MUMBAI : With India’s fast-growing startup sector presenting unprecedented opportunities, large lenders such as Standard Chartered Bank are building a business case to lend them more, and in the process, are also tweaking long-established credit appraisal mechanisms in the absence of hard collaterals. In an interview, Manish Jain, co-head, corporate, commercial and institutional banking, India, Standard Chartered Bank outlined the key challenges and opportunities in this rapidly evolving space. Edited excerpts:
How are you approaching credit underwriting for startups given the fact that collaterals in the typical sense do not exist in most situations ?
The underwriting parameters are very different from the way traditional companies are assessed. A few of the key variables while underwriting such businesses involve evaluating if the startup is solving a core need and whether it is creating an irreplaceable niche while doing so. Also, whether the business model is asset-light or asset-heavy and what stage of equity funding it is at. The investor profile plays an important role too. For instance, whether the investors are well-regarded with deep pockets, and do they have a past track record of repeat investments to support the growth phase and the cash runway. Likewise, how much is the available cash vs the monthly cash burn and if the monthly cash burn is reducing or increasing are some of the key criteria. In addition, we closely track the path to profitability for these startups. Most of these companies have raised significant equity, which provides a great deal of comfort to lenders.
What are the kinds of products that large banks like yours are offering to these companies?
The role of banks with the tech startup ecosystem has clearly been evolving over the years. To start off, the engagement was mainly for creating customized digital transaction banking solutions for these companies. This was particularly so in case of B2C startups with high transaction volumes and reconciliation needs. This is what I would refer to as Phase-1 of banks’ engagement in this space. Over a period of time, banks have also started providing credit facilities to these companies. The credit facilities are usually in the nature of short term limits to help the companies finance their working capital. Now, banks have also begun to evaluate term or acquisition financing facilities to these companies. So, as the tech startup sector has got more established and banks have started understanding this space, their product offerings and risk appetite have grown over time. Standard Chartered too has evolved in addressing these requirements as we continue to cater to this segment.
What has been Standard Chartered’s approach so far in this space?
Tech startups are a key focus area for us at Standard Chartered. We are in regular discussions with a large number of companies in this space and adding new clients every month. We have had multiple companies where we have set up customized, tech-led transaction banking solutions. Such solutions have significantly improved the user experience for the customers of these startups. We have now also built up a portfolio of short-term credit facilities and our experience has been quite good. The companies have been using these credit facilities judiciously to build their credit profile in the banking system, knowing very well that banks are going to become a critical source of funding in their next phase of growth. We have also been able to leverage our large global network and help some of these startups in their efforts to go overseas.
What key trends do you see going forward in the role banks will play in the tech ecosystem?
I see the role of banks in this space evolving continuously. As these companies get bigger and move towards profitability, they will access the full suite of banking products.
Digital transaction banking products and working capital solutions will continue to be top of the pile, in terms of banks’ engagement. I also see these companies tapping the debt capital markets with high yield bond or Term Loan B issuances over a period of time to expand their sources of funding. A few startups have already done Term Loan B and I see the numbers increasing over time.
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