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The Government of India recently gave the start-up sector a much-needed boost by introducing the Credit Guarantee Scheme for Startups. The scheme is part of the Startup India action plan. It would allow firms to borrow money without putting up any security.

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What is a Credit Guarantee Scheme for Startups?

With a commitment of Rs. 2000 crore, the Indian government has created the Credit Guarantee Scheme for Startups (CGSS). The scheme allows startups to obtain loans or credits without having to put up any collateral. The Prime Minister first suggested the scheme as part of his Startup India action plan. The credit guarantee system offers portfolio-based guarantees. Under the scheme, each portfolio contains at least 10 qualified startup loans throughout the course of a fiscal year. 

The scheme provides credit guarantees of up to Rs. 5 crores per case. Such a credit includes term loans, working capital, and other forms of assistance. A member lending institution extends this loan to a qualified borrower, which is often a Startup. Moreover, the Startup is recognized by the Department of Industrial Policy and Promotion.

Features of Credit Guarantee Scheme for Startups

  • To be qualified for the credit guarantee, the startup must be recognized by the DIPP (Department of Industrial Policy and Promotion).
  • The guarantees will be offered in the form of portfolios. Furthermore, each portfolio includes at least 10 starting loans for a given fiscal year.
  • The credit guarantee will cover any other assistance (venture capital, working capital, debentures, optionally convertible debt, term loans, etc.). It will be up to Rs. 5 crores for each eligible company.
  • The scheme provides the following coverage
  • The scheme will provide credit to cover up to 75% of the credit limit, up to a maximum of Rs. 150 lakh. Where micro-enterprises are given loans of less than Rs. 5 lakh. Here, the scheme covers up to 85% of the credit facility.
  • The scheme shall cover to the extent of up to 80% of the credit capacity in exceptional cases. Such cases are MSMEs run or controlled by women, as well as any loans issued to the NER (North-East Region), including Sikkim. 
  • This scheme will cover 50% of the amount of credit for MSME retail trade, up to a limit of Rs. 50 lakh.

Definition of a Startup as per Department of Industrial Policy and Promotion

  1. From the date of incorporation, the company’s existence and operations should not exceed ten years.
  2. The company type is incorporated as a Limited Liability Partnership, a Registered Partnership Firm, or a Private Limited Company
  3. The company should not have had an annual turnover of more than Rs. 100 crore in any of the financial years after incorporation.
  4. An entity should not have been created by severing or reorganising an existing firm.
  5. The company should work on developing or improving a product, method, or service, and/or have a scalable business model with a high potential for income and employment generation.

Prerequisites for Credit Guarantee Scheme for Startups

  • To comply with KYC requirements, Aadhaar is required for all resident partners or directors. Additionally, the Passport number for all non-resident partners or directors is a mandatory requirement.
  • The National Credit Guarantee Trust Company’s management will oversee the scheme’s operation. It also determines the conditions and restrictions for it as it sees fit.
  • The member lending banks would provide a guarantee of up to Rs. 500 lakh to startups that are eligible under this scheme. There is no requirement for a collateral security deposit.
  • The Management Committee will oversee and monitor the Credit Guarantee Scheme for MSMEs.
  • A Risk Evaluation Committee will be established to investigate and resolve any potential conflicts of interest that may develop in any given situation.

Lending Institutions Eligible for CGSMSE

  1. Scheduled commercial banks including private, public, and foreign banking institutions
  2. Regional Rural Banks under the “Sustainable Viable” category recognized through the NABARD
  3. The scheme has 133 eligible lending institutions registered as MLI under the credit trust scheme.
  • 26 Public Sector Banks, 21 Private Sector Banks, 73 Regional Rural Banks, and 4 Foreign Banks
  • Delhi Financial Corporation, Kerala Financial Corporation, and Jammu & Kashmir Development Finance Corporation Ltd.
  • Export-Import Bank of India
  • The Tamil Nadu Industrial Investment Corporation Ltd.
  • National Small Industries Corporation (NSIC), North Eastern Development Finance Corporation (NEDFI)
  • Small Industries Development Bank of India (SIDBI)

Responsibilities of Lending Institutions

  1. When evaluating loan applications and selecting commercially viable projects, the lender will exercise business discretion.
  2. In addition, the lender will keep a close check on the borrower’s account.
  3. The lender will maintain the condition of the securities purchased from the borrower.
  4. The lender will ensure that the guarantee claim is sent to the Trust in the correct format. Any defaults in the borrower’s account will be reported to the Trust immediately.
  5. While the Trust reimburses the lender for the guarantee claim, the lender is still responsible for collecting the full amount owed from the borrower.
  6. The lending institution must adhere to the Trust’s loan recovery guidelines, which are updated on a regular basis.
  7. If the Trust had not offered a guarantee, the lender would be obligated to use the same vigilance in loan recovery as it would if the Trust had not provided a guarantee.

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