Govt Asks Public Sector Banks to Provide More Loans to Startups

The central government has directed public sector banks (PSBs) to increase their lending to startups and work closely with educational institutions and incubation centres to identify and support early-stage ventures. This move is part of the government’s strategy to improve formal banking access for startups and reduce their dependence on foreign funding.

According to officials familiar with the matter, these recommendations were discussed during a performance review meeting with PSBs held in June.

“We have asked banks to look at various steps, including the establishment of specialised branches, to ensure startups receive adequate credit support,” said an official.

Top State-Run Banks Yet to Extend Startup Loans in FY25

Despite India having the third-largest startup ecosystem globally, several major PSBs such as Bank of Baroda, Punjab National Bank, and Central Bank of India did not sanction any startup loans in the current financial year. “This trend needs to change. Banks can adopt best practices from each other to enhance lending to the startup sector,” the official added.

In follow-up meetings held over the past month, the finance ministry has emphasized the need for PSBs to act on the recommendations and show progress.

Banks Explore Tie-Ups with Startup Incubators

A senior bank executive shared that lenders are exploring collaborations with leading incubators like Startup India, NASSCOM, and SIDBI to create a credible pipeline of startups for funding. “We are also discussing the idea of a separate risk assessment model tailored for startups. This will help in early sanctioning of loans and reduce delays,” the executive said.

A uniform startup rating framework is being proposed to evaluate the risk levels of new ventures more accurately, which will assist in faster decision-making by banks.

Focus on Indian Banking Ecosystem for Startup Financing

The government has been encouraging startups to reduce their reliance on foreign lenders and instead utilize Indian banks for their financial needs. As part of this broader strategy, PSBs have also been asked to conduct annual hackathons in collaboration with Indian Institutes of Technology (IITs), universities, and scientific institutions. These hackathons aim to foster innovation, especially in the financial technology (fintech) space.

During the June review meeting, Finance Minister Nirmala Sitharaman urged banks to proactively identify high-growth areas that will drive commercial activity and economic growth over the next ten years. She also emphasized the need to strengthen corporate lending while maintaining sound underwriting and risk-management practices.

How can lending to Startups boost Economy?

Providing loans to startups can play a major role in boosting a country’s economy. When startups receive financial support, they are able to hire employees, purchase equipment, develop their products or services, and expand their operations. This leads to the creation of new jobs, not just within the startups themselves but also in supporting industries such as logistics, marketing, and manufacturing. More employment means more people have income to spend, which in turn increases demand for goods and services and keeps the economic cycle moving.

Startups are also known for their innovative ideas and solutions. By offering them loans, we allow them to turn these ideas into real-world products and technologies that can improve efficiency, solve problems, and even create entirely new industries. This innovation boosts the country’s overall productivity and competitiveness on a global level.

In addition, growing startups contribute to government revenue through taxes such as GST and income tax. They also support other local businesses by purchasing materials and services, which strengthens the overall supply chain. As more people see the government and banks supporting startups, it builds confidence in entrepreneurship and motivates others to start their own businesses. This reduces unemployment and helps retain talent within the country, cutting down on brain drain.

In simple terms, when loans help startups grow, they create jobs, support local businesses, increase tax revenue, and fuel innovation—all of which are key drivers of economic growth.