Banks Throw Star­tups a Life­line to Tide Over Work­ing Cap­i­tal Squeeze

Ei­ther through as­sets or book debt; lenders charge 200-400 ba­sis point pre­mium over the bench­mark rates

The Economic Times - - Brands & Companies - Saikat Das & Baiju Kalesh

Mum­bai: Sev­eral pri­vate In­dian banks, in­clud­ing HDFC Bank, Axis, IDFC, Ko­tak Mahin­dra and Yes Bank have started ex­tend­ing short-term credit to meet work­ing cap­i­tal needs for Ola, Pow­er2SME, Flip­kart, OYO, Zinka, Cap­i­tal Float, in­vest­ment banker-turned-en­tre­pre­neur Fal­guni Na­yar-owned Nykaa and many oth­ers, throw­ing a new credit life­line to star­tups starved of eq­uity cap­i­tal, sig­nalling some sort of ma­tu­rity in the sec­tor.

“There are busi­ness op­por­tu­ni­ties in fund­ing star­tups and new gen­er­a­tion com­pa­nies,” said Sid­harth Rath, group ex­ec­u­tive, cor­po­rate bank­ing at Axis Bank. “We pre­fer com­pa­nies with ad­e­quate eq­uity fund­ing, which helps them to have enough liq­uid­ity and aids in debt ser­vic­ing. It has been sat­is­fac­tory so far.They will grow big­ger in fu­ture, and some of them will turn out to be uni­corns. We too would have higher share of busi­nesses as we are iden­ti­fy­ing them early,” he said. Axis Bank funds them mostly through let­ter of credit, bank credit guar­an­tee, bill dis­count­ing of­fer­ing credit sup­port in trans­ac­tion bank­ing.

The av­er­age size varies in a wide range be­tween ₹ 15 crore and ₹ 10 lakh with ma­tu­ri­ties from one month to two years. Banks price such loans af­ter adding a pre- mium over their re­spec­tive lend­ing rates based on mar­ginal costs of funds, known as MCLR in mar­ket par­lance. This could be about 200-400 ba­sis points (bps) over the bench­mark rates adding up to about 12-13%.

“Banks should fund work­ing cap­i­tal for star­tups and new gen­er­a­tion com­pa­nies. We have started fund­ing the likes of Ola, OYO, Rivigo, which are all funded by well­known (pri­vate) eq­uity funds,” a se­nior ex­ec­u­tive from one of the top three pri- vate banks told ET.

Global pri­vate eq­uity firm War­burg Pin­cus backs Rivigo, a lo­gis­tic startup while Sin­ga­pore sov­er­eign fund GIC and Ja­pan-based SoftBank part-own taxi ag­gre­ga­tor Ola.

Loans are col­lat­er­alised ei­ther through as­sets or book debt (in the form of eq­uity cap­i­tal). For a lo­gis­tic startup ply­ing trucks daily would be as­sets. In some cases, they may be in un­se­cured form and eq­uity fund fund­ing the startup sets the bench­mark for the lender.

“We got a credit line of INR 25 crores from Axis Bank in De­cem­ber 2016,” said R Narayan, founder and CEO of Pow­er2SME, which is fi­nan­cially backed by Pow­er2SME and mar­quee in­vestors in­clude Nan­dan Nilekani. “We also have a SME Fi­nanc­ing Pro­gram sanc­tion from Axis Bank for Pow­er2Sme cus­tomers for INR 50 crores.”

Out of that ₹ 25 crore, the ven­ture debt (term loan) was of ₹ 15 crore and the rest through cash credit limit.

Puru Vashishtha, co-founder WishFin (for­merly Deal4Loans), said star­tups backed by known in­sti­tu­tional in­vestors should get bet­ter deals from lenders. Banks are com­fort­able to ex­tend work­ing cap­i­tal loans when EBIDTA (earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­za­tion) is vis­i­ble.

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