“From a credit quality point of view, it is uncomfortable. You may fund the company against its deposits but pure unsecured funding to startups tends to be a risky proposition, credit wise. Our startup loan portfolio is negligible. Even if it is there, it will be against deposits from the startups,” said Dipak Gupta, joint managing director, Kotak Mahindra Bank.
V Vaidyanathan, managing director and chief executive officer of IDFC FIRST Bank, said startups are extremely important for the country but they are early-stage companies and have “equity risks”.
“So, to take equity risk and have debt returns for the bank is not prudent. Of course where the startup has strong cash flows or other comforts like parentage and cash-generating business model, we can look at it,” he added.
Smita Bhagat, group head–government and institutional business, HDFC Bank, said there are multiple things that come into play when it comes to financing startups.
“It depends on the problem statement that you are trying to address, the field that you have chosen to build the business on and the experience that promoters have,” Bhagat said.
The Department for Promotion of Industry and Internal Trade (DPIT) defines a startup as one where the turnover of an entity for any of the financial years since incorporation has not exceeded Rs 100 crore.
“The entity should be working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation,” a DPIT notification said.
Typically, the start-ups that are yet to turn profitable receive loans against a collateral. This collateral is in the form of receivable discounting, which has lower risk for the lender. Some banks may also be willing to issue loans against physical collateral, such as the office space, say experts.
As far as equity is concerned, mega deals in the Indian startup space fell 45% year-on-year (y-o-y) in 2022. Average ticket size of investment in Indian startups fell to $18 million in 2022 from $22 million in 2021.
Startups in the financial technology segment witnessed the highest funding in 2022.
To enhance the flow of credit to these entities, banks must start offering cashflow-based lending products instead of collateral ones as the former will make more startups eligible for bank products, say experts.
“Since lending in India is collateral-based and startups normally lack collateral as well as profitable financial history, so it’s tough to fund them through traditional banking channels. That’s another reason that Indian banking sector needs to start offering cashflow-based lending products as that will make startups eligible for bank products,” said Biz2Credit CEO and co-founder Rohit Arora.