Priority sector lending will save startups from closure but may lead to NPAs

“Including Startups in priority sector is a great step for startups as it will allow them to access funds through debt,” said Manish Johari, Senior Vice President of Lead Angels, a Mumbai based network of angel investors.

New Delhi: Inclusion of startups under the priority sector lending will open one more avenue for the entrepreneurs to raise money and help them grow fast but it could also lead to non-performing assets if the startups don’t learn to grow profitably from the beginning, said two people from the startup industry.

Reserve Bank Governor Shaktikanta Das on Thursday announced the inclusion of startups under the priority sector lending, putting Indian startups on the same footing as agriculture and SME sector that are eligible to raise loans from banks on concessional terms. The decision will allow startups to raise loans from banks on concessional terms and low interest.

“Including Startups in priority sector is a great step for startups as it will allow them to access funds through debt,” said Manish Johari, Senior Vice President of Lead Angels, a Mumbai based network of angel investors.

He says given the right framework and execution it will really help startups in growing rapidly as access to working capital remains a key challenge for founders.

“As some Venture funds take a pause, the infusion of debt capital could well be the saviour of some startups who would otherwise perish,” Manish Johari told ETV Bharat.

Prime Minister Narendra Modi announced Startup India Scheme in his Independence Day speech in August 2015. In the next budget, the government also announced several measures including tax exemptions and low compliance to promote entrepreneurship and innovation in the country.

Within four years of the launch of the Startup India scheme, the country has become the third largest startup capital in the world following the U.S. and China with nearly 30,000 government recognized startups in the country.

But unlike other sectors of economy, startups primarily rely on raising funds from angel investors and venture capitalists for rapid growth even at the cost of making profits.

Aarti Chhabria, a serial entrepreneur and founder of Clap Global, a Mumbai based edtech startup, says while the startups will learn to get more prudent about borrowing from the bank, the banks, on the other hand, will enter into a high risk lending product.

Aarti, an entrepreneur turned investor, also highlights the importance of putting in place sound guidelines of priority sector lending for startups and recovery mechanism as startup funding and lending is inherently risky in nature.

“Fundamentally Venture Capitalists & Private Equity Funds grew because founders didn’t want to raise money from the banks as they need to grow fast whether they are profitable or not,” she told ETV Bharat.

Aarti Chhabaria, who also works as a director in Pico Capital, a Mumbai based investment firm and a registered NBFC, cautions that bank lending to startups could also lead to rising NPAs as founders chase faster growth despite initial losses.

“Unless startup industry also makes a mindset change to grow alongside profitably from an early stage, this Priority Sector Lending status can add little value and more NPAs,” noted the entrepreneur turned investor.

(Article by Krishnanand Tripathi)