Banks smell potential in startup pie, explore fintech partnerships and co-lending opportunities

Banks in India are looking at startups as a potential business opportunity. Some are exploring partnerships with fintech companies and non-banking financial companies to offer loans to startups and others are investing in them.

Karnataka Bank said it plans to explore co-lending deals aimed at startups.

“This is an opportunistic market for us. We are looking at an overall change in the culture of the bank,” Srikrishnan H, managing director of the Mangalore-based bank, told Moneycontrol. “NBFCs and fintechs which have a strong hold in the digital space will be crucial partners for us to lend to startups.”

Also read: 58% startups believe fund-raising will get tougher in 2023, finds survey

Federal bank too is looking at similar partnerships. In February, the bank partnered with Tamil Nadu Startup and Innovation Mission and MindEscapes Innovation Center to support the startup ecosystem in Tamil Nadu.

Shyam Srinivasan, MD of Federal Bank, said it may look at co-lending for startups as the market has the opportunity to grow.

“Look at the bigger India story. The digital space is thriving and with this, we see growth ahead. For lending to startups, we may look at co-lending partnerships,” said Srinivasan.

Supporting startups

Startups generally get funding from angel investors and government schemes or are self-funded. They usually do not seek loans from banks because of criteria such as collateral or guarantees.

Funding to Indian startups plunged to about a fifth in the first five months of 2023 compared to the same period last year due to funding winter.

Some banks have already begun supporting startups. State Bank of India, the country’s largest lender, said in its annual report for FY23 that it had been an active participant in the alternative investment space in the previous financial year and supported startups through direct equity participation.

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“During the year, we sanctioned investments of more than Rs 800 crore in private equity/alternative investment funds,” SBI said in the annual report.

Small finance banks too are sensing an opportunity in the startup segment.
“Bengaluru is the hub for startups in India,” said a senior official at Bengaluru-based Ujjivan Small Finance Bank. “We are not looking at co-lending deals now but soon we may explore options as this segment has growth potential.”

A report by StrideOne, a tech-enabled NBFC, showed that Indian startups are expected to contribute about 4-5 percent to India’s gross domestic product over the next three to five years, up from 2.5-3 percent currently.

Srinivasan of Federal Bank said that the digital space in India is only expected to grow and with the changes in the business models of some digital startups, there is an opportunity to explore.

“If a company has a model which has the ability to stay, there is an opportunity,” Srinivasan said.

Some big banks have dedicated branches for startups. SBI has five startup branches in Hyderabad, four in Mumbai, three in Gurugram and one in Bengaluru, among other cities, according to press releases.

Some banks have dedicated platforms and services catering to the credit demands of startups.

ICICI Bank, the country’s second-largest private sector lender, said in March it was bringing out a bouquet of digital and physical solutions for startups through its domestic and international networks, and its branch at GIFT City.

The executive from Ujjivan SFB highlighted that for small banks, setting up a branch raises operational costs.

“Co-lending partnerships are a way around for these banks to work around lending operations,” the executive said.

Srikrishnan of Karnataka Bank said NBFCs that are more digital can be a good option for partnerships.

“Digital is the space where we see the opportunity,” he said.

Venture debt firm InnoVen Capital, in its ‘India Startup Outlook Report,’ said that 58 percent of startup founders expect 2023 to pose more challenges vis-à-vis funding. The report showed that only 53 percent of the founders said they had a positive fundraising experience (71 percent of those who attempted to raise funds), down from 92 percent in 2021.