Banks considering rating framework to assess risk profile of startups

The plan to set up this mechanism has come up at a time when the government has asked banks to play a more active role in financing startups

Banks are contemplating the development of a special rating framework or model to assess the risk profile of startups, according to a report by The Economic Times (ET). For this purpose, banks have initiated discussions with relevant stakeholders, including ratings agencies, the government, and the Reserve Bank of India (RBI).

The proposal to establish this mechanism has arisen at a time when the government has encouraged banks to take a more active role in financing startups. Banks believe that a unified rating framework for evaluating the risk profiles of startups will expedite the approval and disbursement processes, the newspaper reported.

What do experts think about the framework?

Experts cited in the ET report opined that a distinct framework would enable banks to evaluate the viability of startup funding based on the products, services, and monetisation capabilities of the startups. This would assist banks in making clearer and more informed decisions regarding startup funding, one expert noted.

Another industry specialist, Vivek Iyer, a partner at consulting firm Grant Thornton Bharat, told ET, "This will help investors assess the risk profile of a startup more clearly, which is a vital prerequisite for funding, thereby increasing the likelihood of securing funding and benefiting the startup ecosystem overall."

According to government data, India boasts the third-largest startup ecosystem globally, which is projected to grow at an annual rate of 12-15 per cent. Formal suggestions and inputs from the RBI will also be solicited and integrated into the development of this framework, the ET report stated, citing individuals familiar with the matter.

Benefits of the framework

Banks will be able to conduct quicker and more reliable assessments for financing startups.

Banks will gain increased confidence in extending working capital lines to startups.

The framework will align banks with the government's policy to support startups.