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RBI Governor warns startups against deep discounting


Governor, Reserve Bank of India, Raghuram Rajan has eased the concerns about cash burn in the thriving e-commerce industry. He made it clear that generating revenues through heavy discount is not a feasible business model for the startups.

RBI Governor warns startups against deep discount model
Raghuram Rajan has appealed to the bankers to be a bit flexible with loans with the small businesses

“If the only reason you are getting revenues, not profit, is because you are selling based on 50 per cent discount, it can’t be viable in the long run,” Raghuram Rajan was quoted by PTI as saying.

Rajan was quick to approve that many businesses in this country are in various stages of their life cycle; some are even trying to establish their livelihood. It is quite natural for such businesses to not work and might lead to shut down.

“I think this (shut down) is a natural process and we should not stand in the way and lament too much,” Rajan was quoted by PTI as saying. He is making a strong policy which will enable an easy exit for the startups and also their resources can be used in a more productive manner.

Looking at the competitive environment, it is necessary to have safety covers like health insurance, unemployment insurance and pensions so that social peace is ensured. Rajan, welcoming the spirit of enterpreneurship mentioned that even if an enterpreneur fails, people should not fail. As flagging skilled talent is important for our country, a lot needs to be done in this area.

Ranjan also stated that there are many other aspects, soon to be introduced, which will boost up the startup ecosystem. He is also looking forward to the Bankruptcy Code, which he expects to be tabled in the present session of the Parliament, and also the establishment of small finance banks. He has also appealed to the bankers to take into consideration that the small firms will not be able to drag every case to the court as the big players, so they should be a bit flexible with loans in such cases.

“I said easy exit (for startups) but it should not be an unfair exit. With respect to small firms, creditors often have draconian powers which large firms can limit in courts. Something like Sarfaesi. A large firm has a better way of dealing with it in the court than a small firm has. The banker may have much more power over the small firm with Sarfaesi than it has over large firms. Because we want to get the money back from the large firms, we continue to make the power harder. So, we have to be a little careful. Balance it out. The small firm should not be put out of business too fast while large firms stay in business too long simply because the large firm has easier access to good lawyers,” Ranjan was quoted by PTI as saying.