New loan guarantee scheme for startups with ₹10 cr ceiling

Amid tightening liquidity conditions in the country, the union government on Friday notified the establishment of the Credit Guarantee Scheme for Startups (CGSS) to improve the availability of collateral free loans to startups.

This comes amid a steep decline in funding available for Indian startups this year. As per some estimates, funding for startups sharply dropped to $885 million in August compared to $4.6 billion in January 2022.

The credit guarantee cover under the scheme would be “transaction based” and exposure to individual cases would be capped at 10 crore per case or the actual outstanding credit amount, whichever is less, the ministry of commerce and industry said in a statement.

“The extent of transaction-based cover will be 80% of the amount in default if the original loan sanction amount is up to 3 crore, 75% of the amount in default if the original loan sanction amount is above 3 crore, and up to 5 crore, and 65% of the amount in default if the original loan sanction amount is above 5 crore (up to Rs. 10 crore per borrower),” the ministry said.

It added that along with institutional mechanisms for operationalizing the Scheme, DPIIT will be constituting a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, supervising and operational oversight of the Scheme and that the National Credit Guarantee Trustee Company Limited (NCGTC) will be operating the scheme.

“Amid the cash crunch, the biggest hurdle that a startup races up and falters against is the funding itself. The hostile response from banks who perceive startups as a high-risk proposition and the endless cycles of pitches to VCs or angel investors can also put off the most determined,” Arham Pratap Jain, Founder & CTO , Trucknetic said.

Jain added that collateral free credit scheme is a much needed intervention and would help the startup ecosystem in the country.

CGSS would be applicable on loans extended by Scheduled Commercial Banks, Non-Banking Financial Companies and SEBI registered Alternative Investment Funds (AIFs).

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