Banks crowd startup lending, squeezing newer lenders

Traditional banks are pushing deeper into startup lending as more young companies turn profitable, opening cheaper credit for growth-stage firms and squeezing pricing for the non-bank lenders that had been funding them. Industry executives said the shift is compressing yields for venture debt players and alternative credit platforms.

HSBC India has already deployed over half of the $1 billion debt capital support it 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 does not have an aggressive approach, he said, but a “well-calibrated method of evaluating business and credit risks” associated with the segment. Banks have become better at understanding the risks and developing underwriting metrics more appropriate for the startup segment, Gopinath added.

Other major lenders have made similar moves. Axis Bank, DBS Bank India and ICICI Bank have set up dedicated verticals to finance startups. State-owned lenders such as State Bank of India and Bank of Baroda also have their startup banking divisions.

Axis Bank has an outstanding credit book of close to ₹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. The bank typically lends to startups from Series A and above, many still in their pre-profit stages. Axis evaluates parameters such as existing cash flows, burn rate, revenue growth, market share and runway, Bhatia said.

Banks are bound by guardrails on acquisition financing and have a lower risk appetite compared with alternative investment funds, NBFCs or venture debt funds that lend to high-burn companies. But as overlap grows, pricing pressure is building. “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.

A traditional bank may charge an average interest rate of about 10% or lower in some situations. Venture debt players that service early-stage startups charge 14-18% due to the high-risk profile. Other mid-market entities, including NBFCs, may charge 13-16%, depending on the situation.

Banks typically place a greater emphasis on collateral-based lending and a company's profit and loss. Newer lenders take larger risk for a premium. The convergence is accelerating as more startups show predictable cash flows and healthy balance sheets, parameters that have become increasingly important to secure the next round of equity funding and eventually tap 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 and 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 banks playing a larger role, BlackSoil has seen pricing pressures, Bansal said. “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.”

Once a startup reaches a certain scale and maturity, banks become more accessible and 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.” The opening of banks in the capital stack improves capital access for growth and lowers capital costs, he said.

Some banks are pursuing a broader strategy. DBS Bank India noted that its banking relationships with startups go beyond lending. The firm's startup banking proposition 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 and midcap) at DBS Bank India. In March 2024, DBS Bank India announced a lending commitment of $250 million for new-age startups.

Axis has a similar approach. “While we typically lend to startups looking to fulfil their working capital gaps, our offerings go far beyond this,” Bhatia said. “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.”