Banks exploring a risk assessment model to fund startups

Following the spate of start-ups in the Indian economy and the valuation risks that they entail to investor funds, banks have come alive to putting together a rating structure and risk assessment model for startups and have already kicked off discussions with the Reserve Bank, ratings agencies and the government.

The banks have become involved in the exercise since the government wants them to have a bigger role in funding startups. Banks, that are inherently risk-averse, need to have a well-thought-out and verified model to put their money into startups.

India is the third largest economy in the number of startups behind the US and China. This market is expected to grow at 12-15% every year.

Incidentally, the startups are passing through a prolonged funding winter when the funding from around the globe has been shrinking over the past three quarters.

Bank authorities think that a universal rating framework would help reduce risk and therefore reduce turnaround time and lead to prompt execution of approvals and timely disbursements.

“This will help investors as- sess the risk profile of a startup very clearly, which is a clear pre- requisite for funding, thereby increasing the probability of funding and hence benefiting the startup ecosystem,” said Vivek Iyer, partner and national leader in financial services risk at consulting firm Grant Thornton Bharat.

For a bank assessing the viability of a startup rests critically on assessment of product or service itself and its monetisation potential. The risk assessment model will precisely do this. Experts think banks can provide working capital to startups.

The RBI is also supposed to add value to the process by putting forward its suggestions.