Government eases credit flow to the micro, small and medium-sized enterprises (MSMEs) and abolishes angel tax for investors, aiming to benefit digital lending startups and spur investments for deeptech startups in Budget 2024.

According to Ashwini Vaishnaw, the union minister for electronics and information technology, the removal of the angel tax for investors is expected to surge investments in deep-tech businesses.

Additionally, Finance Minister Nirmala Sitharaman announced the government’s move to remove angel tax for all investor classes to strengthen the nation's startup ecosystem, encourage entrepreneurship, and foster innovation.

As for digital lenders which are trying to better connect with smaller companies through credit guarantee programs, they are hoping to boost the government's focus on unsecured MSME loans by improving their interactions with banks and non-banking financial institutions (NBFCs).

The limit for microunit development and refinancing agency (Mudra) loans are expected to increase by Rs 20 lakh for business owners who have successfully repaid their prior "Tarun" loans, according to Finance Minister Nirmala Sitharaman. Tarun loans are available under the Mudra scheme, with the maximum amount each applicant can get being Rs 10 lakh.

“The MSME credit guarantee cover up to Rs 100 crore is a big positive for the industry. Also, with the limit enhancement for Mudra loans, banks can now offer larger ticket size credit to good quality borrowers which is always desirable,” said Alok Mittal, cofounder of digital lending startup Indifi Capital.

The finance minister also announced the government’s plans to aid public sector banks in developing a credit assessment model to underwrite small firms using their digital footprints as a basis.

“The new assessment model for MSME credit by public sector banks, which relies on digital footprints, will help small businesses lacking extensive documentation gain better access to credit,” said Jatinder Handoo, chief executive officer, Digital Lenders Association of India.

Other than some trickle-down from the Rs 100 crore credit guarantee fund, micro-scale businesses, which account for the majority of non-farm jobs, are not specifically mentioned in the budget, according to Sanjay Sharma, managing director of another lending startup, Aye Finance. Therefore, some streamlining of these microlending programs would have been beneficial.

The government wants the Trade Receivable Discounting System (Treds) to start taking on more of a role within the larger MSME sector. The Treds platform, supported by the Reserve Bank of India, assists businesses in financing their invoices.

“This is the right policy extension keeping in mind that recently the RBI allowed NBFCs to participate in the Treds platform. This move will open up a large number of smaller companies including public sector enterprises to get access to this platform,” said Ramaswamy Iyer, CEO at supply chain financing startup Vayana.

Industry experts also noted that while Treds policy decisions have been made thus far, the industry still needs to develop onboarding procedures for smaller enterprises.

Fintech lenders feel that many small businesses can now hold land as collateral and access finance, which is essential for their growth and expansion, as a result of the digitization of land records.