Context

The Reserve Bank of India (RBI) brought startups under the purview of priority sector lending (PSL), a move that will make it easier for startups to raise funds from banks.

About

What is Priority Sector Lending?

• The RBI mandates banks to lend a certain portion of their funds to specified sectors-- agriculture, micro, small and medium enterprises (MSMEs), export credit, education, housing, social infrastructure, renewable energy and others.
• The idea behind this is to ensure that adequate institutional credit reaches some of the rather vulnerable sectors of the economy, which otherwise may not be attractive for banks from the profitability point of view.

The existing guidelines:

• Under existing guidelines, bank loans up to a limit of Rs 150 million for purposes like solar power generators, biomass power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities like street lighting systems and remote village electrification are currently eligible to be classified under priority sector loans under the ‘Renewable Energy’
• For individual households, the loan limit is Rs 1 million per borrower.
• The PSL guidelines were last reviewed by the RBI in April 2015.
• The revised guidelines also aim to encourage and support environment friendly lending policies to help achieve Sustainable Development Goals (SDGs).

Startups Startups are companies or ventures that are focused around a single product or service that the founders want to bring to market. These companies typically don't have a fully developed business modeland, more importantly, lack adequate capital to move on to the next phase of business. Most of these companies are initially funded by their founders. Startups were considered under the MSME category and were required to show three years of profitability.

Significance of the step

• Low cost debts: This move will help startups free up their equity and raise low cost debt. Banks will now see startups more seriously while providing them loans.
• Reducing dependency: The inclusion of startups in the PSL category is expected to add value by reducing dependence on equity capital.
• More liquidity: It will enhance the liquidity options available to startups.