Updated Credit Guarantee Scheme for Startups – Starting a new business often comes with significant challenges, especially in securing adequate financing. Many entrepreneurs struggle to establish businesses due to a lack of funds and the hesitation of banks to grant loans in high-risk situations. To address these challenges, the government has introduced an updated Credit Guarantee Scheme for Startups (CGSS) that allows eligible startups to access loans without the need for collateral. This article will explore the details of CGSS, including its requirements, benefits, and eligibility criteria.
Launch of the Credit Guarantee Scheme for Startups
The Credit Guarantee Scheme is orchestrated by the **Department for Promotion of Industry and Internal Trade (DPIIT)** under the Ministry of Commerce and Industry, which is responsible for fostering industrial development while aligning with national economic goals. DPIIT has rolled out this scheme to facilitate collateral-free loans for startups commencing from October 20, 2024. The central government has endorsed the CGSS to provide guarantees on loans availed by eligible startups through participating institutions.
Eligible startup companies must have established a steady income stream, evidenced by audited bank statements over a 12-month period, and should not be in default to any lending or investing entities, as per the Reserve Bank of India’s guidelines. The scheme covers a maximum guarantee of Rs 10 crore, provided that this amount is not secured under any other guarantee program.
Loan insurance coverage under this scheme will offer:
- 80% of the default amount for loans up to Rs 3 crore
- 75% for loans exceeding Rs 3 crore but within Rs 5 crore
- 65% for loans above Rs 5 crore, up to Rs 10 crore
Startup India Seed Fund Scheme
Objectives of the CGSS
The Credit Guarantee Scheme for Startups aims to enhance the domestic funding landscape for Indian startups as part of the broader Startup India initiative. Its primary purpose is to provide credit guarantees against loans extended to eligible startups by member institutions, thus fostering a supportive financial ecosystem for new businesses.
Key Features and Benefits of the CGSS
- Offers collateral-free financing to startups, aligning with the PM’s Startup India initiative.
- The scheme guarantees loans for companies approved by the DIPP.
- Provides portfolio-based guarantees for more than 10 startup loans every year.
- Guarantees up to 75% credit on loans up to Rs 150 lakh.
- Includes financial support of up to Rs 5 crores for eligible startups covering diverse funding forms such as cash flow, venture capital, and long-term debts.
- Ensures that 85% of microbusiness loan requests of Rs 5 lakh or less will be approved.
- Allows for up to 80% of loans for women-led startups and those in the Northeastern region (including Sikkim).
- Provides a 50% guarantee for MSME retail loans up to Rs 50 lakh.
Prerequisites and Required Documents for CGSS
- All resident partners or directors must possess an Aadhaar card; non-residents should provide a passport number.
- Participants may include Alternative Investment Funds (AIFs), scheduled commercial banks, and other RBI-registered financial institutions.
- CGSS will adhere to the guidelines set by the National Credit Guarantee Trust Company (NCGTC).
- Members provide guarantees of up to Rs 500 lakh to qualified entrepreneurs without requiring a third-party guarantee or collateral.
- A Management Committee will oversee the implementation of this MSME Credit Guarantee Scheme.
- The Risk Evaluation Committee (REC) will be responsible for resolving conflicts of interest.
Eligible Lending Institutions for CGSS
Only banks listed on the Government’s Official List of Commercial Lenders are eligible to provide loans under this scheme:
- Scheduled commercial banks
- Small Industries Development Bank of India
- Export & Import Bank of India
- North Eastern Development Finance Corporation
- Delhi Financial Corporation
- Kerala Financial Corporation
- National Small Industries Corporation
- J&K Development Finance Corporation Ltd
- Tamil Nadu Industrial Investment Corporation Ltd.
- AP State Financial Corporation
Credit Guarantee Fees Under CGSS
- The annual guarantee fee is set at 1.0% of the total loan amount extended.
- For women-led businesses, microenterprises, and those in the Northeastern region, a reduced guarantee fee of 0.75% applies to loans up to Rs 5 lakh and 0.85% for loans ranging from Rs 5 lakh to Rs 1 crore.