Union Budget 2021: Fintech Needs Access To Liquidity From PSU-Generated Funds

  • KredX Editorial Team
  • 25 Feb 21
  • Budget
Union Budget 2021 proposed a bill with Rs. 20000 crore-outlay to establish a Development Financial Institution (DFI). Financial experts believe this bill will prove useful in boosting MSME and SMEs’ access to funds and significantly help the infrastructure and manufacturing sectors. This step is likely to help address the problem of financing gaps, related to long-term infrastructure projects. The development of a state-of-the-art fintech company in Gujarat will also add to the cause. It will operate to facilitate and develop financial tech services and related products. The Rs. 1500 crore-incentive is expected to create opportunities for fintech companies to adapt to the new standard and facilitate large-scale adoption of digital-based borrowing by MSME and SMEs that are often wary of digital transactions. Let us proceed to find out more about the Union Budget 2021 and what it holds for fintech companies in India.

Financial Technology Sector – 4 Major Takeaways From The Union Budget 2021

The Union Budget 2021 upheld the vision of an ‘Aatma Nirbhar Bharat’ or self-reliant India. Key policies and announcements focused on the fintech sector to boost access to liquidity through digital transformation. So, without much ado, let us glance at some major takeaways of this year’s budget announcements regarding the technology-based financial sector.

Fintech Hub In GIFT City

As per the announcement, a fintech hub is expected to be set up in Gujarat International Finance Tech (GIFT) City. The upcoming project will emerge as a centre of the fintech sector. It will be the country’s very first operational smart city and an international financial service centre. The fintech hub aims to accelerate the use of Machine Learning and Artificial Intelligence, among others, in the country. Plus, it is expected to promote digitalisation and push tech-based tax functioning more rapidly.

Allocated Funds To MSME

Rs. 157 billion has been allocated to the MSME sector in Budget 2021 to improve its infrastructure and scope. Some key announcements related to MSMEs are –
  • Incorporation of individual-owned companies without restricting turnover and paid-up capital
  • The budget set for the MSME sector has been increased
  • The definition of small companies under the Companies Act, 2013 has been updated
The announcement has been received well by the sector and acknowledged as an awaited respite. Furthermore, fintech companies that extend cash flow solutions to businesses have gained significant popularity in these last few years. With the focus being on making credit more accessible and digitalising lending services, one can expect that more businesses, previously wary of the said lending medium, will gain confidence in the set-up.

Fund Allocation To Boost Digital Payment

The last few years witnessed a landmark increase in digital payments. To sustain and boost it further, the government has announced that it has set aside Rs. 15 billion to encourage digital transactions and digitalise the economy.  This decision aims to make e-payments accessible across India, especially in tier-1 and tier-2 cities. As financial institutions go digital to improve access to credit, it can be expected that the current infrastructure and connectivity will improve significantly across the nation to make Digital India achievable. 

Establishment Of ‘Bad Bank’

This budget also raised the proposal to privatise PSBs with Rs. 200 billion and established a ‘bad bank’ to manage the Non-Performing Assets. The move to set-up an Asset Reconstruction and Management Company is likely to prove useful in managing bad loans and help address the problem of NPAs directly. 

Prospect For Fintech – In A Nutshell

The fintech sector’s recognition as a formal industry in Budget 2021 is likely to facilitate collaboration between financial institutions and start-ups, small-scale businesses, etc. It will ensure structured lending and further setting up funds with PSUs.  If things work out as they are intended to, collectively, PSUs, fintech, and traditional banking industries can significantly boost liquidity and simplify credit access. A primary segment will be invoice discounting platforms in this regard.  These provide businesses with quick solutions to their cash flow crisis. Based on your convenience, you may opt for either invoice discounting or factoring to raise funds tied-up against your unpaid receivables. With the prospect of digitalising lending platforms, one may expect that the role, prominence, and effectiveness of invoice discounting platforms would become more acknowledged in coming years. 

Bottom Line:

The Union Budget 2021 aims to increase MSMEs’ accessibility to credit through digital lending platforms and related fintech endeavours. As digital transactions gain prominence in India, businesses can leverage the momentum to spur growth in a dynamic business ecosystem.