Funding start-ups a challenge for banks
The Reserve Bank of India’s decision to include loans of up to ~50 crore to startups under priority sector lending (PSL) has been largely welcomed by entrepreneurs in the sector, investors and experts. However, most of them feel that implementation of this plan may not be an easy job.
Even banks, most of which are battling high non-performing assets (NPAS), are of the opinion that they have to really work towards building capacity for start-up lending. This is a high risk segment as most of these young ventures don’t have any collateral to offer for accessing loan.
Banks, however, believe that the RBI’S move has provided them a stepping stone to cater to the funding requirement of this segment.
“While the classification of start-ups among RBI’S priority sectors, from a lending perspective, is likely to be a good move. But in the long run, it may only benefit established start-ups. They may need working capital loans and have collateral available,” said Sachin Taparia, founder and chairman of Localcircles, a platform which hosts a community of 30,000 start-ups and micro, small and medium enterprises (MSMES).
Seed and early-stage start-ups are high-risk businesses and rarely have collateral. Only one in 10 becomes a viable company.
Sreejith Moolayil, co-founder of True Elements, a Pune-based consumerfocused start-up, said “principally” the initiative is very welcoming, but the issue is about implementation. “Bankers don’t understand businesses which don't make a profit. The credit people (banks) who provide the loan need to understand where the repayment would come from. And when you see the book of a start-up, most of them are not making profit,” said Moolayil. The initiative, he said, may work better if the government itself or any other player can give guarantee of repayment on behalf of the startups. The same view was also echoed by Sumit Chhazed, founder and chief executive officer (CEO) of automotive leasing firm OTO Capital. Chhazed said even though it was a game-changing decision, “The announcements should immediately
come up with clear guidelines.”
Traditionally, banks and financial institutes have shied away from catering to the growing sector as start-ups don’t provide collateral while the performance evaluation mechanism matrix is way different for them. The cash flow mechanism for many start-ups is quite different than what banks typically prefer. “Bank will have to build skills for assessing cash flows of units that are in early stage. The current understanding of a start-up seems to be IT and Itenabled services though the field is actually quite vast,” said Suresh Khatanhar, deputy managing director, IDBI Bank.
Private sector lender YES Bank said, it would prepare a policy for funding start-ups, keeping in mind PSL norms. According to Prashant Kumar, managing director at YES Bank, prior to this, the bank would fund fintech start-ups that could provide services to the bank itself in areas like digital payments.
“I think it would save a lot of companies,” said Rehan Yar Khan, managing partner at Orios Venture
Partners. “The RBI’S move, along with the ~10,000 crore ‘Fund of Funds’ that the government has announced, shows the big focus the government has on start-ups,” added Khan, who is also part of the executive committee of Indian Venture Capital Association (IVCA).