Collateral free funding – a reality for Indian entrepreneurs: Credit Guarantee Scheme for Startups
The Indian startup ecosystem continues to evolve in tandem with market needs and commercial developments, and the Government of India’s unparalleled support towards this ecosystem is a clear step in the right direction. As a country that adds over 80 startups every day, India is home to over 88,000 startups and counting. However, progress does not come without its own set of hindrances.
Apart from the several managerial and regulatory challenges, one of the biggest problems faced by startups is easy access to early-stage debt to finance their capital requirements. Traditional lending institutions, such as commercial banks, rely on the same old mandate to facilitate funding for startups. Prerequisites such as promising credit history, established reputation and most importantly, the requirement of collateral, are expectations that most startups by default cannot cater to. With the practical implications of such challenges hampering startups in raising debt; there has been a requirement to facilitate this process for budding startups looking for growth and expansion.
With an aim to simplify and ease the process, DPIIT (Department for Promotion of Industry and Internal Trade), Ministry of Commerce and Industry 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). CGSS is aimed at providing credit guarantee up to a particular limit to finance eligible borrowers i.e., eligible startups against loans extended by Member Institutions (MI).
In terms of how a guarantee will be issued, an eligible startup approaching the MI will be evaluated on the basis of checks and balances put in place by the MI. If approved, the guarantee cover under CGSS shall be issued automatically upon meeting the required eligibility parameters, which must be ensured by the MI.
For a startup to be eligible for this scheme, it must -
- Be a DPIIT-recognised startup
- Not be in default to any lending/investing institution and not be classified as Non-Performing Asset as per guidelines of the Reserve Bank of India (RBI)
- Have reached the stage of stable revenue stream, as assessed from audited monthly statements over a 12-month period.
The scheme is expected to kickstart a new chapter in nurturing the startup ecosystem and facilitating ease of doing business and raising funding. The framework has been prepared after multiple deliberations by a panel of expert stakeholders from banks, NBFCs (Non-Banking Financial Companies), line ministries, Venture Debt Funds, startup founders, etc.
The credit guarantee cover under this scheme would be transaction as well as umbrella based. What does it mean for you or your startup? Let us understand:
- Transaction based guarantee cover: Under this cover, guarantee is provided to Member Institutions (MI) on a single borrower basis. The extent of the cover shall be 80% of the amount when loan sanctioned up to 3 Cr, 75 per cent of the amount when loan amount is between 3 and 5 Cr, 65 per cent of the amount when the amount of the load exceeds 5 Cr (and up to 10 Cr).
- Umbrella based guarantee cover: Under this cover, an overall guarantee is provided 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. Instead of providing guarantee case to case basis, the cover will provide an overall guarantee on a maximum of 5 per cent of the pooled investments.
The scheme is a part of the Startup India Action Plan, launched on 16th January 2016 by Prime Minister, Shri Narendra Modi. The Plan highlighted the requirement of a Credit Scheme to catalyse and promote entrepreneurship and facilitate provision of venture debt from banks and Member Institutions to startups. Watch the video here.
Notified by DPIIT in October of 2022, this Scheme is a step in the right direction, expected to revolutionise the collateral free funding mechanism for Indian startups. Read the official press release here.
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