Department for Promotion of Industry and Internal Trade (DPIIT) notifies establishment of Credit Guarantee Scheme for Startups (CGSS)

Source: The post is based on the article “Department for Promotion of Industry and Internal Trade (DPIIT) notifies establishment of Credit Guarantee Scheme for Startups (CGSS)” published in the PIB on 7^th October 2022.

What is the News?

The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry has notified the establishment of the Credit Guarantee Scheme for Startups (CGSS).

About the Credit Guarantee Scheme for Startups (CGSS)

The scheme will provide credit guarantees for Startups to loans extended by Scheduled Commercial Banks, Non-Banking Financial Companies and Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds (AIFs).

Aim: Providing credit guarantees up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers.

Eligibility: To all the startups as defined in the Gazette Notification issued by DPIIT.

Credit guarantee cover: The cover under the Scheme would be transaction-based and umbrella based. The exposure to individual cases would be capped at Rs. 10 crores per case or the actual outstanding credit amount, whichever is less.

Transaction-based guarantees will promote lending by Banks/ NBFCs to eligible startups. On the other hand, umbrella-based guarantee cover will provide guarantee to Venture Debt Funds (VDF) registered under AIF regulations of SEBI.

Operational oversight: DPIIT will be constituting a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, supervising and operational oversight of the Scheme.

Operating agency: The National Credit Guarantee Trustee Company Limited (NCGTC) will be operating the Scheme.

What is the need for a dedicated Credit Guarantee Scheme for Startups (CGSS)?

Startup India Action Plan launched in 2016 lay the foundation of Government support, schemes and incentives envisaged creating a vibrant startup ecosystem in the country. This action plan envisaged a Credit Guarantee Scheme to catalyze entrepreneurship through credit to innovators and encourage banks and other member institutions in the ecosystem for providing venture debt to startups.

The Scheme further reiterates Government’s focus towards promoting innovation and fostering entrepreneurship for making Indian startup ecosystem the best in the world.

What are the advantages of a dedicated Credit Guarantee Scheme for Startups (CGSS)?

The scheme will 1) Address the issue of unavailability of collateral free loans to startups, 2) Enable flow of financial assistance to innovative startups through their journey to becoming full-fledged business entities, 3) Mobilise domestic capital for Indian startups, 4) Act as a key enabler and risk mitigation measure for the lending institutions enabling collateral-free funding to startups, and 5) Complement the existing Schemes under Startup India initiative viz. Fund of Funds for Startups and Startup India Seed Fund Scheme.