Reserve banks increase credit limit: Reserve bank of India revised its guidelines to broaden the scope of the priority sector lending category. The guidelines were last reviewed in April 2015. These guidelines’ goal is to encourage the development of start-ups and companies that provide solutions with renewable energy, such as biogas, solar energy, and other weaker sections.
This category was before filled by education, the housing sector, infrastructure, and other MSMEs (ministry of micro and small-medium enterprises). This ministry was found in the year 2007. “To align the guidelines with emerging national priorities and bring a sharper focus on inclusive development, the guidelines have been reviewed after wide-ranging consultations with all stakeholders,” the RBI said.
“This is a huge booster as sufficient funding and user adoption are two primary challenges for Indian entrepreneurs. The current environment has increased the digital adoption & banks stepping in to assist with funding will be a huge booster,” said Ankit Chaudhari, co-founder, and CEO, Aiisma.
Reserve banks increase credit limit Start-ups have always faced issues in raising funds which made them turn to high-cost private lenders. The new guidelines make the banks assign a 40% adjusted net bank credit or credit equal amount off-balance sheet exposure (whichever is higher) to this sector.
Banks will also be able to partner with private venture players to increase their credit strength. The credit weight will be higher in incremental priority sector credit in districts with low credit flow and districts with higher credit flow will receive comparatively lower weight in incremental priority sector credit.
“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.
Now, even at pre-revenue stages sans customers, startups may be able to tap one more source of funds: loans from banks.” said Prasanto K Roy, public policy consultant.
As per a survey by FICCI, 12% of startups have been shut down and 70% start-ups have been affected by the pandemic. These guidelines are revised by the government to provide support for startups in this uncertain business environment.
“Often, promising startups experience the downsides of a 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.