2020 was a year that we will remember forever – and not for the best of reasons. The Covid-19 outbreak brought the world to its knees. The machinery that kept businesses and the economy going ground to an excruciating halt, seemingly overnight. With people confined to their homes to avoid accidental exposure and community transmission, extended lockdowns became the flavour of the season.
But, in every cloud, exists a silver lining. The black swan event added inadvertent momentum to India’s journey toward becoming a digital-first economy. With more consumers across the country – even from the relatively untapped rural and semi-urban markets – taking to the digital medium to combat lockdown restrictions, the volume of digital transactions jumped to an all-time high. Over 2.3 billion UPI-based payments were processed in January alone, while the total quantum of non-cash transactions is expected to cross INR 4,630 crore by the end of FY2020-21.
These statistics all point to one conclusion: that India’s digital payments ecosystem is set to register exponential growth over the next few years, whether in terms of the market size, end-consumer adoption, or transaction volumes. And proposals made in the recent Union Budget presented by the Finance Minister Nirmala Sitharaman will only accelerate the growth trajectory of the Indian fintech industry.
Decoding the budget: What the fintech industry gained in the first post-pandemic fiscal plan
Walking the tightrope between rejuvenating the economy and avoiding fiscal overcommitment, the Union Budget 2021-22 underscored the government’s focus on stimulating economic growth after a turbulent 2020. The proposed establishment of development finance institutions (DFIs), for instance, is a positive step that will streamline and simplify business lending, especially in mission-critical sectors such as manufacturing and infrastructure that are perennially starved for capital.
Similarly, public sector banks (PSBs) will now be allowed to directly raise capital from the market to ease the fiscal pressure that comes with providing frequent government-backed financial aid to these institutions. On the other hand, the formation of dedicated asset reconstruction and asset management companies will help BFSI players to deal with bad loans. These measures are expected to ease the liquidity crisis currently afflicting the economy by freeing up much-needed capital for lending in the future.
However, these measures pale in comparison with perhaps the biggest proposal for the BFSI sector in the Union Budget 2021-22: the creation of a corpus worth INR 1,500 crore to accelerate the adoption of digital payments. The fund will incentivise fintech companies and traditional BFSI players to launch new-age digital solutions that are aligned with the varied needs of India’s diverse consumer base and can address existing barriers to financial inclusion through cutting-edge technology.
The announcement follows close on the heels of promising policy and regulatory developments in recent months. Earlier this year, the RBI outlined a Payments Infrastructure Development Fund (PIDF) worth INR 345 crore for the development of digital and offline point-of-sale (PoS) infrastructure in regional markets across tier-3/tier-4, semiurban, and rural geographies. Through the fund, it aims to establish non-cash transactions as the preferred mode of payment in areas that have hitherto been heavily dependent on cash by improving the coverage of, and access to, digital financial services.
Other measures in the pipeline are also expected to accelerate India’s ongoing transformation. The National Payments Corporation of India (NPCI), for instance, has announced its plans to introduced NFC-based UPI payments to enable seamless offline transactions in areas with limited to no internet connectivity. The RBI, on the other hand, has issued a directive to payment system operations to shift to interoperable QR codes, backed by UPI or BharatQR, to further improve the reach, scale, and penetration of digital transactions. The first cohort of fintech start-ups selected under the RBI’s regulatory sandbox is also working toward enabling state-of-the-art solutions, such as contactless, soundwave-based payments. All of these solutions are being designed to overcome the issues of low digital literacy, limited internet connectivity, and poor smartphone adoption prevalent outside tier-1 and tier-2 regions.
The latest Union Budget builds on this robust, future-oriented foundation by incentivising fintech innovation. The end-goal? To make digital transactions more accessible, available, and convenient for the mass consumer by eliminating traditional hurdles involving geographical location, purchasing power, or infrastructure. The scope and intent behind it are applause worthy. All that remains to be seen now is how well the ecosystem stakeholders – from conventional BFSI companies and fintech start-ups to government agencies, regulatory bodies, and businesses – can translate this ambitious vision into a tangible reality. The early indicators are promising and make us believe that the promise of India’s imminent evolution into a less-cash economy is no longer a matter of ‘if’, but merely that of ‘when’.
Views expressed above are the author’s own.
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