Skip to contentSkip to sidebarSkip to footer

Will the PSL tag help startups win over Bank loans

Last month, Reserve Bank of India took an unprecedented decision by including startups under priority sector lending category (PSL). The decision, which was unanimously hailed by the startup community, was aimed at increasing the credit penetration in the cash-starved startup industry. Last week, India’s central bank issued fresh guidelines with regards to PSL, requesting banks to lend a minimum INR 50 crores to startups. However, there is still some ambiguity whether INR 50 crores is an annualized or quarterly figures.

Over the years, India has emerged as one of the global hubs for startups. Today it is home to 22 unicorns that collectively have a market valuation of $73 – $75 Bn. As per rough estimates, India is home to 4 lakh – 5 lakh startups out of which approximately 34,000 startups have been registered DPIIT. But these supposedly flattering numbers have not found any resonance with India’s banking industry.

It is no secret that the formal banking industry has always shown unambiguous apathy to the startup sector’s incessant need for capital. Banking sectors have always justified this gross apathy by citing reasons like startup’s poor cash-flow, no real metrics to evaluate their business model, absence of hard collateral and long gestation period to turn profitable. Bank’s apathy has been so empathic that even startups that have raised series C & series D rounds and also unicorns have found it often hard to raise credit from Banks.

It is not surprising then that VCs and angel investors have become default credit lenders for the fledgling startup sector. In the absence of hard collateral, VC and angel investors take up a stake in the company in return of substantial equity infusion.

However, now the question is with startups getting PSL tag, will big and mid-size banks join VC and angel investors in meeting the credit demands of startups.

According to sources, despite the PSL tag banks are still not willing to open their coffers for startups. Sources claim that banks are likely to engage with the Indian government on this issue and may even seek security from government to run a dedicated credit lending program for startups. There is unlikely to be any major change in banks traditional rigid attitude visa via bank loans for startups.

Industry experts claim that PSL tag will make real impact only if RBI and Finance Ministry pitches in to nudge the banks in opening credit flow for startups. Banks though, experts add, will continue to remain adamant unless the finance ministry gives solid financial assurance that credit flow to startups won’t add to their NPA woes.

Notably, Indian government’s much publicized Mudra Loan scheme – designed for micro & small enterprises, had contributed immensely to the banking sector’s NPA problems during the last few financial years. So much so that last year RBI’s Deputy Governor raised a red flag over rising NPAs under the government’s Mudra loan scheme.

This Pop-up Is Included in the Theme
Best Choice for Creatives
Purchase Now