Bank funding of start-ups should pick up: SBT chief

Commercial banks can provide debt funding to start-ups but equity funding is best left to venture capital and private equity funds, says Jeevandas Narayan, Managing Director, State Bank of Travancore (SBT).

“Without being sceptical, I would say that start-ups need mostly seed capital or venture capital till the viability of the business model is established. Banks can come in for working capital or term loan funding,” he told BusinessLine here.

In that sense, start-ups are a slightly different ball game. Typically, in start-ups, VCs/PEs are a natural fit. They need to get, say, three or four correct calls out of 10 such calls. They’ll make up in those three or four investments what they may lose in the rest six or seven, Narayan said.

According to him, commercial banks need to be focussed on risk as they earn only interest on their funding. PEs have an upside from equity appreciation as well, and also have well planned exit strategies. So, the dynamics are different. For banks to fund start-ups, there is a need to see clear revenue models in operation, he said. Some shake-up in the sector is expected, said Narayan, and added that commercial banks’ involvement in the area of debt funding of start-ups will pick up sooner than later. Banks are unable to fund projects with very long gestation periods due to the relatively medium-term nature of their liability structure and the consequential asset-liability management issues.

“But going forward, newer players such as payments banks and small finance banks will soon make their presence felt. Without legacy issues and with nimble structures and processes, they will bring in a paradigm shift. Hence, established players will need to run faster in the days ahead and see the bends in the road,” Narayan said.