The Department for Promotion of Industry and Internal Trade (DPIIT) has notified the establishment of the Credit Guarantee Scheme for Startups (CGSS) to provide credit guarantees to loans extended by banks, non-banking financial companies and Sebi-registered alternative investment funds (AIFs).
The credit guarantee provided under the CGSS, which is aimed at providing credit a guarantee of up to a specified limit against loans extended by member institutions (MIs) to finance eligible borrowers viz startups, 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,” the commerce and industry ministry said in a statement.
It added that in respect of a transaction-based guarantee cover, the guarantee cover is obtained by the MIs on a single eligible borrower basis. The transaction-based guarantees will promote lending by banks/ NBFCs to eligible startups.
“The extent of transaction-based cover will be 80 per cent of the amount in default if the original loan sanction amount is up to Rs 3 crore, 75 per cent of the amount in default if the original loan sanction amount is above Rs 3 crore, and up to Rs 5 crore, and 65 per cent of the amount in default if the original loan sanction amount is above Rs 5 crore (up to Rs 10 crore per borrower),” the ministry said.
The umbrella-based guarantee cover will provide guarantee to venture debt funds (VDFs) 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.
It said, “The extent of umbrella-based cover will be the actual losses or up to a maximum of 5 per cent 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 operationalising 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. National Credit Guarantee Trustee Company Limited (NCGTC) will operate the scheme.
In 2016, Prime Minister Narendra Modi launched the Startup India Action Plan to lay the foundation of government support, schemes and incentives envisaged to create a vibrant startup ecosystem in the country. The Action Plan envisaged a credit guarantee scheme to catalyse entrepreneurship through credit to innovators and encourage banks and other member institutions in the ecosystem for providing venture debt to startups.
A dedicated credit guarantee for DPIIT-recognised startups will address the issue of unavailability of collateral-free loan and enable 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 Indian startup ecosystem the best in the world.
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