Banks Must Support Start-Ups as a National Obligation
Targeted lending by Indian Banks to Agriculture, MSME, Housing & Exports has brought miraculous results. The dedicated funding of farmers actualised self-sufficiency in food, and milk production and the MSME segment became an arterial destination for employment. Housing loans are pivoting the construction industry across the country and actualising the dreams of owning the roof. The exports have touched the $ 500 billion mark to tilt the Balance of Trade and improve forex reserves. Invariably, all banks are integral players in this growth story deserving appreciation for their valuable support.
However, the world has not heard of any significant innovation by India for a long time and eagerly awaits fresh discoveries. But there is little chance for out-of-the-box creation, as Indian banks discard supporting Startups inhibiting their potential to make India an innovative country. We continue to be a cut-and-paste manufacturing economy rendering a below-the-mark quality.
With low NPAs and improved profitability, the time is ripe for banks to support Start-ups. RBI should mandate banks to extend focused targeted lending and earmark a minimum share of funds to Startups as part of National Obligation.
A startup venture in the Indian context is a new business in the initial stages of operation, beginning to grow and is typically financed by an individual or small group of individuals. It is a young entrepreneurial, scalable business model built on technology and innovation wherein the founders develop a product or service for which they foresee demand through disrupting existing markets. Startups are the embodiment of ideas that manifest into commercial undertakings.
Banks should mandatorily lend a minimum of 5% equivalent of the previous year’s loan book to Start-ups to make India an incubator for innovators. America and China have already reaped the benefits of similar efforts. Europe has empowered Startups and enhanced the GDP to reduce unemployment.
Four important facets of a startup venture help the economy grow. These are broad market acquisitions, human resources deployment, intellectual property rights registrations and efficient capital management. These features upgrade the convenience of doing business and make the country an investment destination. The success of these four pillars initially stands on low-cost domestic funds. Indian banks are still security conscious and do not lend to Startups who carry fresh but risky ideas and concepts. But even the orthodox industry has also generated substantial non-performing debts. Banks must reorient to finance Startups rather than leaving the field open to NBFCs and Private Equity funds.
Startups in the Indian scenario have tremendous scope in catering to local and niche markets that could be viable and sustainable with the early potential of revenue generation. With a small area of operations and an exemplary product /service, the success rate could be high, with a possible chance for expansion.
The most significant value of Startups is the force behind them—most of the Startups rope in highly qualified MBAs and Engineers. With a proper response from banks, fresh ideas could see the light of the day, firewalling our cities from the orthodox polluting industries that are energy guzzlers, carbon-intensive with poor job creators.
Presently, disappointed Startups enter open markets and lean heavily on private equity, which is not only short-term but also prohibitively costly. Some budding entrepreneurs leave the country, further fueling the brain drain losses.
The startup arena has a lot of challenges apart from finance. The scarcity of quality human resources at a reasonable price and the remnant constraints of the license raj hinder their sustenance. In a country with a large population, many opportunities are available for startups ranging from food, retail, and hygiene to solar and IT applications for daily use. All these are deliverable at affordable prices. Some of these startups would become unicorns and world-renowned businesses by expanding into distant geographies of developing and underdeveloped countries.
History shows that the fulcrum of prosperity shifts towards innovative nations. Banks must finance Startups to take India forward on its path to become a $ 5.0 trillion economy.
Rightly said Reliance founder Dhiru Bhai Ambani, “The success of the young entrepreneur will be the key to India’s transformation in the new millennium”.