Centre notifies establishment of 'Credit Guarantee Scheme for Startups'

CGSS is aimed at providing credit guarantees up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers viz. Startups as defined in the Gazette Notification issued by DPIIT and amended from time to time

Sanjay JogUpdated: Friday, October 07, 2022, 04:27 PM IST
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Union Minister Piyush Goyal | Photo: PTI

In a big move to promote startups, the Centre on Friday notified the establishment of the Credit Guarantee Scheme for Startups (CGSS). The scheme will act as a key enabler and risk mitigation measure for lending institutions, enabling collateral-free funding to startups.

‘’Mew start for Startups. Credit Guarantee Scheme for Startups notified. Government enables eligible companies to borrow collateral-free money up to Rs 10 crore making sure they reach their true potential,’’ said commerce minister Piyush Goyal in a tweet.

‘’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) for providing credit guarantees to loans extended by Scheduled Commercial Banks, Non-Banking Financial Companies and Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds (AIFs).

As per the company, CGSS is aimed at providing credit guarantees up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers viz. Startups as defined in the Gazette Notification issued by DPIIT and amended from time to time.

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

A dedicated credit guarantee for DPIIT-recognised startups will address the issue of the unavailability of a collateral-free loan and enable the flow of financial assistance to innovative startups through their journey to becoming full-fledged business entities.

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

With the objective of mobilising domestic capital for Indian startups, CGSS will complement the existing Schemes under the Startup India initiative viz. Fund of Funds for Startups and Startup India Seed Fund Scheme.

The framework of CGSS has been prepared in extensive consultations with the stakeholders over the years with line ministries, banks, NBFCs, venture debt funds, academia and experts from the startup ecosystem. The Scheme will act as a key enabler and risk mitigation measure for the lending institutions enabling collateral-free funding to startups.

In respect of transaction-based guarantee cover, the guarantee cover is obtained by the MIs on a single eligible borrower basis. Transaction-based guarantees will promote lending by Banks/ NBFCs to eligible startups.

The extent of transaction-based cover will be 80% of the amount in default if the original loan sanction amount is up to Rs 3 crore, 75% of the amount in default if the original loan sanction amount is above Rs 3 crore, and up to Rs 5 crore, and 65% of the amount in default if the original loan sanction amount is above Rs 5 crore (up to Rs 10 crore per borrower).

The umbrella-based guarantee cover will provide a guarantee to Venture Debt Funds (VDF) registered under AIF regulations of SEBI (a growing segment of funding in the Indian startup ecosystem), in view of the nature of funds raised by them and debt funding provided by them.

The extent of umbrella-based cover will be the actual losses or up to a maximum of 5% of Pooled Investment on which cover is being taken from the fund in eligible startups, whichever is lower, subject to a maximum of Rs 10 crore per borrower.

Along with institutional mechanisms for operationalizing the Scheme, DPIIT will be constituting a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, supervising and operational oversight of the Scheme. The National Credit Guarantee Trustee Company Limited (NCGTC) will be operating the Scheme.

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