India is currently in the midst of a mini banking crisis of sorts. The reason for this is the unwinding of large, unsecured loans made by its public-owned banks to large businesses, most prominent among which include a jewellery brand, a pen maker and a PC maker. The size of the now-soured loans to these companies? $1.7 billion, $570 million and $80 million, respectively.
India’s startup ecosystem has been fuming.
I don't understand why my banker gets panic attacks everytime forex needs to come in or go out.
I don't understand why my own bank, sitting on all my data, with great indicators, can't serve me debt.
I don't understand crypto.
I do understand that banks will keep losing. (3/3)
— Avlesh Singh (@avlesh) February 20, 2018
Avlesh Singh is the founder and CEO of Webengage, a seven-year-old VC-funded marketing software maker headquartered in Mumbai.
Debt in India is only for the Rich!
— Upasana Taku (@UpasanaTaku) February 20, 2018
Upasana Taku is the co-founder of MobiKwik, a nine-year-old digital payments company that has raised over $80 million in venture funding and has over 55 million users.
If PSU banks would have done such large disbursements to Indian startups, we would have been a $10 trillion economy by now https://t.co/DawXzVn6Gh
— Shailesh Vickram Singh (@svickram) March 1, 2018
Shailesh V Singh is a venture capitalist.
“The bank debt ecosystem doesn’t exist for us,” says Webengage’s Singh. “Even our own bank, which knows us very well and with which all our business data has been sitting for nearly four years, doesn’t think we qualify for debt.”
Indian tech startups have largely internalised the lack of credit funding for them from traditional banks, whether private or public-owned. But in doing so, they’ve turned off an important source of funding that can help them complement their other sources, most notably, venture funding.
Does it have to be this way?
A High Bar for Credit
“Smart financial management is always about using the right source of capital for the right purpose. A mix of capital sources is always better,” says Paras Chopra, founder and chairman of Wingify, a bootstrapped SaaS (software as a service) company with over $10 million in revenue.
But standard practice among many, if not most, young tech startups in India has been to raise and spend what is arguably the most expensive capital—venture capital. It’s expensive because founders divest significant equity in order to access it.
One reason is that bank credit is hard to get.
“I’ve had multiple conversations with banks on the various filters they use to decide if they will give us a loan.