DPIIT notifies establishment of credit guarantee scheme for startups
- ByStartupStory | November 7, 2022
Providing credit guarantees to loans extended by banks, non-banking financial companies, and Sebi-registered alternative investment funds is the purpose of the Credit Guarantee Scheme for Startups (CGSS), which has been notified as being established by the Department for Promotion of Industry and Internal Trade (DPIIT) (AIFs).
The credit guarantee that would be provided under the CGSS would be transaction-based and umbrella-based. The purpose of the credit guarantee would be to provide a guarantee of credit up to a specified limit against loans that would be extended by member institutions (MIs) to finance eligible borrowers, such as startups. The Ministry of Commerce and Industry issued a statement in which it said that the government’s “exposure to individual instances will be restricted at Rs 10 crore per case or the actual overdue credit amount, whichever is less.”
It went on to say that in the case of a transaction-based guarantee cover, the MIs get the guarantee cover on the basis of a single qualified borrower. Lending by banks and NBFCs to qualifying startups would be encouraged as a result of the transaction-based guarantees.
According to the statement made by the Ministry of Finance, “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).”
Due to the nature of the funds collected by them and the debt financing that they offer, the umbrella-based guarantee cover would give a guarantee to venture debt funds (VDFs) registered under the AIF rules of Sebi (a rising category of investment in the Indian startup ecosystem).
According to what was said there, “The amount of umbrella-based insurance shall be the actual losses or up to a maximum of 5 per cent of pooled investment on which cover is being obtained from the fund in qualified startups, whichever is lower, subject to a maximum of Rs 10 crore per borrower.”
In addition to the institutional mechanisms that will be used to operationalize the scheme, the DPIIT will be forming a management committee (MC) and a risk evaluation committee (REC) to provide review, supervision, and operational oversight of the scheme. These committees will work in conjunction with the institutional mechanisms that will be used to operationalize the scheme. The National Credit Guarantee Trustee Company Limited (NCGTC) is going to be in charge of running the programme.
The Prime Minister of India, Narendra Modi, initiated the “Startup India Action Plan” in the year 2016, with the intention of laying the groundwork for governmental assistance, programmes, and incentives that would be necessary to establish a thriving startup ecosystem in the nation. The Action Plan envisioned a credit guarantee programme as a way to incentivize banks and other member institutions in the ecosystem to provide venture finance to startups. This would be accomplished by giving credit to innovators, which would stimulate entrepreneurial activity.
In order to solve the problem of the lack of accessibility to unsecured loans, a dedicated credit guarantee for innovative startups that have been recognised by DPIIT will be implemented. This will make it possible for innovative startups to receive financial assistance as they work toward becoming fully-fledged businesses. The programme reaffirms the government’s commitment to supporting innovation and entrepreneurship as a means of elevating the quality of the startup ecosystem in India to the position of finest in the world.
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