FM’s Reform Splurge to Surge Economy Hits the Right Notes

Masterstroke seems to be the leitmotif of Modi government ever since it came into power. Just when the market pundits were speculating a mini-recession of sorts, the Honourable Finance Minister gave it the much needed panacea. The multifarious measures announced by Smt Nirmala Sitharaman will definitely give the economy its much needed stimuli. The timing of the announcements was spot on as well. With the festive season approaching there would be a surge in demand for credit and the NBFCs can now leverage the reforms to its benefits.

Angel Tax

The key takeaway from the announcement was the revocation of Angel Tax for startups. Ever since the new government took office, startup founders and entrepreneurs have been clamouring for this step. However those left disheartened after the Budget 2019 might now breathe a sigh of relief. The exclusion of startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) from Section 56 (2) (b) of the Income Tax, will help in its fair valuation and bring respite to the founders who get summons from the IT department based on their quantitative investments. Furthermore the proposal for a dedicated cell under a member of Central Board of Direct Taxes (CBDT) is the right step in redressing the income tax issues faced by startups. Investor outlook in several fledgling segments in Fintech will also revive after this step. Fintech companies looking for the next stage of funding will also largely benefit from this move.

Aadhar authenticated bank KYCs

Another announcement that is bound to have a profound impact in the functioning of NBFCs and FinTech companies is the consent to use Aadhar authenticated bank KYCs. The unnecessary process of re-authenticating customers has been a deterrent while on-boarding new customers, both in terms of money spent and TAT. By tweaking the Aadhar regulations and making changes to the Prevention of Money Laundering Act (PMLA) 2002 the cost for KYC process will be reduced by 95% while improving operational efficiency. While awaiting its operational update it has to be said that the scope of submitting documents digitally (e-KYC) will aid many startups who have modelled their business in the Fintech landscape.

The ramification of e-KYC and Aadhar authenticated bank KYCs will be huge in the digital lending space as P2P players can now save over 95% of its expense in customer KYC, the benefits of which can be passed to the customer. Furthermore the TAT of customer acquisition will be reduced which will consequently reduce the entire credit disbursement duration. A simplified and fast process will help spread the concept of digital lending to the masses.

GST refund

Micro, Small and Medium Enterprises (MSMEs) (the clientele of several Fintech companies) would be toasting the FM’s announcement of quick disbursal of GST refunds. MSMEs can now expect to get its pending GST refunds within 30 days. This will boost the credit flow in the market, which is a huge relief to the MSME sector. (However, a word of caution here – most of the delay in GST refund happens at the State level and it remains to be seen whether the Centre comes up with some mechanism to address this delay).

These and several other economic “surgical” strikes by the FM have come about at the right time when the market sentiments were beginning to fade. Even the news of an impending announcement by the FM was enough to boost the market. But only time will tell the long term impact of these steps.