Why India Needs An Entrepreneurial Development Bank

The backdrop of India’s 70th year of Independence and the inspiring speech by Prime Minister Narendra Modi provide a perspective on why it’s important for India to develop faster than ever before. It is imperative that if the idea of vikas (development) was to be implemented on the ground, at the scale being promised, it is important that India needs to look at the idea of a ‘start bank’ from a policy perspective. Employment generation is a key part of the Modi government’s strategy and this article tries to look at the background of development banks, why India needs them, and more importantly, how it will help the country’s broader developmental goals.

The idea of an entrepreneurial development bank (EDB) in India would serve multiple purposes. First, it could serve as a one-stop-shop for startup developmental funding across industries and governmental organisations. Even though there have been small pockets of startup initiatives undertaken by government’s premier think tank NITI Aayog, the scalability of a centralised EDB is very important for its success as a good lending partner to prospective entrepreneurs. For example, Indian companies generated only about $1.5 billion in startup funding in 2016. This is much smaller compared to the scale at which investment is needed.

In addition, most of this investment, since it is not driven by a central authority, lacks consistent funding over a longer period of time. This has further accentuated the plight of some startups that have folded up due to lack of funding or have been acquired by bigger players. This potential to scale the bank provides it with substantial capital provided by the government and other donors. It will help address one of the main concerns of the startup community and provide a stream of credit, which is reliable and consistent.

Second, the bank would integrate or streamline a wide array of financing schemes, which are run to promote startups in the country. The issue with these governmental schemes and policies is that they are too cumbersome, convoluted and add more to the regulatory burden for the entrepreneurs. Not only would this streamline these services into one unit, it would also serve as a cumulative force to drive home the concerns of startup owners.

Third, it could be a boon for the small and medium enterprises due to a consistent credit supply provided at affordable rates. The availability of credit through such a specialised and centralised organisation is a blessing for rural entrepreneurs. Almost 80 per cent of the informal sector (which is more than 70 per cent of the economy) access credit through informal financial institutions at exorbitant rates. This creates a debt spiral among entrepreneurs, and causes them to shrink, and in some cases even close their businesses. This is where the EDB can prove to be of great value with strong credit supply at affordable rates over a longer period of time.

In addition, the EDB can also help to drive key government schemes such as the MUDRA initiative through a far more focused campaign rather than being part of a behemoth like the Reserve Bank of India, which is involved in way too many things to focus on such schemes.

So, are there such precedents globally for such schemes? Starting such a bank is the need of the hour for our economic progress. India needs it and hence it needs to be incorporated. However, other countries have also tried these policies and have benefitted immensely. For example, the Netherlands has an entrepreneurs development bank, which is a public-private partnership with the government holding a majority stake. It has pioneered the emergence of startups in the country and was recently called the high-tech startup capital of the world due to such favourable credit enhancing mechanisms such as the FMO mentioned here. In France, the state investment bank has become the highest investor in startups including the private sector after the pro-entrepreneurial policies of President Emmanuel Macron and his government since being elected a few months ago.

It would be imperative for India to learn from these models and evolve an EDB that would benefit the entrepreneurs in the country. A public-private partnership model would be wise with a seed capital of more than Rs 1,000 crores to start with. All the states in the country need to be made stakeholders and participants so that there is a federal engagement with the bank. In addition, it would also enable to tap into the vast single market that India’s states can provide for entrepreneurs to explore and grow with. Not only will this provide a credit access platform for entrepreneurs, it would also enable an employment boom in the country pioneered by common businessmen, who are eager to challenge the world in their respective fields.

In short, the potential of India’s youth can only be leveraged when they are provided with opportunities to nourish their entrepreneurial talent. The access to credit, the feasibility of business loans and the continuous support of financial schemes and mechanisms are very important to achieve development goals. One of the innovative yet simple ways is to create an entrepreneurial development bank that can benefit everyone. It could be the masterstroke that can benefit both politically and economically for the Modi government in the years ahead.