RBI includes startups in priority sector lending category

Bengaluru: The Reserve Bank of India (RBI) on Thursday brought startups under the purview of priority sector lending (PSL), which will make it easier for startups to raise funds from banks.

Sectors already covered by PSL include agriculture, SMEs, education, housing and social infrastructure.

“This is a huge boost as sufficient funding and user adoption are two major challenges for Indian entrepreneurs. The current environment has exponentially increased digital adoption and banks stepping in to help with funding will be a huge boost,” said Ankit Chaudhari, co-founder and CEO, Aiisma.

Analysts and startup founders said startups have always been classified in the SME category and had to demonstrate three years of profitability.

Startups have been relying on expensive venture debt. This move will help startups free up equity and raise cheap debt. For SMEs, secured debt has been an option for banks to explore so far. Banks will now take startups more seriously by lending to them.

“The opening of more funds for startup lending (non-SME) by the RBI is a very positive step. Startups have not had easy access to debt, limited by traditional lenders’ credit ratings. Early startups are mostly funded through bootstrapping or through friends and family, though more early-stage startups have recently had access to seed funding or angel investors,” says Prasanto K Roy, a public policy consultant. “Now, even at the pre-revenue stage without customers, startups may be able to tap another source of funds: loans from banks.”

Venture debt lenders say that while including startups in the PSL category should increase value by reducing reliance on equity, traditional lenders may have difficulty understanding the equity dependence of fast-growing businesses.

“While this move will increase the liquidity options available to startups, one of the challenges that traditional lenders face is their ability to understand high-growth business models and how to underwrite them. This is a gap that venture debt players have historically filled,” said Ankur Bansal, co-founder and director of venture debt firm BlackSoil. “This will be a positive development for the venture debt model as we will now see banks partnering with venture debt players in their funding rounds, enabling them to write bigger checks.”

The steps taken by the RBI will also help startups that have been hit due to the COVID-19 pandemic.

“Often promising startups face the disadvantage of liquidity crunch which also reduces their bargaining power at the negotiating table. The inclusion of startups in PSL will go a long way and improve the operational efficiency of the segment,” said Atul Rai, Co-founder and CEO, Staqu, an AI-based startup.

Due to uncertainty in the business environment and unexpected changes in government and corporate priorities, many startups are struggling to sustain their operations.

According to a Ficci study, 70% of startups said their operations have been impacted by COVID-19, while 12% of startups have shut down and 60% are operating with disruptions.

Apart from adding startups to the PSL category, the central bank, while announcing its monetary policy, said it will implement pilot offline mobile payments programmes to bridge the digital divide in terms of digital payments in the country.