Budget 2020 India: Even as the liquidity windows and regulatory incentives ushered after the last year’s budget improved the liquidity situation in the financial system, a more concrete approach is in order

By Piyush Khaitan

Union Budget 2020 India | Credit and Finance for MSMEs: The Indian economy is at an inflexion point. The past year brought with itself several welcome moves from the government to boost the cashless economy and the availability of credit. The budget 2020 provides a strong opportunity to build on these measures and create a benign cycle of credit which lubricates the industry and leads to higher growth and financial wellbeing for all.

With the improvement in digital penetration, we are likely to see even more MSMEs obtain formal credit and kickstart the growth engine. The upcoming budget could provide the launch-pad for all three interconnected aims of the current policy regime – more credit, digital economy and growth of the MSME segment. The NBFC sector has played a pivotal role in the development and delivery of last-mile credit in India. The lending book of NBFCs has grown at a rate of 18 per cent year-on-year in the last five years. Also, the sector’s contribution to total credit has increased from 15 per cent to 20 per cent in the last three years.

The announcements in budget 2020 should focus on the MSME sector which employs more than 50 per cent of India’s workforce. Apart from continuing with ease of doing business reforms, the government should focus on introducing certain incentives to the lending sector too and make credit more easily available. We have expectations from the government for positive news around digital payments, lending, regulations for NBFCs as well as the overall macroeconomy which needs a bump in consumer demand. Specifically, we have the following expectations from the budget 2020.

Improving Credit Flow to NBFCs

Even as the liquidity windows and regulatory incentives ushered after the last year’s budget improved the liquidity situation in the financial system, a more concrete approach is in order. External commercial borrowings for onward retail lending is one solution that can be considered. Meanwhile, another important reform in waiting is the further strengthening of the liquidity framework for NBFCs which will ensure that the sector is in the pink of the health and insulated from exigencies and shocks.

Clarity in Digital KYC Guidelines

Data costs have fallen by over 95 per cent in India in the last three years leading to a proliferation of smartphones and in effect, digitization of small businesses. However, the know-your-customer guidelines are still not fully optimized to enable frictionless onboarding of merchants and businesses into the credit system. We expect more firming up of regulations in this regard to enhance digital lending and enable us to deliver superior customer experience.

Unlocking Financial Data
The announcement of Account Aggregators by the RBI was an important step towards ushering in an era of open banking in India. The government should seek to expedite the onboarding of Account Aggregator NBFCs which can unlock value in currently isolated and siloed financial data of MSMEs. This will result in stronger underwriting and faster disbursals and a secure experience since customer consent will be at the heart of this information flow.

Incentivizing Digital Business Practices
It will augur well for the MSME sector as well as the economy as a whole if businesses carrying out digital transactions, availing digital credit and filing GST returns can be incentivized. The government should think out-of-the-box and try to boost GST compliance by offering tax incentives and also reducing some of the financial costs associated with accepting digital payments for small merchants.

At this point, the government should consider taking bold measures that will help revive the macroeconomy of the country and generate demand which starts the virtuous cycle of growth. At the intersection of digital payments, credit and MSMEs, we have observed that even small steps that remove bottlenecks can have an exponential effect in the state of the economy.

The government should aim to roll out Public Credit Registry and the regulatory sandbox sooner than later in order to kickstart innovation and help digital credit truly reach the last mile. With its stellar work on Jan Dhan Yojana, financial inclusion was achieved but for millions of entrepreneurs, true financial independence will only happen when they are not starved of benign credit.

(Piyush Khaitan is the Managing Director at NeoGrowth Credit. Views expressed are the author’s own.)

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