The decision of the Reserve Bank of India (RBI) to bring startups under the ambit of the priority sector lending (PSL) comes as a significant boost for the ecosystem, with new financing avenues opened up for these young companies.
RBI, in its monetary policy announcement on Thursday, broadened the scope of PSL by including startups. This decision has been welcomed by the participants of the ecosystem.
Welcoming this decision, Pankaj Makkar, Managing Director of Bertelsmann India Investments, said, “This is a welcome move to add more fund raising avenues for startups. Though it will have to be seen how the banking sector builds products for startups which carry more risk than usual customers.”
The route of debt financing, especially venture debt, has become an important element of financing for startups in India. Though in its early days, it has started to show traction.
According to YourStory Research, during the first half of 2020, 30 companies raised a total of $615.6 million in venture debt, as compared to 20 startups that garnered $436.5 million in the year-ago period.
Ishpreet Singh Gandhi, Founder and Managing Partner, Stride Ventures, said, “RBI’s announcement shows real impetus by the government to support the cause of startups who have been growth drivers of innovation and have played a key role in the ecosystem.”
Ishpreet further added, “Under the new PSL norms, startups will now be able to attract better pricing. The development brings to light a much-needed move to increase the concentration of banking play in the startup ecosystem, especially during current times of turmoil.”
The debt financing route for the startups has been a much-debated issue in the country, and recently, the government brought in regulations to treat startups as MSMEs. This could also open up newer funding route for the startups.
Caspian Debt Co-founder and MD Viswanatha Prasad, said, “The announcement by RBI that loans to startups will be treated as Priority Sector Lending (PSL) is a positive sign for entrepreneurs. However, lending to startups is a very specialised activity as there are usually collateral-free loans to high growth businesses. If we concede that this is a special category of clients, banks will find it hard to lend without collateral.”
The issue of collateral is likely to emerge as a big issue for banks when they start to lend to the startups. Typically, it has been seen that startups are in the digital platform, and they have little of physical assets.
V Balakrishnan, Chairman, Exfinity Ventures, said, “The decision of the RBI is a feel good move as things on the ground may not move that fast.”
He felt that banks would be unwilling to lend without the collateral from the startups and the founders of such companies would be averse to give any kind of personal guarantee.
Avishek Gupta, Investment Director, Caspian Debt, said, “Revision of priority sector guidelines to make it more nuanced to address regional disparities in credit flow is a very good step. It appears that priority sector specifications will now take into account the sustainable development goals (SDGs). For lenders like us, who have emphasised on the need to focus on sustainability and hence SDGs as a core principle guiding strategies around credit delivery, it is an encouragement to see our regulator give it the due importance.”
Industry observers believe that to enhance the liquidity flow into the startup ecosystem, the RBI could have enhanced fund infusion into financial institution like SIDBI, which has a dedicated ‘fund of fund’ to invest in startups. This would have ensured certain trickle down of capital into startups.