Decoding the PSL Guidelines for Startups: Are Startups now becoming a Priority for India?
Holding over 25 years of experience in the BFSI industry, Pratapsingh has been associated with various organizations and has experience in the Indian Debt Capital Markets, Loan Syndication & Investment Banking landscape and more.
For eons, India has always had this inherent lifeline and penchant for trade and commerce. We have been a country that has had a very live and active enterprise. A country that has had several big enterprises that have risen before, during and even after the 3 centuries of colonial rule, over us. A country many times even called the Jugaadu Nation, we have witnessed many upstarts rise meteorically, to establish themselves and make their mark on the world stage.
But it is over the last decade or so, we have been witnessing a new resurgence of enterprise coming from the very younger generation, who instead of working in cushy jobs, have been jumping ship only to venture out and start-up new enterprises with their extreme passion to solve India’s problems in multiple sectors. Inspite of the fact that starting a business has always been an extremely risky business, we are now witnessing a startup boom in the country where every other person passing out of their college want to start up something instead of looking for a cushy job and an equal number of working executives, who are readily leaving their cushy jobs to join the bandwagon.
Whilst having a good business idea that enables you to solve a major public problem is extremely important, it is also necessary to have the required capital to furthering the cause and executing the idea. One must acknowledge the fact that the Indian capital markets have not been very forthcoming and conducive for raising start-up and venture capital. One does look to friends and family to lend a hand to make a beginning, with the hope that once the idea generates enough traction, there would be interest from the investment community.
India’s banking system has been wary of providing capital to its micro enterprises and it has been extremely challenging to convince banks to lend without collateral. Comparatively across the world, the lenders have moved on to lend capital against cash flows and receivables, India hasn’t been able to convince its central bank to be able to allow a broad policy that allows banks to lend to asset light models. Having said that we do see some of the banks taking an aggressive view and relenting to allow lending only against receivables and cash flows but only to established names in the corporate sector.
After a great deal of convincing and the severe liquidity crunch as a result of the Covid 19 crisis, our policy makers and the ruling government did see good reason, and convinced the Reserve Bank of India to include startups into priority sector advances from the Banking system. By the sound of it, one does feel delighted of it being included in the priority sector advances of the banking system, and as a consequence a hope that there will be a rush of release of capital towards the start-up segment. To analyse and get a sense of the how much capital will be eligible or released by the banking system, we need to jump down the rabbit hole of the Master Directions of RBI guidelines related to Priority Sector Advances (PSL).
The PSL allowed by RBI has been set out at 40% of Adjusted Net Bank Credit (ANBC) and is allocated to various segments with emerging national priorities. The various categories encapsulated within these categories are Agriculture (18%), Micro Enterprises (7.5%), Weaker Section (12%) and the remaining for Export Credit, Education, Housing, Social Infrastructure, Renewable Energy and Others. Further classification of ‘Others’ breaks down to members of SHG/JLG, Distressed Persons, State sponsored entities for SC/ST and our very own Startups segment!!
Given that it’s a new allocation within PSL, new capital flows will only be dependent only on the incremental credit advances from the banking system. Considering the current situation, wherein the Indian banking system itself faces headwinds and turbulence from the ongoing defaults and the Covid19 liquidity stress, it will be extremely difficult for the banking system to allocate a decent amount of capital towards the start-up segment. Even if out of its commitment to promote start-ups and meet a long standing demand from the start-up fraternity, lending may happen only to a couple of the established players.
Furthermore, we already had an experience with the CGTSME scheme wherein SIDBI was allocated a huge amount of capital by the Government and banks were told to lend 1 Cr (and then limit raised to 2 Crs) without collateral to businesses with a partial credit guarantee support from SIDBI. Even with a partial credit guarantee being given by Government itself hasn’t help the cause of release of money to small enterprise called SMEs and MSMEs which are nothing but start-ups.
Possible Solutions:
•Given that Startups do need to be considered a priority by India, the central bank may cull out a small 2-5% of the overall 40% allocated to priority sector to really make a real difference to & reap the benefits from the sector.
•Lending to startups may be taken up on a graded interest rate scheme which is directly linked to the size of the startup.
•Banks may even join hands with established incubators to do a credit analysis and join hands with them to release debt capital linked to milestones.
•To enable many genuine startups receive money and to avoid the money being given to established names, the Central Govt should enable a 50% setoff rebate of annual tax payable by any Bank but when divesting they may be charged at full applicable tax. This enables the tax dept to get a larger pie later while giving up small gains at the time of investment. This scheme should only be made available for seed funding and pre-Series A only A
•Allow CSR money from Banking & NBFC segment to be eligible for Seed capital investments and pre-series A funding. This will enable huge flows into startups and when they grow bigger full tax on divestment of the startup within 3 years or a graded tax on tenor of divestment.
Pratapsingh Nathani is the Chairman and Managing Director of Beacon Trusteeship Limited. He is also the Co-Chairman of SME Banking and Finance Council set up by the SME Chamber of India. Views expressed here are personal.
For eons, India has always had this inherent lifeline and penchant for trade and commerce. We have been a country that has had a very live and active enterprise. A country that has had several big enterprises that have risen before, during and even after the 3 centuries of colonial rule, over us. A country many times even called the Jugaadu Nation, we have witnessed many upstarts rise meteorically, to establish themselves and make their mark on the world stage.
But it is over the last decade or so, we have been witnessing a new resurgence of enterprise coming from the very younger generation, who instead of working in cushy jobs, have been jumping ship only to venture out and start-up new enterprises with their extreme passion to solve India’s problems in multiple sectors. Inspite of the fact that starting a business has always been an extremely risky business, we are now witnessing a startup boom in the country where every other person passing out of their college want to start up something instead of looking for a cushy job and an equal number of working executives, who are readily leaving their cushy jobs to join the bandwagon.
Whilst having a good business idea that enables you to solve a major public problem is extremely important, it is also necessary to have the required capital to furthering the cause and executing the idea. One must acknowledge the fact that the Indian capital markets have not been very forthcoming and conducive for raising start-up and venture capital. One does look to friends and family to lend a hand to make a beginning, with the hope that once the idea generates enough traction, there would be interest from the investment community.
India’s banking system has been wary of providing capital to its micro enterprises and it has been extremely challenging to convince banks to lend without collateral. Comparatively across the world, the lenders have moved on to lend capital against cash flows and receivables, India hasn’t been able to convince its central bank to be able to allow a broad policy that allows banks to lend to asset light models. Having said that we do see some of the banks taking an aggressive view and relenting to allow lending only against receivables and cash flows but only to established names in the corporate sector.
After a great deal of convincing and the severe liquidity crunch as a result of the Covid 19 crisis, our policy makers and the ruling government did see good reason, and convinced the Reserve Bank of India to include startups into priority sector advances from the Banking system. By the sound of it, one does feel delighted of it being included in the priority sector advances of the banking system, and as a consequence a hope that there will be a rush of release of capital towards the start-up segment. To analyse and get a sense of the how much capital will be eligible or released by the banking system, we need to jump down the rabbit hole of the Master Directions of RBI guidelines related to Priority Sector Advances (PSL).
The PSL allowed by RBI has been set out at 40% of Adjusted Net Bank Credit (ANBC) and is allocated to various segments with emerging national priorities. The various categories encapsulated within these categories are Agriculture (18%), Micro Enterprises (7.5%), Weaker Section (12%) and the remaining for Export Credit, Education, Housing, Social Infrastructure, Renewable Energy and Others. Further classification of ‘Others’ breaks down to members of SHG/JLG, Distressed Persons, State sponsored entities for SC/ST and our very own Startups segment!!
Given that it’s a new allocation within PSL, new capital flows will only be dependent only on the incremental credit advances from the banking system. Considering the current situation, wherein the Indian banking system itself faces headwinds and turbulence from the ongoing defaults and the Covid19 liquidity stress, it will be extremely difficult for the banking system to allocate a decent amount of capital towards the start-up segment. Even if out of its commitment to promote start-ups and meet a long standing demand from the start-up fraternity, lending may happen only to a couple of the established players.
Furthermore, we already had an experience with the CGTSME scheme wherein SIDBI was allocated a huge amount of capital by the Government and banks were told to lend 1 Cr (and then limit raised to 2 Crs) without collateral to businesses with a partial credit guarantee support from SIDBI. Even with a partial credit guarantee being given by Government itself hasn’t help the cause of release of money to small enterprise called SMEs and MSMEs which are nothing but start-ups.
Possible Solutions:
•Given that Startups do need to be considered a priority by India, the central bank may cull out a small 2-5% of the overall 40% allocated to priority sector to really make a real difference to & reap the benefits from the sector.
•Lending to startups may be taken up on a graded interest rate scheme which is directly linked to the size of the startup.
•Banks may even join hands with established incubators to do a credit analysis and join hands with them to release debt capital linked to milestones.
•To enable many genuine startups receive money and to avoid the money being given to established names, the Central Govt should enable a 50% setoff rebate of annual tax payable by any Bank but when divesting they may be charged at full applicable tax. This enables the tax dept to get a larger pie later while giving up small gains at the time of investment. This scheme should only be made available for seed funding and pre-Series A only A
•Allow CSR money from Banking & NBFC segment to be eligible for Seed capital investments and pre-series A funding. This will enable huge flows into startups and when they grow bigger full tax on divestment of the startup within 3 years or a graded tax on tenor of divestment.
Pratapsingh Nathani is the Chairman and Managing Director of Beacon Trusteeship Limited. He is also the Co-Chairman of SME Banking and Finance Council set up by the SME Chamber of India. Views expressed here are personal.
