Credit Guarantee Scheme for Startups

For any entrepreneur, getting a business off the ground is not an easy feat. Two of the main reasons why startups have found it so difficult to even open their doors are the lack of enough finance when needed and the banks’ high-risk opinion of this market. In order to provide the startup business in India the much-needed boost it needs, the government has unveiled a unique programme called the Credit Guarantee Scheme for Startups, often known as the Credit Guarantee Fund Scheme or (CGSS). With a commitment of Rs. 2000 crore, this initiative, which is a spinoff of the Prime Minister’s Startup India strategy, would allow startups to get loans without collateral for beginning businesses.

Let us see what exactly Credit Guarantee Scheme for Startups is in more detail.

Historical Background of Credit Guarantee Scheme for Startups

Lending banks who are participants in this programme will provide the guarantee to qualified companies that have received Department of Industrial Policy and Promotion (DIPP) recognition.  Every included portfolio in the guarantees provided by CGSS will contain ten or more startup loans for the financial year.  Every qualified case would be given credit guarantees of up to Rs. 5 crores, including any assistance provided in the form of working capital, venture capital, optionally convertible debt, debentures, term loans, etc. Up to a maximum of Rs. 150 lakh, this programme would grant credit at a rate of up to 75%. Micro businesses looking for loans under Rs. 5 lakh may receive up to 85% of their sought credit amount.

For NER and MSMEs owned or controlled by women, a loan of up to 80% will be offered (including Sikkim). For MSME retail trade, a guarantee cover of up to 50% of the sum, subject to a cap of Rs. 50 lakh, would be made available.

Credit Guarantee Scheme for Startups

The program’s goal is to provide credit guarantees for loans made by Member Institutions (MIs) to qualified borrowers who are startups. Financial intermediaries (banks, financial institutions, and non-banking financial companies) that engage in lending or investing and meet the qualifying requirements outlined in the Scheme are considered MIs.

This plan would aid in supplying start-ups with crucial debt financing without the use of any collateral. The Scheme would provide transaction-based and umbrella-based credit guarantee coverage. The maximum exposure to any one instance would be Rs. 10 crores, or the actual amount of unpaid credit, whichever is smaller. Regarding transaction-based guarantee cover, the MIs receive the guarantee cover on the basis of a single qualifying borrower.

Transaction-based guarantees will encourage banks and NBFCs to provide money to qualified startups. Venture Debt Funds (VDF) registered under the Alternative Investment Funds (AIF) regulations of the Securities and Exchange Board of India (SEBI) would receive a guarantee from the umbrella-based guarantee cover.

Aim of Credit Guarantee Scheme for Startups

The aim of the Credit Guarantee Scheme for Startups is to assist companies that have been severely damaged by the epidemic and will be further harmed by the increasing interest rate environment when cash is unlikely to be readily available to new entrepreneurs.

Pre-requisites of Credit Guarantee Scheme for Startups

The following are the Pre-requisites of the Credit Guarantee Scheme for Startups:

• Aadhaar will be required for KYC for any resident partners or directors, whilst non-resident partners or directors would just be required to provide their passport numbers.
• Alternate Investment Funds (AIFs), scheduled commercial banks/financial institutions, or NDFCs registered with the RBI are examples of lending institutions that may be participants of this programme.
• CGSS shall operate in accordance with the conditions of the National Credit Guarantee Trust Company’s trusteeship management (NCGTC).
• Without requesting security or guarantee from a third party, member lending institutions would provide up to Rs. 500 lakh in guarantees to qualified startups.
• A Management Committee will oversee and manage this Credit Guarantee Scheme for MSME (MS).
• The Risk Evaluation Committee (REC), which will be created for this purpose, will address and deal with conflicts of interest.

Eligibility Criteria under Credit Guarantee Scheme for Startups

The Credit Guarantee Scheme for Startups has the following two eligibility criteria:

• Borrower Eligibility Criteria under the Credit Guarantee Scheme for Startups
• Eligibility Criteria for Lending/Investing Institutions under the Credit Guarantee Scheme for Startups

Let us discuss them one by one in detail.

• Borrower Eligibility Criteria under the Credit Guarantee Scheme for Startups
  Startups interested in borrowing through CGSS must meet the following essential qualifying criteria:
  • The Department for Promotion of Industry and Internal Trade (DPIIT) should acknowledge the startup.
  • The startup should have reached the point where it has a reliable income stream that can be financed with loans.
  • The startup should not be in arrears with any financing or funding institution.
  • According to RBI criteria, the startup should not be classed as a non-performing asset (NPA).
  • The member institution should certify the startup’s qualifying conditions for guarantee cover.

• Eligibility Criteria for Lending/Investing Institutions under the Credit Guarantee Scheme for Startups
  The following are the eligibility requirements for lending/investing institutions under the CGSS:
  • Commercial banks that are listed;
  • Institutions of finance;
  • The Reserve Bank of India (RBI) has registered particular Non-Banking Financial Companies (NBFCs).
  • Alternative Investment Funds with SEBI registration (AIFs).

The Benefits of the Credit Guarantee Scheme for Startups

The following are the benefits of the Credit Guarantee Scheme for Startups:

• To be qualified for the loan guarantee, the startup must be recognized by the DIPP (Department of Industrial Policy and Promotion).
• The guarantees will be issued in the form of portfolios, each of which will include at least ten startup loans for a given fiscal year.
• The credit guarantee will include any additional support (venture capital, working capital, debentures, optionally convertible debt, term loans, etc.) and will be granted to each qualifying company up to Rs. 5 crores.
• The system provides the following coverage:
  • The plan would provide credit to cover up to 75% of the credit limit up to Rs. 150 lakh.
  • Where micro-enterprises are awarded loans of less than Rs. 5 lakh, the plan covers up to 85% of the credit facility.
  • MSMEs run or managed by women, and all loans made to the NER (North-East Region), including Sikkim, shall be eligible for up to 80% of the credit facility.
  • This programme would cover 50% of the loan for MSME retail trade, subject to a limit of Rs. 50 lakh.

Takeaway

CGSS would supplement current schemes under the Startup India initiative, such as the Fund of Funds for Entrepreneurs and the Startup India Seed Fund Scheme, with the goal of mobilizing domestic funding for Indian startups.

The CGSS framework was developed after extensive talks with stakeholders over the years, including line ministries, banks, NBFCs, venture loan funds, academics, and professionals from the startup ecosystem. The initiative will serve as a crucial facilitator and risk mitigation mechanism for lending institutions, allowing companies to get collateral-free finance.

Connect to our Experts at Legal Window if you want more clarifications regarding Credit Guarantee Scheme for Startups.