Priority Sector Lending - Startup Edition
Priority Sectors are identified by the RBI as those sectors which lack adequate and timely funding and they guide banks to set aside a portion of their lending to a few sectors hereinafter called as priority sectors.
RBI has guided banks to provide 40% of their Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure (whichever is higher) towards priority sectors.
In 2016, RBI had released eight broad categories eligible for PSL, namely -
- Agriculture
- MSMEs
- Export Credit
- Education
- Housing
- Social Infrastructure
- Renewable Energy
- Others – Personal loans to weaker sections, distressed persons, loans to state sponsored organisations for SC/ST.
On 6th August, 2020 RBI included startups under the ambit of PSL which will potentially give a big boost to the entire startup ecosystem.
With a view to aligning the guidelines with emerging national priorities and bring sharper focus on inclusive development, the Priority Sector Lending (PSL) guidelines have been reviewed,” - RBI Governor Shaktikanta Das
The Indian Startup Ecosystem consists of close to 40k startups with approximately 2k investors for the same. Any startup looks largely at raising capital from individual investors, private equity players and venture capital funds. Although, it might be easier for an established startup to raise money from Private Equity Firms and VC Funds, it is extremely difficult for an early stage startup to raise capital from them before entering their idea validation stage.
Currently, startups also find it difficult to get loans from banks due to the high debt rates owing to the lack of providing collateral. This has led to the route of venture debt financing becoming an important element of financing for startups in India. Within the first 6 months of 2020, companies have raised approximately $600 million via venture debt financing.
The Government over the years has slowly improved their focus on startups on MSMEs by announcing various schemes and opportunities over the years. The 59 Minute Loan scheme was established to help MSME’s get approval for business loans in 59 minutes. SIDBI started investing in companies directly instead of going through banks and started providing business loans 300 basis points cheaper than the traditional banks.
The inclusion of startups as a priority sector is a good sign of things to come for the startup ecosystem as the Government has finally made a concrete step towards the development and uplift of the entire startup community. Although the implementation guidelines have not been established yet, early stage companies now have another avenue to raise capital from ensuring that good ideas don’t die out just because the founder was not able to convince the so called veteran investors in the space.
This move will also help the current players with their working capital issue as the CoVid-19 Pandemic has affected startups and companies across the globe. A Nasscom survey suggested that 70% of startups will have cash reserves for 3 months and around 90% of startups faced a revenue decline.
It will be interesting to see how much of the 40% banks deploy towards startups, especially considering that 18% out of the 40% is kept aside for the agricultural sector. It will also be interesting to see how banks approach the companies in the first place, whether it is going to be in partnership with venture debt funds or whether banks are going to go solo.