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In 2023, Banks see strong potential for a share of startup pie, explore co-funding tie-ups

Banks see potential for a share of startup pie, explore co-funding tie-ups

Banks in India are recognizing the potential business opportunities presented by startups and are actively exploring various avenues to tap into this market. Some banks are considering partnerships with fintech companies and non-banking financial companies (NBFCs) to offer loans and financial services to startups, while others are making direct investments in startups.

Karnataka Bank has expressed its intention to explore co-lending deals specifically targeted at startups. Srikrishnan H, the managing director of the Mangalore-based bank, stated that they view this market as an opportunity and are looking to bring about a cultural change within the bank. Recognizing the strong digital presence and capabilities of NBFCs and fintech companies, Karnataka Bank sees them as crucial partners in providing loans to startups.

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By collaborating with NBFCs and fintechs, traditional banks like Karnataka Bank can leverage their expertise in the digital space, enabling them to offer efficient and tech-enabled lending solutions to startups. This approach allows banks to tap into the growing startup ecosystem and support their financial needs while leveraging the technological capabilities and market reach of their partners.

The move towards partnerships and investments in startups highlights the evolving approach of Indian banks towards embracing innovation and exploring new business models. By actively engaging with startups, banks can support entrepreneurship, drive economic growth, and foster a dynamic and vibrant startup ecosystem in the country.

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Federal Bank, like other banks in India, is also exploring partnerships to support the startup ecosystem. In February, the bank entered into a partnership with the Tamil Nadu Startup and Innovation Mission and MindEscapes Innovation Center to provide support and resources to startups in Tamil Nadu.

Startups typically secure funding through angel investors, government schemes, or by self-funding their ventures. Due to criteria such as collateral or guarantees required by traditional banks, startups often do not seek loans from banks as a primary source of funding. This is because startups, especially in their early stages, may not have substantial assets or a strong credit history to meet the traditional lending criteria.

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However, banks like Federal Bank are recognizing the potential of startups and their contribution to the economy. As a result, they are actively seeking ways to support and cater to the unique needs of startups. By forming partnerships with organizations that specialize in supporting startups, such as the Tamil Nadu Startup and Innovation Mission and MindEscapes Innovation Center, Federal Bank aims to provide startups with the necessary financial assistance, mentorship, and resources to thrive.

These partnerships can help bridge the gap between startups and traditional banking services by offering tailored financial solutions and more flexible lending options. By collaborating with startup-focused organizations, banks like Federal Bank can better understand the requirements and challenges faced by startups, providing them with access to capital and banking services that align with their specific needs and growth trajectory.

Funding to Indian startups has decreased by around 80% in the first five months of 2023 compared to the same period last year, leading to a funding slowdown commonly referred to as a “funding winter.”

In response to the challenges faced by startups, some banks have already begun supporting them. State Bank of India (SBI), the largest lender in the country, reported in its annual report for FY23 that it actively participated in the alternative investment space and supported startups through direct equity participation. SBI sanctioned investments of over Rs 800 crore in private equity/alternative investment funds during the year.

Small finance banks are also recognizing the opportunity presented by the startup segment. Ujjivan Small Finance Bank, based in Bengaluru, highlighted the growth potential of the startup sector and expressed interest in exploring options to support startups in the future.

A report by StrideOne, a tech-enabled non-banking financial company (NBFC), indicated that Indian startups are expected to contribute around 4-5% to India’s gross domestic product (GDP) in the next three to five years, up from the current 2.5-3%.

According to Srinivasan of Federal Bank, the digital space in India is projected to grow, and banks have an opportunity to explore partnerships with digital startups whose business models have the potential to succeed.

Some banks have dedicated branches or platforms to cater specifically to startups. SBI, for instance, has startup branches in various cities, and ICICI Bank has introduced a range of digital and physical solutions for startups through its networks and branch at GIFT City.

To work around operational costs, small banks like Ujjivan SFB consider co-lending partnerships as an alternative to setting up dedicated branches. Srikrishnan of Karnataka Bank believes that partnering with more digital-focused NBFCs can be a viable option.

The India Startup Outlook Report by InnoVen Capital revealed that 58% of startup founders anticipate more funding challenges in 2023. The report also indicated a decline in positive fundraising experiences, with only 53% of founders reporting a positive experience compared to 92% in 2021.

In summary, the funding winter has impacted Indian startups, prompting banks to actively support them. Banks are exploring partnerships, establishing dedicated branches, and offering specialized services to cater to the credit demands of startups. Despite the challenges, startups remain an integral part of India’s economy, with expectations of significant contributions to GDP in the coming years.

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