The Reserve Bank of India (RBI) on Thursday said the PSL guidelines are being reviewed with a view to be more inclusive and the new framework will be more mindful of the district-wise distribution of credit.

Banks will now be able to lend to start-ups under their priority sector portfolios, and a larger chunk of their exposures to renewable energy will be eligible for classification as priority sector lending (PSL). The Reserve Bank of India (RBI) on Thursday said the PSL guidelines are being reviewed with a view to be more inclusive and the new framework will be more mindful of the district-wise distribution of credit. To what extent bankers favour start-ups as borrowers will be a key determinant of the effectiveness of the new rules.

“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 revised guidelines also aim to encourage and support environment friendly lending policies to help achieve Sustainable Development Goals (SDGs),” the RBI said in its statement on developmental and regulatory policies.

The changes include broadening the scope of PSL to include start-ups, increasing the limits for renewable energy, including solar power and compressed biogas plants and increasing the targets for lending to small and marginal farmers and weaker sections.

While the renewable energy segment has been a key driver of corporate loan growth for banks in recent years, few lenders have been keen on lending to start-ups. A senior executive with a state-owned bank said, “It’s not as if we can lend to anybody who comes up with a great idea. We typically give loans to enterprises which have some kind of connection with the real economy, such as sectors like food processing or textiles.” Consequently, start-ups as defined by Indian banks could have overlaps with the small-enterprises ecosystem.

Sameer Narang, chief economist, Bank of Baroda (BoB), said that bank lending to start-ups has typically been in the area of working capital. “Some of them have expenses related to logistics, labour and other things like office supplies. So, most of the demand could be met in the form of a CC/OD (cash credit/overdraft) facility for their expenses. That is where the requirement for loans could come in.”

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, the central bank said.

According to data released by the central bank last month, banks’ outstanding credit to rural areas stood at only Rs 7.26 lakh crore as on March 31, 2020, as against a Rs 66.77-lakh-crore exposure to metropolitan locations. Semi-urban locations accounted for Rs 12.38 lakh crore, while urban areas owed banks Rs 15.77 lakh crore. Bankers welcomed the move and said it could aid a more equitable disbursement of credit. KVS Manian, whole time director, president and member of group management council, Kotak Mahindra Bank, said: “The new PSL norms are progressive and help direct credit to the more needy segments.”