Department for Promotion of Industry and Internal Trade (DPIIT) announces new credit guarantee scheme for startups

The Department for Promotion of Industry and Internal Trade (DPIIT) has notified a credit guarantee scheme for startups for providing collateral-free loans.

It would provide collateral-free debt funding up to Rs 10 crore for start-ups extended by commercial banks, non-banking financial companies (NBFCs) and Securities and Exchange Board of India (Sebi)-registered alternative investment funds (AIFs).

The credit guarantee cover under the Scheme 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.

In a notification, the Department for Promotion of Industry and Internal Trade (DPIIT) said that loan/debt facilities sanctioned to an eligible borrower on or after October 6 would be eligible for coverage under the scheme.

“The central government has approved the ‘Credit Guarantee Scheme for Startups (CGSS) to provide credit guarantees to loans extended by member institutions (MIs) to finance eligible borrowers being startups,” it said.

To be eligible for this program’s benefits, startups must be recognized, have a stable revenue stream that is amenable to debt financing as determined by audited monthly financial statements covering 12 months, be in good standing with all lending and investing institutions, and not be considered a non-performing asset as defined by the RBI.

The umbrella-based guarantee cover will provide a guarantee to venture debt funds (VDFs) registered under AIF regulations of Sebi (a growing segment of funding in the Indian startup ecosystem), because of the nature of funds raised by them and debt funding provided by them.

The extent of transaction-based cover will be 80 percent of the amount in default if the original loan sanction amount is up to Rs 3 crore, 75 percent if the original loan sanction amount is above Rs 3 crore, and up to Rs 5 crore or 65 percent of the default amount if the original loan amount is above Rs 5 crore.

Additionally, it stated that lending institutions must examine credit applications using prudent banking judgment, apply business judgment and due investigation to choose commercially viable ideas, and manage borrower accounts with typical banking prudence.

Along with institutional mechanisms for operationalizing the scheme, DPIIT will also constitute a Management Committee and a Risk Evaluation Committee to review, supervise, and maintain operational oversight of the scheme.

To mobilize domestic capital for Indian startups, CGSS will complement the existing schemes under the Startup India initiative such as the Fund of Funds for Startups and Startup India Seed Fund Scheme.

The framework of CGSS has been prepared in extensive consultations with the stakeholders over the years with line ministries, banks, NBFCs, venture debt funds, academia, and experts from the startup ecosystem.