Startups come under priority lending

In a bid to incentivise credit flow to specific segments like clean energy, weaker sections, health infrastructure and credit deficient geographies, the Reserve Bank of India ( RBI) on Friday included them as fresh categories eligible for finance under priority sector lending ( PSL) guidelines.

“Bank finance to startups up to Rs 50 crore, loans to farmers for installation of solar power plants for solarisation of grid connected agriculture pumps and loans for setting up compressed bio gas plants have been included as fresh categories eligible for finance under priority sector,” the RBI said in a release.

The priority sector guidelines have been comprehensively review- ed and revised to align it with emerging national priorities and bring sharper focus on inclusive development, after having wide ranging discussions with all stakeholders.

Priority sector loans refer to loans that banks need to mandatorily lend to economically weaker sections of the society. With the change in definition in 2015, the performance of banks in achieving PSL targets has significantly improved. In FY20, all the bank- groups ( public, private and foreign banks) have been able to achieve the overall target of 40 per cent lending ( public 41.05 per cent, private banks 40.32 per cent and foreign banks 40.81 per cent).

The revised PSL guidelines will enable better credit penetration to credit deficient areas; increase the lending to small and marginal farmers and weaker sections; boost credit to renewable energy, and health infrastructure. The revised guidelines also seek to address regional disparities in the flow of priority sector credit. As a result, higher weightage have been assigned to incremental priority sector credit in ‘ identified districts’ where priority sector credit flow is low.

The targets prescribed for “small and marginal farmers” and “weaker sections” are being increased in a phased manner, said the apex bank adding that higher credit limit has been specified for farmer producer organisations ( FPOs)/ farmers producers companies ( FPCs) undertaking farming with assured marketing of their produce at a predetermined price.

“The inclusion of startups in PSL will reduce their cost of capital by allowing them better access to bank credit. Going forward, 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'.

However, to boost lending to start- ups it is also imperative to set in place an institutional mechanism.