22, in 13 key sectors. .
The policy measures taken by the government have contributed to the growth of the economy in the financial year 2021-22. Real GDP growth in 2021-22 is estimated at 9.2%, compared to a contraction of (-) 7.3% in 2020-21.
The financial services (FS) sector is the bedrock of the country. Financial, real estate and professional services contribute the most to the economy (-) 22% of total gross value added (GVA) at basic price. It is followed by trade, hotels, transport, communications and broadcasting services (18.27%), manufacturing industry (17.52%), agriculture, forestry and fishing (15 .67%), and public administration, defense and other services such as education, health, leisure, etc. (13.74%).
The financial services sector is crucial to the growth potential of the economy and their expectations for the 2022 budget revolve around the catalysts to achieve stable levels and enhance nation building.
Relaxation of regulations
Regulatory compliances, including new rules and rule changes, have increased for the financial services industry. The cost of compliance and risk mitigation is a heavy burden. Industry demand is simplification, automation and standardization of compliance and risk mitigation procedures, with government grants to cover the cost of technology in regulations, especially for small and medium if. This is similar 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”) program. This grant helps Singapore-based financial institutions improve their risk management and compliance functions through the use of technology solutions and also supports employee development.
NBFCs play an important role in reaching the underserved financial services market viz. rural areas and Tier 3 cities and beyond. They have also succeeded in introducing many innovations in the provision of credit in the financial sector, such as microcredit and the bagging of credit. The COVID pandemic has hit this industry hard. In the first quarter of the 2020-21 financial year, they faced severe disruption during the lockdown and reduced activity. The situation improves slightly in fiscal year 21-22, with an increase of 17% in the second quarter of the year. However, the sector expects an increase in NPAs, especially regarding MSMEs or unsecured loans.
Expectations for NBFCs in this year’s budget include increased lending from banks through the Priority Sector Lending (PSL) window, a tax incentive in the form of an increased deduction for NPAs, increased the carry-forward period for losses due to loss of business/activities during the pandemic.
Innovative Last Mile Financial Service Providers – Payment Systems
Last mile connectivity is a major problem in rural India, mainly due to illiteracy, poor network connectivity and a general lack of awareness of financial services. Fintechs are playing a crucial role in moving India towards “digital India” alongside banks and NBFCs. However, several fintechs are still unregulated.
To incorporate global best practices, India will need to strike a balance between rules and regulations by providing space and freedom to provide new technological solutions in this area of FS. Industry players expect the budget to provide a liberal regulatory framework, lower tax rate based on digital lending volumes, concession in applying lower withholding tax rate not only to foreign currency lending abroad but also to Indian currency lending abroad, clarity on the applicability of TDS and the administrative compliance burden under Section 139A, etc.
Over the past six to seven years, India has made impressive progress on the “digital” way of consuming financial services, catalyzed by PMJDY, India Stack, e-KYC and UPI. However, during this transition, the traditional banking method remained unchanged for extending credit and issuing demand deposits. The government is assessing the prospect of “digital banks” or DBs that will issue deposits, grant loans and offer the full range of banking services relying primarily on the internet and other convenience channels and not physical branches. A new licensing/regulatory framework is proposed as a regulatory innovation. The FS industry will take giant leaps forward with such unique regulatory measures.
RBI’s “India Banking Industry Trend and Progress Report 2020-21” highlights the need to initially adopt the basic models of Central Bank Digital Currency (CBDC) and test them in practice. thoroughly so that they have a minimal impact on monetary policy and the banking system. system.
In his address to the Davos Agenda of the World Economic Forum (WEF) on January 17, 2022, Prime Minister Modi called for synchronized global action to regulate cryptocurrencies, given the type of technology involved.
The main driver to reach the $5 trillion economy is the manufacturing and agricultural sector, which must grow exponentially to become part of global supply chains and next-generation technology solutions. The financial services sector can do the heavy lifting in providing sustainable financing to these sectors and expect incentives, liquidity, guarantees and support for these activities.
Bahroze Kamdin is Partner, Deloitte India; Smita Parulkar is a partner at Deloitte India.