Unique challenges need unique solutions

Question: What policies and practices have you adopted to mitigate risks associated with start-ups?

The explosion of the start-ups and their huge growth potential opens a variety of opportunities for the financial sector – to see them as customers as well as partners. Four risk experts share their insights.

DAMODARAN C., Vice President & Chief Risk Officer at

Federal Bank

Banks may face risks like business continuity, data privacy/ confidentiality, cybersecurity etc. The pandemic has exposed the inadequacy and ineffectiveness of business continuity strategies in some of the startups. Having said that, the services that startups, particularly in the fintech space, provide to help partner banks in using innovative and cost-effective solutions for widening the scope and reach of banking services is commendable.

As the bank engages startups to deliver new experiences to our customers and to reach out to new customer segments, a robust framework is put in place covering selection, approval and ongoing monitoring of the partnerships for managing the risks involved. The experience that the bank has gained in credit assessment comes in handy while selecting an ideal partner too. We look into the managerial capability, the experience of the promoters, their systems and process, the importance they give to banking regulatory compliances and so on.

Almost all startups leverage technology for offering their services. We assess their business continuity mechanism, technological capabilities, measures adopted to ensure cybersecurity, easiness of their system to interact with our system etc. We share the least minimum data with our startup partners and we are keen to ensure that their systems and processes are as robust as ours in fulfilling our responsibilities towards customers.

K R MOHANACHANDRAN, Chief Risk Officer at ESAF Small Finance Bank

We deal with startups without hesitation or worries that startups are not experienced or that they do not have proven experiences or achievements to demonstrate. Our policies and practices are accordingly aligned. Obviously, startups whom we engage as our business partners undergo litmus tests on their professional, managerial, technical and financial capabilities.

PRITHVI CHANDRASEKHAR, President, Risk & Analytics at InCred

The startup ecosystem is distinctive and nuanced. Startups naturally have much more survival risk than mature companies.

However, as a lender, we are more exposed to the survival risks as our upside is limited.

Startups also generally have less mature processes in terms of tech-security, fraud control, etc.

We therefore provide startups with arrangements that protect our risk while providing them with the funding they need. This includes due diligence on the startup’s equity position and cash flow, FLDG (first loss default guarantee) arrangements, and extensive technology-based monitoring to ensure that the underlying credit and compliance risks are being appropriately managed.

SUJAY DAS, CRO at MoneyTap

In a startup, things do tend to move very fast. There is minimal wait time before decisions get taken and the ability to huddle together as a team and come to a quick decision is another quality. This leads to quicker implementations.

The challenges that are usually seen with speed is that it brings in the risk of processes breakdowns. A keen eye on the process allows you to make sure that there are enough checks and balances. It also helps to take a step away to make sure you are also seeing the higher-level vision of where the direction is headed. It helps you to monitor so that things don’t fail or that there are triggers which are like notifications for you as soon as there are any problems, so those can be rectified immediately.

With our company being in the fintech lending sector, the customer relations are long term. Hence, there are many touchpoints for a customer - starting from onboarding to repayments, to foreclosure, to re-opening of accounts, to customer service. As a result, whenever any product gets launched or any changes are done, there are many departments that get involved. While we plan to do it fast, we make sure all departments sync up about the product and each of their processes are built in.

We document the end-to-end process comprising all the departments and then start the build. When you put a document around any concept, it makes your head and vision clearer. It becomes easier to explain and then point out if anything is missing.

SUMMARY

Data Points for Assessing Start-Ups:

i. Managerial capability. ii. Financial capability. iii. Experience of the promoters. iv. Robustness of Systems and process. v. Importance given to banking regulatory compliances. vi. Business continuity mechanism. vii. Technological capabilities. viii. Measures adopted to ensure cyber security. ix. Ease of interaction with the bank’s systems.

Solutions

i. FLDG (first loss default guarantee) arrangements. ii. Have triggers which give notifications as soon as problem arise.