The Reserve Bank of India on Thursday included startups among its ‘priority lending’ sectors, ensuring access to easy credit from banks. The move, industry members said, will lower startups' reliance on equity funding for growth.

“With a view to aligning the guidelines with emerging national priorities and bring a sharper focus on inclusive development, the Priority Sector Lending (PSL) guidelines have been reviewed,” RBI governor Shaktikanta Das said during his monetary policy speech, adding that an incentive framework is now being put in place for banks to address the regional disparities in the flow of priority sector credit.

“PSL status is also being given to start-ups,” he added.

This puts startups in the same bracket as sectors such as agriculture, MSMEs, education, housing, and a few others.

Under the scheme, banks are mandated to provide a certain portion of their funds to the priority sectors.

“Priority sector tag to Indian startups is a watershed moment for the ecosystem as it will finally allow startups to access credit and working capital,” said Siddarth Pai of VC fund 3one4 Capital.

“Many startups have had to raise equity in order to finance working capital and credit needs, leading to needless dilution. This single act 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,” he added.

“This is a good move as it will, hopefully, open up lending to startups,” said Padmaja Ruparel, head of the Indian Angel Network.

“At least cash positive companies will have another line of funding,” she added.

Harshil Mathur, CEO of Razorpay said this move will also help banks diversify and meet their priority sector lending targets.

"Most banks are not aggressive on working with startups. However, they also struggle 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," Mathur said.

Upasana Taku, the co-founder of Mobikwik, called the move a "step in the right direction", especially in what she referred to as a "challenging time" for all companies, big and small.

The RBI also announced setting up of an Innovation Hub to boost startups in the financial sector.

”The Reserve Bank has constantly endeavoured to encourage responsible innovation by entities in the financial services sector. In order to further promote and facilitate an environment that can accelerate innovation across the financial sector, Reserve Bank will set up an Innovation Hub in India," the governor said.

"We welcome the Monetary Policy announcements made by the Reserve Bank of India, today. Broadening the scope of Priority Sector Lending to include startups & setting up an Innovation Hub are both great steps towards promoting and facilitating an environment that accelerates innovation," said Sangeeta Gupta, vice president of industry body NASSCOM.

"This will further expand the horizon for emerging businesses and start-ups in different sectors to tap newer sources of funding, improve start-ups' operational efficiency, and would act as a confidence booster for the entire ecosystem especially at a time when the world is battling the COVID-19 pandemic," she added.

First Published:Aug 6, 2020 8:19 PM IST