In an unprecedented move, RBI for the time has included startups under the Priority Sector Lending category. This was announced as part of RBI’s monetary policy statement for 2020-21 that was unveiled by Governor Shaktikanta Das on Thursday morning.
This is the first time that India’s Central Bank has reviewed the guidelines for Priority Sector Lending since 2015.
What is Priority Sector Lending and the importance of including startups in this category?
Priority Sector Lending seeks to increase the supply of credit to those specific sectors and industries that are often neglected by financial and credit lending institutions. As a result, these sectors and industries are left starving for capital and this resultantly creates hindrance in their economic progress.
By including startups under this unique category, Banks will be now more encouraged to open their credit wallet to fledging startups. But will this move actually pave way for increase credit flow for startups is yet to be seen.
It is no secret that compared to MNCs, commercial banks usually don’t favor startups for credit lending. Therefore, most startups are forced to look towards venture capital firms, private equity investors and Angel investors for fulfilling their capital needs. In fact, today it is common knowledge that 80-90% capital requirements of startups are sourced through VCs and private equity investors.
However, things are getting little better over the years as banks have become comparatively lenient in facilitating credit for the startup industry. Since past few years, major banks like HDFC, Axis, IDFC, Kotak Mahindra and Yes bank have started extending short term credit to well-funded startups.
Several big startups including Oyo, Ola, Capital Float, Flipkart, Nykaa and Power2SME have already availed the short term credit facilitation service offered by the banks. This has particularly helped them in meeting their working capital needs.
Although banks have now become more open in offering credit to well-funded startups, they carry the same stringent attitude towards small and bootstrapped startups. But hopefully RBI’s latest move will bring some change in their attitude.
In another important development, RBI has also offered some respite to MSME on account of economic fallout due to COVID-19 crises. The central bank has asked banks to restructure the loans of MSME customers provided that they meet certain criteria.