Priority lending tag to provide new credit lifeline for young startups

Say banks will have to understand ecosystem's high-growth business model

Ever since the Covid-19 pandemic struck the country, Prakash Kumar, an III-T graduate and founder of start-up KhaaliJeb, has been doing the rounds of offices of venture capital (VC) firms to raise funds for his bootstrapped banking app for the youth. He’s been turned down by 10 VCs so far.

“Pre-2016, a lot of young start-up founders were raising funds. But doing so has become difficulty now for new start-up founders. Most of the funds are being raised by second-time founders or those who have a corporate trail,” said Kumar, who has been bootstrapping KhaaliJeb for two years.

Many start-ups, particularly in India, are funded only if they have founders from the IITs, say players. “But fresh ideas don’t necessarily come from the IITs and then it becomes difficult for such ventures to see the light of day,” said Ashok Kadsur, co-founder of SignDesk, a digital start-up that is in the process of raising its first funding.

With the Reserve Bank of India (RBI) including start-ups in the priority sector lending (PSL) group, these companies now see hope. “This opens up a new avenue of capital, especially in the early stages when many founders struggle to convince a small pool of investors to raise Rs 50 lakh to Rs 1 crore to start their companies. As a result, they have limited sources other than friends and family,” said Anup Jain, managing partner, Orios Venture Partners.

 

 

There have been instances when start-up founders have had to mortgage their houses to secure bank loans. So, to be able to simply walk into a bank and get a PSL at 8-10 per cent is a dream for any start-up founder who has to otherwise rely on costly debt from venture capitalists.

According to Tracxn, funding activity in the start-up ecosystem fell by nearly 29 per cent to $4.2 billion in the first six months of this year compared to $5.9 billion in the same period last year. This is due to the impact of the Covid pandemic. Only 443 companies were funded in the January-June period this year against 725 in the corresponding period in 2019.

Segments such as internet of things (IoT) and health care would certainly gain from this step by the RBI, says Sanjay Swamy, managing partner at Prime Venture Partners. However, banks might not consider start-ups in areas such as the stock market and trading as these are seen as a speculative activity.

“Procuring an unsecured or a secured loan looks highly implausible because of this outlook. It really depends on where the start-ups operate,” said Tejas Khoday, co-founder and chief executive officer (CEO) of bootstrapped brokerage start-up Fyers. “All start-ups can't be painted with the same brush. Asset-heavy businesses such as renewable energy may get preference.”

This development also comes with some riders as borrowing from banks has its own risks. Banks will have to understand the high-growth business models of the start-up ecosystem and how to underwrite them.

The priority lending tag could also help India become self-reliant in start-up funding. Of the $14 billion raised by start-ups from VCs in the year ending December 2019, roughly only $1 billion came from Indian sources. “Now, banks and financial institutions will unleash rupee capital into the ecosystem. We may become self-reliant in terms of start-up funding than being completely and inordinately reliant on foreign capital and external funding due to regulations,” said Siddarth Pai, founding partner at early-stage VC fund 3one4 Capital.

“There are enough debt funds overseas and a few in India that have come up over the last 4-5 years. We strongly feel this will open up opportunities for debt funds,” added Ashish Fafadia, Partner at early stage VC Blume Ventures.