Indian banks must invest, not just lend: The Israeli model.

The idea of investment by banks may sound bizarre as we are accustomed to receiving loans from banks but can active investment from banks help startups and entrepreneurs create more jobs?

Let's look at the Yozma Program from Israel.

To kick start the startup culture in the country Israel created a $100 Million fund. The rule of the program was that, 40% of the fund will be invested by the Government of 60% is raised by venture capital. If, a venture capital firm raises $12M the Government will invest $8M and complete the $20M fund.

So was it successful?

In 1992, when the program began, there were only 20 venture capital funds but, by the year 2020, within a span of 8 years, the number was a whooping 513!

The question is, how can India replicate it?

The public sector banks in India are neck deep into NPAs (Non-performing Assets) mainly because of the fact that once a loan is sanctioned, the banks have no control on the company. Hence, investing in companies can help the Public Sector Banks in the following ways:

1) More control: If the Public Sector Banks become Investors and not just lenders then, the banks can appoint their own member in the board of directors who'll not only have a check on the company but can also be an additional manpower for the company.

2) Incentive for professionals: Graduates from top business colleges often tend to avoid working for public sector banks for the lack of autonomy and incentive. If these banks decide to appoint these professionals as directors in the companies they are investing in, then, this will be a win-win-win scenario.

• The B-school professional can be given incentive based on the profit of the startups.

• The Startups will have a top professional for free.

• The Banks will have an efficient professional on the board where they are investing.

The startup ecosystem in India is still at it's infancy and just relying on interest from lending is ageing the public sector banks into a slow death. If, they come together, the startup and the banking industry in India can see a huge boom!

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