- Sectors that are already under the category are agriculture, MSMEs, education, housing, social infrastructure among others
- Startups were considered under the MSME category and were required to show three years of profitability
The Reserve Bank of India (RBI) on Thursday brought startups under the purview of priority sector lending (PSL), a move that will make it easier for startups to raise funds from banks.
Sectors that are already under PSL are agriculture, MSMEs, education, housing, social infrastructure among others.
“This is a huge booster as sufficient funding and user adoption are two primary challenges for Indian entrepreneurs. The current environment has exponentially increased the digital adoption & banks stepping in to assist with funding will be a huge booster,” said Ankit Chaudhari, co-founder and CEO, Aiisma.
Analysts and startup founders said startups were always considered under the MSME category and were required to show three years of profitability.
Startups have relied on expensive venture debt. This move will help startups free up their equity and raise low cost debt. For MSMEs so far it was collateral-based debt which was explored as an option for banks. Banks will now see startups more seriously while providing them loans.
“RBI opening up more funds for lending to startups (distinct from MSMEs) is a very positive step. Startups have not had easy access to debt, stymied by traditional lender metrics of creditworthiness. Early startups are mostly bootstrapped or friends-and-family funded, though of late more early-stage startups have had access to seed or angel funding” said Prasanto K Roy, public policy consultant. “Now, even at pre-revenue stages sans customers, startups may be able to tap one more source of funds: loans from banks.”
According to venture debt firms, while the inclusion of startups in the PSL category is expected to add value by reducing dependence on equity capital, traditional lenders might find it difficult to understand capital dependency of high-growth businesses.
“Though the move will enhance the liquidity options available to startups, one of the challenges traditional lenders have faced is their ability to understand high growth business models and how to underwrite them. This is a gap that has historically been filled by venture debt players,” said Ankur Bansal, co-founder and director, BlackSoil, a venture debt firm. “This will be a positive development for the venture debt model since we will now see banks partnering with venture debt players in their funding rounds, enabling them to write bigger cheques.”
The steps taken by the RBI will also help start-ups which had been impacted by the covid-19 pandemic.
“Often, promising startups experience the downsides of liquidity crunch, which also decreases their bargaining power at the negotiation table. The inclusion of startups to PSL will go a long way and improve the segment’s operational efficiency,” said Atul Rai, co-founder and CEO, Staqu, an artificial-intelligence based startup.
With uncertainty in the business environment and an unexpected shift in the priorities of the government as well as the corporates, many start-ups are struggling to keep their operations going.
According to a Ficci survey, 70% of start-ups stated that their businesses have been impacted by covid-19, while 12% of the start-ups have shut operations and 60% are operating with disruptions.Tweet
Along with adding startups in the PSL category, the central bank, while announcing its monetary policy, said it will roll out offline mobile payment pilots, to address the digital divide of digital payments in the country.