PSL: Startup Edition

An insight on how Reserve Bank of India has included Startups under Private Sector Lending.

PSL: Startup Edition

The Reserve Bank of India on Thursday included start-ups among its ‘priority lending’ sectors, ensuring access to easy credit from banks. 

Let’s Understand Priority Sector Lending:

Priority Sector Lending (PSL as it called popularly) is way to provide higher priority to certain economic sectors in our country by giving them better access to credit/loans as usually these sectors are not very attractive for banks to lend in comparison to other opportunities available to the bank for deploying the money with them.

Well, these sectors are listed out by the RBI with the idea that these sectors are critical to the country’s economy and for people’s upliftment in the country e.g. Agriculture, MSMEs since they give employment for more people, Microfinance, Education as it helps in skill improvement of people, Housing up to a certain amount as it provides shelter to the needy, Renewable energy as it may help Indian become less dependent on fossil fuels, etc.

How much priority? Each bank when it crosses, a certain size is required to keep aside and deploy 40% of total credit/loans it gives towards PSL. This ensures Banks are also on the lookout of giving loans to the borrowers from such sectors. If the Banks miss out on meeting the PSL targets, the banks get penalized by the RBI. 

Well even if it’s not fair for Banks, it's Important because “Sabka Sath, Sabka Vikas”.

Well, there is a masterstroke by RBI again by allowing start-ups under PSL Definition. It means Banks can also lend to start-ups.

The PSL status was till now reserved for sectors such as micro, small and medium enterprises (MSMEs), agriculture, education, and housing and now allowing start-ups under PSL is a Masterstroke by RBI. Isn't it?

Most banks are reluctant to work with start-ups because of missing 4 C’s which are:

1. Capital- Promoters skin in the game.

2. Collateral- There are no assets to pledge.

3. Capacity- Missing Track record of Loans/debt finance.

4. Character- Good Credit Rating.

Well, start-ups can’t have 4C’s, and Bank don’t understand anything beyond 4C’s. We did bridge the disconnection.

However, Banks also struggled to meet their priority sector lending targets, and with startups coming in, banks can diversify their lending, which will also bring more lending capital to startups.

Many startups were forced to raise equity to finance working capital and credit needs, leading to needless dilution and this move by RBI will allow them to access alternate lines of cash, and will go a long way in creating larger and more resilient startups without leading to significant loss of control. 

Ok. OK... At least cash positive companies? Hardly there are any startups which are cash positive.

We hope this welcome move doesn't get overshadowed by the bureaucratic hurdles as are the most Government initiatives.

Until then…

We hope you share this story on Whatsapp or LinkedIn because hey... It's all about the Start-ups. Who wouldn't right?