Banks warm up to startup lending as new economy matures

Banks warm up to startup lending as new economy matures

Mumbai, Aug. 21 -- Traditional banks are moving deeper into startup lending as more new-age businesses turn profitable and generate steadier cash flows, opening up cheaper credit for growth-stage firms. The shift is squeezing pricing for newer lenders that were so far keeping their growth engines funded, industry executives said.

HSBC India, for one, has already deployed over half of the $1 billion debt capital support announced for startups in 2025. "We have specialist teams across the business and risk functions to understand the nuances of startups and, accordingly, calibrate our credit appetite on an ongoing basis," said Dilip Gopinath, who heads innovation banking at the lender.

The bank doesn't have an aggressive approach, but a "well-calibrated method of evaluating business and credit risks" associated with the segment, Gopinath said. He added that banks have become better at understanding the risks and developing underwriting metrics more appropriate for the startup segment.

Over the last few years, other major lenders such as Axis Bank, DBS Bank India and ICICI Bank have also set up dedicated verticals to finance these high-growth startups to catch them earlier in their journey. State-owned lenders such as State Bank of India (SBI), and Bank of Baroda (BoB) also have their startup banking divisions.

Axis Bank has an outstanding credit book of close to Rs.3,000 crore for the new economy built over the last five years. "For many of our clients, their loan book from banks has substantially increased, but the number of lenders across banks and non-banks has also expanded from a risk mitigation perspective," said Sanjiv Bhatia, group head-strategic clients group, NEG, FS, capital markets & custody at Axis Bank.

Axis typically lends to startups in the series A stages and above, many of which are still in their pre-profit stages. The bank closely evaluates parameters such as existing cash flows, burn rate, how the company's revenues have grown, type of market share it commands and the runway ahead.

Banks are typically bound by guardrails in facets such as acquisition financing and have a lower risk appetite as compared to alternative investment funds (AIFs), NBFCs or venture debt funds that lend to high-burn companies.

Now, with increasing overlap across the mid-market lenders and banks, there are some pricing pressures in recent times. In some of the edgier situations, it is preferred to have the risk distributed across the system spanning NBFCs, debt funds, alongside banks, Bhatia said.

For context, a traditional bank may have an average interest rate of about 10% or even lower in some situations, while the band for venture debt players that service early-stage startups is 14-18% due to the high-risk profile. Other mid-market entities, including NBFCs, may charge in the 13-16% range, depending on the situation.

While the banks may provide varying structures, startups depend on different sources of capital for their debt requirements; price, quantum and flexibility of capital are also key to decision-making. Banks typically place a greater emphasis on collateral-based lending and the company's profit and loss, while newer lenders may have a larger risk appetite, for which they charge a premium.

The convergence of the playing field between banks and non-banks is accelerating, as more startups show predictable cash flows and healthy balance sheets, parameters that have increasingly become important to secure the next round of equity funding and eventually tap the public markets.

"We are seeing traditional banks step up in a big way to lend growth stage startups as they look to grow their corporate books. Given their lower cost of capital, they have become the first port of call for startups," said Ankur Bansal, co-founder & managing director of The BlackSoil Group. "For the next tranche of capital, companies leverage new-age lenders like us to keep their blended borrowing rate lower."

"With these banks playing a larger role in lending to startups, we have seen some pricing pressures in recent times. This has prompted us to provide greater flexibility in our terms and at the same time be more creative in our structures but not at the cost of our credit selection process," he said.

BlackSoil is an alternative credit platform and operates as a non-banking financial company in India that provide flexible debt financing, venture debt, and structured credit to startups, small-and-medium enterprises (SMEs) and high-growth businesses.

It is alternative credit platforms and non-banking financial companies (NBFCs) in India that provide flexible debt financing, venture debt, and structured credit to startups, small-and-medium enterprises (SMEs) and high-growth businesses.

As startups evolve and become more bankable, NBFCs that traditionally filled the gap between venture capital and conventional bank debt are facing greater competition from banks, putting pressure on lending yields and forcing them to differentiate through speed, flexibility and structuring rather than pricing alone.

Once you have a certain scale and maturity, banks become more accessible, can offer size and diversified products, said Rumit Dugar, chief financial officer of jewellery startup BlueStone.

"Banks have built deeper understanding of internet driven business models. In our early stages, new lending players supported our growth and now banks are scaling," he said, adding that "the opening of banks in the capital stack not only improves capital access for growth but also lowers our capital costs."

Some of the banks have a more diversified strategy to become more relevant to the new economy and provide them with full-stack solutions.

DBS Bank India noted that its banking relationships with startups go beyond lending. The firm's startup banking proposition does not operate in isolation but is an extension of the broader institutional banking franchise, adjacent to the corporate and small business verticals, said Santanu Mitra, managing director and country head of corporate banking (large & midcap) at DBS Bank India.

In March 2024, DBS Bank India had announced a lending commitment of $250 million for new-age startups.

Axis has a similar strategy. "While we typically lend to startups looking to fulfil their working capital gaps, our offerings go far beyond this. We operate in areas like transaction banking, where we help companies with the tech and payment infrastructure and also investment banking services through our wholly-owned Axis Capital subsidiary," Bhatia added. Published by HT Digital Content Services with permission from MINT. For any query with respect to this article or any other content requirement, please contact Editor at contentservices@htdigital.in