Banks in India are considering the implementation of a distinct rating framework designed specifically for assessing the risk profiles of startups. These discussions have been initiated with key stakeholders, including government entities, rating agencies, and the banking regulator.
As this initiative progresses, formal input will also be sought from the Reserve Bank of India, the country’s banking sector regulator, regarding the specific metrics and criteria for the proposed startup rating framework.
India boasts the world’s third-largest startup ecosystem, with consistent annual growth projected at 12-15%, according to government data.
Financing startups
The motivation behind this move stems from the government’s desire to see banks play a more significant role in financing startups. Banks believe that establishing a standardised rating framework will have several advantages, including reducing turnaround times, expediting approval processes, and ensuring timely disbursements of funds.
A dedicated framework for startups would enable a more comprehensive evaluation of their viability, focusing on their products or services and their monetization potential. This approach would provide a transparent assessment of the advantages and disadvantages of funding a particular startup.
Such a framework would enhance investors’ ability to gauge the risk profile of startups accurately. This, in turn, could increase the likelihood of funding and contribute positively to the startup ecosystem.
Additionally, the proposed rating system could assist banks in making more informed decisions regarding the provision of working capital to startups. Without such a framework, startups are often assessed as micro, small, and medium-sized enterprises without due consideration for their innovative contributions to the overall business landscape.
