Start-up loans of up to Rs 50 cr under priority sector as RBI revises norms

Advances to weaker section now 12% of credit for scheduled banks and SFBs, rule doesn't apply to foreign lenders with under 20 branches. RRBs already have to lend 15% to weaker sector

The Reserve Bank of India (RBI) on Friday said loans of up to Rs 50 crore towards start-ups would qualify for the priority sector, alongside renewable energy used for agriculture. The central bank also doubled the overall limit for such renewable energy and health care as part of its revision to priority sector guidelines.

The revised guidelines are aimed at aligning them with “emerging national priorities and bring sharper focus on inclusive development”, said the RBI. These will enable better credit penetration to credit-deficient areas, increase lending to small and marginal farmers and weaker sections, and boost credit to renewable energy and health infrastructure, it said.

Once lending is done under priority sector, the rates are subsidised and in some cases, the government also chips in with subvention. The RBI did the last such priority sector revision in 2015. 

In the latest revision, banks have been told to earmark 10 per cent of their loan book for advances towards small and marginal farmers, as against 8 per cent now. The central bank has also told banks to ensure that districts or sectors that don’t get adequate credit should witness more lending activities.

The start-up introduction is part of the government’s move to include the sector in micro, small and medium enterprises (MSMEs). The RBI said in its master circular that starts-ups engaged in agriculture and allied activities, as well as those which qualify to be called MSMEs, would get loans under the priority sector target. 

State Bank of India (SBI) Group Chief Economic Advisor Soumya Kanti Ghosh wrote in a note that the inclusion of start-ups in priority sector lending (PSL) would reduce their cost of capital by allowing them better access to bank credit. “Equity infusion will not be the only route to follow when start-ups need funds for working capital requirements, and this will greatly ease the risk of ordinary shareholders being wiped out due to ‘down-rounds’,” he said. 

However, start-ups don’t have collateral and performance evaluation mechanism matrix, and hence “it will be interesting to see how lenders can diversify their risk appetite and lend to start-ups which do not meet traditional security/collateral/cash flow requirements”, Ghosh wrote, adding that letting farmers take loans for installation of solar power plants was also a policy enabler.

The central bank said a farmers’ collective could take loans of up to Rs 30 crore for purposes like solar-based power generators, biomass-based power generators, wind mills, micro-hydel plants, and for non-conventional energy-based public utilities, viz., streetlighting systems and remote village electrification, etc. “For individual households, the loan limit will be Rs 10 lakh per borrower,” it said.  

The RBI said that from 2021-22 onwards, a weighting of 125 per cent would be assigned to incremental priority sector credit in districts where credit flow was comparatively lower (less than Rs 6,000). To compensate that, a lower weighting of 90 per cent will be assigned to incremental priority sector credit in districts where credit flow is comparatively higher (at Rs 25,000 per capita towards priority sector lending).

Advances to weaker sections would now be 12 per cent of credit for scheduled commercial banks, and 12 per cent for small finance banks.

The guidelines should enable more credit flow to small and marginal farmers, who are largely outside the ambit of the formal credit system and will also boost credit to the farmer-producer organisations and companies, experts said. 

Within agriculture credit, 10 per cent should be mandatorily given by banks to small and marginal farmers over the next three years, starting 2020-21.  

However, as pointed by the NK Jain Committee on Agriculture Credit which submitted its report last year, though, small and marginal farmers, constituted 86.21 per cent of total operated holdings and have 47.34 per cent share in the operated area, but just 40.90 per cent of them were covered by scheduled commercial banks.

“This gradual increase in PSL guidelines for small and marginal farmers will enable NBFC and MFIs which are today main avenues for credit to rural India to increase their lending,” said Pravesh Sharma, former Managing Director of Small Farmers Agribusiness Consortium (SFAC) and Co-Founder and CEO of Kamatan FarmTech Private Ltd.

According to Sharma, banks may not lend more to small and marginal farmers which they presently don’t find comfortable dealing with as their cost of getting a customer is far higher due to several reasons such inadequate papers etc, but they can increase their lending to non-banking finances companies (NBFCs) and microfinance institutions (MFIs) who can help meet banks their priority sector targets. At the end of the month, banks buy the portfolio back from these firms and meet their lending targets.

These agents of banks “have become one the main instruments for rural credit could find it now more comfortable to lend to small farmers who actually need the fund,” Sharma said. 

"On the whole it seems to be a good move forward, particularly the focus on districts in eastern India etc, but my only concern is implementation as many times we have seen that PSL norms aren't fulfilled entirely. But, at the same focus on new sectors such as solar energy etc. is welcome," said Mahendra Dev, Director of Indira Gandhi Institute of Development Research (IGIDR). 

Total priority sector lending for primary urban cooperative banks (UCB) will be raised to 75 per cent of their books by March 2024, from the existing 40 per cent target. This rule had already been notified after the PMC Bank fiasco. Advances to weaker section would be 12 per cent for UCBs from 2023-24, from 10 per cent now. Small and marginal farmers should get 10 per cent of the total loans from 8 per cent now.   

Farmers producers organisations (FPO) that undertake farming with assured marketing of their produce at a pre-determined price can now get loans up to Rs 5 crore. At the same time, crop loans to farmers can go up to Rs 2 crore per borrowing entities for medium- and long-term loans for agriculture and allied activities. The farmers can get loans up to Rs 50 lakh for 12 months against their warehouse receipts.

FPOs are always in need of capital to increase their benefit for the members, and this move by RBI is highly encouraging, Sharma said. The banks can tap into the NBFCs for lending to FPOs, instead of directly lending, Sharma said.

Loans towards agriculture infrastructure can go up to an aggregate sanctioned limit of Rs 100 crore per borrower.

The RBI also doubled credit limit for health infrastructure, including for ‘Ayushman Bharat’. Banks can now give loans of up to ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc. and loans up to a limit of ₹10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres, the central bank said.