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Govt Notifies Credit Guarantee Scheme for Startups (CGSS)

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

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

Scheme to act as a key enabler and risk mitigation measure for lending institutions, enabling collateral free funding to startups

The Credit Guarantee Scheme for Startups (CGSS) has been established by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, to provide credit guarantees for loans made by Scheduled Commercial Banks, Non-Banking Financial Companies, and Alternative Investment Funds registered with the Securities and Exchange Board of India (SEBI) (AIFs).

The Department for Promotion of Industry and Internal Trade (DPIIT) indicated loans/debt facilities sanctioned on or after October 6 will be covered.

Read also – [Funding alert] Vanity Wagon Raises $2 mn in Pre-Series A Funding

Credit Guarantee Scheme for Startups provides credit guarantee up to a specific limit against loans made by Member Institutions (MIs) to qualifying borrowers, namely Startups as defined in DPIIT’s Gazette Notification and revised from time to time. The Scheme’s credit guarantee is transaction- and umbrella-based. Individual case exposure is capped at Rs. 10 crore or the outstanding credit amount, whichever is smaller.

In respect of transaction-based guarantee cover, the guarantee cover is obtained by the MIs on 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 guarantee to Venture Debt Funds (VDF) registered under AIF regulations of SEBI (a growing segment of funding in 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.

Read also – [Funding alert] AgeTech Startup Sarathi Healthcare raises Rs 1 Cr seed funding from ah! Ventures, others

On 16 January 2016, Prime Minister Narendra Modi launched Startup India Action Plan to develop a strong startup environment in the country. The Action Plan envisioned a Credit Guarantee Scheme to incentivize banks and other ecosystem members to provide venture debt to companies.

A credit guarantee for DPIIT-recognized entrepreneurs would solve the lack of collateral-free loans and help creative startups become full-fledged businesses. The Scheme reaffirms the government’s commitment to boosting innovation and entrepreneurship to make India’s startup ecosystem the finest in the world.

Credit Guarantee Scheme for Startups will supplement Fund of Funds for Businesses and Startup India Seed Fund Scheme to mobilise domestic finance for Indian startups.

The Credit Guarantee Scheme for Startups framework was established with input from line ministries, banks, NBFCs, venture loan funds, academics, and startup ecosystem professionals. The Scheme will let lending institutions provide collateral-free funding to businesses.

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