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Banks are urging the Reserve Bank of India (RBI) to establish a dedicated liquidity window to offer financing to startups in the country.
While banks are adequately capitalised to support growth, accessing funds at concessional rates from the RBI would serve as a safety net for their net interest income in dealing with this high-risk segment, according to the survey findings jointly released by the Indian Banks’ Association and the Federation of Indian Chambers of Commerce & Industry.
Startups primarily receive equity in the form of risk capital from sources like angel and venture funds. However, they also require debt to scale up their businesses over time, and banks can play a crucial role in providing this, with appropriate safeguards.
One of the major concerns is the high risk of mortality associated with startups, which can result in loans going bad, a worrisome scenario for lenders when making provisions.
Concessional funding can serve as a buffer to absorb such risks, said public sector bank executives.
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Many banks have established separate wings and branches to support the growth of new enterprises, especially in financial technology, information technology, and emerging sectors. These efforts aim to cater to the specific financial needs of startups, including offering tailored loan products, mentorship services, and financial guidance.
State Bank of India, the country’s largest bank, has opened dedicated branches for startups in Mumbai, Bengaluru, Chennai, and Gurugram.
When asked about their readiness for startup funding, most respondent banks emphasised that the startup ecosystem is dynamic, and there is always room for improvement.
Banks have proposed collaborating with government and private entities to establish risk-sharing mechanisms or credit guarantee schemes for startup loans. Such initiatives would reduce the perceived risk associated with startup funding and encourage banks to provide greater financial support.
There is also room for considering collateral alternatives. Startups often struggle to provide traditional collateral, prompting banks to explore alternative forms, such as intellectual property rights, equity stakes, or future cash flows, to enable access to bank funding.
Regarding fostering innovation ecosystems, banks highlighted their active participation in supporting startup ecosystems by partnering incubators, accelerators, and venture capital firms. This tie-up provides banks with valuable insights into emerging sectors, potential investment opportunities, and allows for a more informed decision-making.
Steps sought by banks
> Streamlining loan application and approval processes
> Risk mitigation through credit guarantees
> Alternative forms of collateral such as intellectual property, equity stakes
> Fostering startup ecosystems via incubators, accelerators and VC firms
