0

0

0

0

0

0

0

0

0

This article is more than 1 year old.

Startup priority lending: Banks want govt guarantee, credit guarantee fund still stuck

Mini

The Reserve Bank of India on September 4, released the Revised Priority Sector Lending Guidelines and said bank loans to startups up to Rs 50 crore will be included under priority sector lending.

Startup priority lending: Banks want govt guarantee, credit guarantee fund still stuck
Vipul Singh, CEO of drone startup Aarav Unmanned Systems, was looking to raise capital of Rs 1.5 crore for the company at the beginning of the pandemic and approached the bank that he is a customer with for a loan.
But despite multiple attempts, he failed to get any bank financing, and finally decided to go for equity funding to get the needed money.
Singh is among the many entrepreneurs who have faced rejections from banks and end up diluting their stake in exchange for venture capital.
Priority sector lending
The Reserve Bank of India on September 4, released the Revised Priority Sector Lending Guidelines and said bank loans to startups up to Rs 50 crore will be included under priority sector lending.
But are banks willing to lend to startups?
Sonali Narayanan, deputy MD of SBI told CNBCTV- 18 that banks are looking for a government guarantee for lending to startups.
“There are some challenges to financing startups. It will be a win-win for all if we come out with the right kind of product. From the bank's perspective, right now we are not doing this. We will definitely be looking for a government guarantee,” she said.
The government had envisaged a Rs 2000 crore credit guarantee fund for startups back in 2016 as part of the Startup Action Plan under Startup India.
The Action Plan had said that “to encourage banks and other lenders to provide venture debt to startups, a credit guarantee mechanism through the National Credit Guarantee Trust Company or through SIDBI is being envisaged with a budgetary corpus of Rs 500 crore per year for the next four years. “
Four years on, the fund is still to come to life.
“The scheme is ready and is in process of inter-ministerial consultation,” said Guruprasad Mohapatra, secretary of DPIIT, which is in charge of the Startup India program.
"Any scheme has to undergo a process, it requires a financial commitment. Startups also operate across many sectors, which is why an inter-ministerial consultation process is on, ” he said.
On details on the timeline for the scheme to be launched, the size of the fund, and how much guarantee the government will offer, Mohapatra said he couldn't share anything further.
The DPIIT Secretary said that with startups now getting a priority sector, the credit guarantee scheme will help banks lend to entrepreneurs.
“Banks are still reluctant to fund startups and to increase their comfort level this fund has been thought of. A committee will look into recommendations. Banks will be given credit guarantee,’ Mohapatra said.
While the scheme may bring some comfort to banks, will it move the needle for startups?
“The underlying proposition has to be financeable, to begin with. Credit guarantee just enables financial institutions to extend risk appetite,” said Akhil Handa, head of FIntech, partnerships and digital lending at Bank of Baroda.
“The credit guarantee scheme will not make an unfinanceable project a financeable one. That is the beginning condition. On top of that, any credit guarantee that comes in is welcome,” he said.
So while a credit guarantee would enhance a bank’s risk appetite, the gap between a bank’s conventional lending model and a startup’s growth plans may not be an easy fit.
Singh speaks from experience.
“Banks are looking for financing against the asset and don’t value the technology, IP, or even order books, which are the prime movers for startups. They want positive balance sheets, which is a challenge because startups are chasing growth in the early stage, not profits. It is difficult to convince banks,” Singh said.
“We have received multiple rejections from different banks, where they do not appreciate what the growth trajectory of a startup looks like. That is still a big gap,” he said.
For banks, it’s the safety of capital first.
“Our returns are in order of 8-10 percent. We are not looking for 10-100x returns. Safety of capital is paramount to us,” Handa said, though adding that The Bank of Baroda started a startup banking channel across 15 cities last year, with an aim to build a relationship with startups and then possibly lend to them in the future.
“We started Startup Banking to build relationships with startups so that we take them over the curve where they become bank financeable,” Handa said.
While banks are slowly warming up to the startup idea, venture debt is another option for founders, though it still remains a small chunk of the larger startup funding pie.
In India, venture debt is about 2-3 percent of overall equity raised, while in the US it’s about 8 percent.
According to Venture Intelligence, in 2019, the startup sector saw Venture Debt investments of $207 MN, while Venture Capital funding stood at $10.1 Billion.
In 2020, till July, Venture Debt stood at $63 MN, while Venture Capital funding was $4.7 billion.
“While the headline numbers may seem small, the penetration of venture debt is definitely going up. We have been doing 35-40 transactions a year,” said Ashish Sharma, MD & CEO of venture debt firm Innoven Capital.
Innoven Capital has so far deployed over $400 million, and has backed several companies that have turned unicorns, such as Swiggy, Byju’s Oyo and others.
“We exist because debt from a bank standpoint doesn’t fit the risk around startups. If banks were lending to startups in a big way, there is no reason for us to exist,” Sharma said.
There are, however, still some limitations for startups to access venture debt.
Singh said he considered venture debt before going for an equity funding but failed to get that as well.
“We couldn’t get standalone venture debt. It has to be done with a venture capital in parallel. That’s a minimum condition, and so if a founder is in a stressed situation such as the current pandemic, then venture debt is unpredictable,” Singh said.
Sharma of Innoven, however defended the strategy.
“There is a risk in this asset class. It is important for us that the company has raised some level of institutional funding and has reached a product market fit. Debt investors like us draws comfort from the company’s ability to get to the next level and raise institutional capital,” Sharma said.
The fight for funding for startups may have fewer hurdles, but is not necessarily over.
next story