In a significant development poised to reshape the landscape of startup financing in India, banks are planning to unveil a dedicated rating framework designed to assess and profile the risk associated with startups, according to a report by The Economic Times (ET). This initiative is a welcome step as it promises to bolster credit disbursement among startups and streamline the loan approval process. In this article, we delve into the importance of this proposed rating framework and its possible impact on India's burgeoning startup ecosystem.
The Need for a Separate Rating Framework
Startups have long grappled with the challenge of securing timely and adequate financing. Traditional lending institutions frequently exhibit reluctance in extending credit to startups primarily due to the perceived higher risks associated with these ventures, coupled with deficiency of collateral typically available for pledging by startup entities. This hurdle has hindered the growth and expansion of countless promising startups.
Recognizing the need to address this issue, banks have initiated discussions with key stakeholders, including rating agencies, government bodies, and regulators, to establish a specialized rating framework tailored to startups. Such a framework holds the promise of mitigating the challenges startups face in accessing credit and loans.
The collaborative approach involving all stakeholders ensures that the framework is comprehensive, addressing the unique needs and risk factors associated with startups. Additionally,
formal suggestions from the Reserve Bank of India are being incorporated into the framework, further solidifying its credibility and effectiveness.
Government Initiatives in Startup Financing
While banks work diligently on crafting this innovative framework, the Indian government is not far behind in its efforts to support startup financing. The government has consistently demonstrated its commitment to creating a favourable environment for startups, recognizing them as key drivers of economic growth and innovation. Noteworthy initiatives such as the Startup India Initiative, the Startup India Seed Fund Scheme, and the Mudra Yojana have played pivotal roles in advancing this noble objective.
The Department of Animal Husbandry and Dairying conducted a grand challenge in association with Startup India, awarding top startups in five categories with 10 lakhs INR each. Additionally, the Small Industries Development Bank of India launched a scheme to provide assistance to existing Small and Medium Businesses in need of capital for growth. Over 26 states in the country have established startup policies to foster entrepreneurship.
These initiatives align with the broader vision of nurturing and promoting entrepreneurship across the country.
Collaboration with Reserve Bank of India
A critical element of the new rating framework is the active collaboration with the Reserve Bank of India (RBI). The RBI plays a pivotal role in the financial ecosystem of the country, and its formal suggestions are invaluable in shaping a framework that is robust, reliable, and credible.
The collaboration with the RBI not only lends credibility to the framework but also ensures that the loan approval process becomes more efficient and streamlined. Startups can anticipate reduced waiting times and quicker credit disbursement, which is essential for their growth and sustainability.
Benefits of a Separate Framework
The advantages of having a separate rating framework for startups are plenty. One of the main benefits is the framework's ability to assess the viability of startup funding comprehensively. By focusing exclusively on startups, the framework can consider the unique risk factors and potential rewards associated with these ventures.
Furthermore, the specialized framework can identify both the drawbacks and advantages of funding specific startups. This level of detail enables financial institutions to make informed decisions, resulting in better-targeting of fund allocation. It also allows startups to gain insights into areas where improvement is needed, cultivating a culture of continuous growth and development.
Recent Data and Statistics
According to the latest data, India has the third-largest startup ecosystem globally and has recognised as many as 98,119 entities as startups as on April 30 this year. In 2018, India was home to approximately 50,000 startups, with approximately 8,900-9,300 of them being technology-led startups. The pace of growth in the startup ecosystem increased by 15% year-on-year, while the number of incubators and accelerators also grew by 11%, as per government data.
Notably, the number of women entrepreneurs in the startup ecosystem has risen to 14%. Moreover, startups in India have created an estimated 40,000 new jobs, contributing to a total of 1.7 lakh jobs within the startup ecosystem.
Conclusion
In conclusion, the banking industry's proactive step toward creating a dedicated rating framework for startups is a game-changer for India's entrepreneurial landscape. By addressing the unique financing challenges faced by startups, this innovative framework has the potential to unlock new avenues of growth and opportunity for countless startups across the nation.
As the nation continues its journey toward fostering a culture of innovation and entrepreneurship, the creation of this specialized rating framework represents a significant leap forward in facilitating easier financing for startups. With a rapidly growing startup ecosystem and a supportive environment, India is poised for continued success on the global stage.
Written by P. Udayakumar, Rahul Nair
Sh. P. Udayakumar is the Ex- Chairman and Managing Director of National Small Industries Corporation as well as NSIC Venture Capital Fund Ltd. under Ministry of MSME, Government of India. He is currently contributing as a Principal Advisor and Mentor at House of Startups India.
Rahul Nair is the Manager at House of Startups India and a Delhi-based lawyer who graduated from the National University of Advanced Legal Studies, Kochi.