RBI: Reserve Bank of India assigns Priority Sector Lending (PSL) status to Indian StartUps

The Reserve Bank of India (RBI) on Thursday brought startups under the purview of priority sector lending (PSL. This move will benefit over 1000s of small startups to raise funds from banks. Initially, this sector contained small industrialists, mainly from agriculture, MSMEs, education, housing, social infrastructure, etc. Initially, it considered startups under the MSME category. They had to show three years of profitability.

RBI has also decided to put in place an incentive framework for banks in order to address the regional disparities in the flow of priority sector credit. Under the revised PSL norms, the RBI has also increased the targets for lending to 'Small and Marginal Farmers' and 'Weaker Sections'. Further, it aims to bring solutions to the financial sector by tapping into areas such as cybersecurity, data analytics, delivery platforms, and payment services.

Changes due to this move by RBI

Earlier, startups relied on expensive venture debt. In fact, MSMEs also had to take collateral-based loans, but startups had to go for funding. This move will help startups free up their equity and raise low-cost debt. Banks will now see startups more seriously while providing them with loans.

This move of RBI will also help startups which had been impacted by the COVID-19 pandemic. It will reduce the dependence on equity capital while adding value to high-growth businesses.

According to a Ficci survey, 70% of start-ups stated that their businesses have been impacted by covid-19. On the other hand, 12% of the startups have shut operations and 60% are operating with disruptions. Many startups ran out of business due to the uncertainty in the business environment. Now will be a time for them to re-begin their businesses.

RBI said it will roll out offline mobile payment pilots, to address the digital divide of digital payments in the country.