Banks extend help to start-ups in need of credit


Mumbai: Private sector lenders HDFC Bank, Axis, IDFC, Kotak Mahindra and Yes Bank have started extending short term credit to meet working capital needs for Ola, Power2SME, Flipkart, OYO, Zinka, Capital Float, investment banker-turned-entrepreneur Fulguni Nayar-owned Nykaa and many others, throwing a new credit lifeline for startups starved of equity capital, signalling some sort of […]


start-up-iit-alumMumbai: Private sector lenders HDFC Bank, Axis, IDFC, Kotak Mahindra and Yes Bank have started extending short term credit to meet working capital needs for Ola, Power2SME, Flipkart, OYO, Zinka, Capital Float, investment banker-turned-entrepreneur Fulguni Nayar-owned Nykaa and many others, throwing a new credit lifeline for startups starved of equity capital, signalling some sort of maturity in the sector.

“There are business opportunities in funding start-ups and new generation companies,” said Sidharth Rath, Group Executive, Corporate Banking, Axis Bank. “We prefer companies with adequate equity funding, which helps them to have enough liquidity and aids in debt servicing. It has been satisfactory so far”.

“They will grow bigger in future, and some of them will turn out to be unicorns. We too would have higher share of businesses as we are identifying them early,” he said. Axis Bank funds them mostly through letter of credit, bank credit guarantee, bill discounting offering credit support in transaction banking.

The average size varies in the wide range between Rs 15 crore and Rs 10 lakh with maturities from one month to two years. Banks price such loans after adding a premium over their respective lending rates based on marginal costs of funds, known as MCLR in market parlance. This could be about 200-400 basis points over the benchmark rates adding up to about 12-13%.

“Banks should fund working capital for start-ups and new generation companies. We have started funding the likes of Ola, OYO, Rivigo, which are all funded by well-known equity funds,” a senior executive from one of the top three private banks told.

Global private equity firm Warburg Pincus backs Rivigo, a logistic startup while Singapore sovereign fund GIC and Japan-based internet company SoftBank part-own taxi aggregator Ola.

Loans are collateralised either through assets or book debt (in the form of equity capital). For a logistic startup plying trucks daily would be assets. In some cases, they may be in unsecured form and equity fund funding the startup sets the benchmark for the lender.

“We got a credit line of INR 25 crores from Axis Bank in December 2016,” said R Narayan, founder and CEO of Power2SME, which is financially backed by Power2SME and marquee investors include Nandan Nilekani. “We also have a SME Financing Program sanction from Axis Bank for Power2Sme customers for INR 50 crores.”

Out of that Rs 25 crores, the venture debt (term loan) was of Rs 15 crore and the rest through cash credit limit.

Puru Vashishtha, co-founder WishFin (formerly Deal4Loans) said startups backed by known institutional investors should get better deals from lenders. Banks are comfortable to extend working capital loans when EBIDTA (Earnings before interest, tax, depreciation and amortization) is visible.

IDFC Bank is providing credit and working capital support to merchants, ecommerce resellers, offline sellers and start-ups through its partnership with fintech companies.

“An increasing number of these merchants are now going digital – in terms of selling and the way they access credit,” said a senior IDFC Bank official. “This means that a bank can write algorithms to underwrite them much better now than in the past.”

“The intent is to expand format credit to an underserved segment and expand geographic reach in locations where the bank does not have a presence,” he said.

Fintech companies like Capital Float, Indifi and Novopay sanction loans live, customers accept the sanction letter on the web browser and enter into a tripartite agreements among the borrower, IDFC Bank and its fintech partner.

This has helped IDFC Bank to skim the market, which is getting larger. For example, small businesses based in Surat, Rajkot, Chandigarh and Bangalore approach Capital Float and Indifi and the bank underwrites these loans. Yes Bank too funds with Rs 1-2 crore ticket size to fintech startups.

Source: Times of India

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