Banks will lend to kirana stores but not startups: RBI Governor Raghuram Rajan

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Raghuram Rajan on Wednesday said banks are not very likely to invest in startups, especially software enterprises that do not have hard collateral.

Rajan, who was in the startup capital on Wednesday, was asked why banks are stingy when it come to lending to startup entrepreneurs.

“It is a real issue everywhere. Banks may not lend to startups working on software or a cloud system and will likely tell the entrepreneur to approach venture capitalists and investors who can understand the sector better,” said Rajan.

“We need a variety of sources of capital. Angel and venture capital investments in startups have exploded in the last few years, and a few successes will energise more people to lend. However, it won’t be banks, since they will likely lend to kirana shops than a fancy, hitech startup,” he added.

The RBI governor also proposed a series of innovations to help both students and bankers, when asked about high collateral demands by banks on student loans.

“Banks are finding that default rates are picking up on student loans and that is why they are not lending freely to students,” he said. “However, there are several ideas, such as tying loan payments to salaries, and using the unique ID to help in identifying and disclosures.”

Asked if India will ever be able to catch up with China, Rajan said India can’t follow the same path of growth and should look at China as an inspiration rather than competition.