The union government announced on Friday the creation of the Credit Guarantee Scheme for Startups (CGSS) to increase the accessibility of collateral-free loans to startups amid tightening liquidity conditions in the nation.
This is occurring as funding for Indian startups has drastically decreased this year. According to some estimates, funding for startups sharply decreased, from $4.6 billion in January 2022 to $885 million in August.
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According to a statement from the ministry of commerce and industry, the credit guarantee cover under the scheme would be “transaction based” and exposure to individual cases would be capped at 10 crore rupees per case or the actual outstanding credit amount, whichever is less.
“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.
The National Credit Guarantee Trustee Company Limited (NCGTC) will run the scheme, it was further stated, and in addition to institutional mechanisms for operationalizing the Scheme, DPIIT will establish a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, overseeing, and operational oversight of the Scheme.
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“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 further added that collateral fee credit scheme is a much needed intervention and would help the startup ecosystem in the country.
CGSS would be applicable to loans provided by SEBI-registered Alternative Investment Funds, Scheduled Commercial Banks, and Non-Banking Financial Companies (AIFs).
