Start-up loans up to ~50 cr now under priority sector

Greater focus on lending to farmers, weaker sections as RBI revises guidelines

The Reserve Bank of India (RBI) on Friday said loans of up to ~50 crore towards startups would qualify for the priority sector, alongside renewable energy used for agriculture. The central bank also doubled the overall limit for such renewable energy and health care as part of its revision to priority sector guidelines.

The revised guidelines are aimed at aligning them with “emerging national priorities and bring sharper focus on inclusive development”, said the RBI. These will enable better credit penetration to credit-deficient areas, increase lending to small and marginal farmers and weaker sections, and boost credit to renewable energy and health infrastructure, it said.

Once lending is done under priority sector, the rates are subsidised and in some cases, the government also chips in with subvention. The RBI did the last such priority sector revision in 2015.

In the latest revision, banks have been told to earmark 10 per cent of their loan book for advances towards small and marginal farmers, as against 8 per cent now. The central bank has also told banks to ensure that districts or sectors that don’t get adequate credit should witness more lending activities.

The start-up introduction is part of the government’s move to include the sector in micro, small and medium enterprises (MSMES). The RBI said in its master circular that starts-ups engaged in agriculture and allied activities, as well as those which qualify to be called MSMES, would get loans under the priority sector target.

State Bank of India (SBI) Group Chief Economic Advisor Soumya Kanti Ghosh wrote in a note that the inclusion of startups in priority sector lending (PSL) would reduce their cost of capital by allowing them better access to bank credit. “Equity infusion will not be the only route to follow when start-ups need funds for working capital requirements, and this will greatly ease the risk of ordinary shareholders being wiped out due to ‘downrounds’,” he said.

However, start-ups don’t have collateral and performance evaluation mechanism matrix, and hence “it will be interesting to see how lenders can diversify their risk appetite and lend to start-ups which do not meet traditional security/collateral/cash flow requirements”, Ghosh wrote, adding that letting farmers take loans for installation of solar power plants was also a policy enabler.

The central bank said a farmers’ collective could take loans of up to ~30 crore for purposes like solar-based power generators, biomass-based power generators, wind mills, micro-hydel plants, and for non-conventional energy-based public utilities, viz., streetlighting systems and remote village electrification, etc. “For individual households, the loan limit will be ~10 lakh per borrower,” it said.

The RBI said that from 2021-22 onwards, a weighting of 125 per cent would be assigned to incremental priority sector credit in districts where credit flow was comparatively lower (less than ~6,000). To compensate that, a lower weighting of 90 per cent will be assigned to incremental priority sector credit in districts where credit flow is comparatively higher (at ~25,000 per capita towards priority sector lending).

Advances to weaker sections would now be 12 per cent of credit for scheduled commercial banks, and 12 per cent for small finance banks.

The guidelines should enable more credit flow to small and marginal farmers, who are largely outside the ambit of the formal credit system and will also boost credit to the farmer-producer organisations and companies, experts said.

Within agriculture credit, 10 per cent should be mandatorily given by banks to small and marginal farmers over the next three years, starting 2020-21.