Banks to Form Framework for Risk Assessing Startup Risk Profile
Banks are considering developing a separate rating framework or model for risk profiling startups and have begun discussions with interested parties, including rating agencies, the government, and the banking regulator. The move comes amid the government's desire for banks to play a larger role in startup financing. Banks believe that a common rating framework will help reduce turnaround time and ensure faster approval execution, in addition to timely disbursements.
Experts believe that a separate framework will help assess the viability of startup funding based on an assessment of the product or service itself and its monetisation abilities, thereby providing a clear case for the benefits and drawbacks of funding the startup.
"This will help investors assess the risk profile of a startup very clearly, which is a clear prerequisite for funding, thereby increasing the probability of funding and hence benefiting the startup ecosystem," said Vivek Iyer, partner and national leader in financial services and risk at consulting firm Grant Thornton Bharat.
Iyer added that the ratings will also help banks make more informed decisions about providing working capital lines to startups, which would otherwise be evaluated solely as MSMEs with no weight given to the novelty they bring to the overall ecosystem. According to government data, India has the world's third largest startup ecosystem and is expected to grow at a rate of 12-15% per year.
According to people familiar with the developments, the Reserve Bank of India will be asked for formal recommendations on the metrics for such a separate framework.