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Current Affairs Brain Booster for UPSC & State PCS Examination

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Topic: Priority Sector Lending to Startups

Why in News?

• The Reserve Bank of India (RBI) has assigned priority sector lending (PSL) status to India’s start-ups sector. This is expected to help thousands of small startups get better access to bank credit for working capital support.

Revised Norms

• The Reserve Bank of India (RBI) has tweaked priority sector lending (PSL) norms to include loans to startups. According to the RBI, with a view to align the guidelines with emerging national priorities and bring sharper focus on inclusive development, the guidelines have been reviewed after wide ranging consultations with all stakeholders.
• The new framework will be more mindful of the district-wise distribution of credit.
• Borrowing limits for the renewable energy sectors-- solar power and compressed biogas plants- are also being raised by the central bank.
• 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’ category. For individual households, the loan limit is Rs 1 million per borrower.

Implementation

• To address the regional disparities in the flow of priority sector credit, an incentive framework has been put in place for banks.
• While higher weight will be assigned for incremental priority sector credit in the identified districts where credit flow is comparatively lower, a lower weight would be assigned to incremental priority sector credit in identified districts where the credit flow is comparatively higher.
• All scheduled commercial banks and foreign banks with a sizeable presence in India are mandated to set aside 40% of their Adjusted Net Bank Credit (ANDC) for lending to these sectors.
• The banking sector regulator has not issued a detailed outlay of sub-target or restructuring guidelines in lending to start-ups.
• The move would, however, benefit smaller bootstrapped businesses that had earlier faced challenges in getting low-priced debt from banks.

Priority Sector Lending Norms

• Priority Sector Lending (PSL) is a tool given by the RBI to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.
• 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 PSL guidelines were last reviewed by the RBI in April 2015. The central bank said the revised guidelines also aim to encourage and support environment friendly lending policies to help achieve Sustainable Development Goals (SDGs).