Overview of Credit Guarantee Scheme for Start-Ups

India ranks as the world’s 3rd largest start-up ecosystem as well as a home to approximately 75,000 Startups. Currently, there are 105 unicorns, out of which 44 came in 2021 and 19 in 2022.

Department for Promotion of Industry and Internal Trade, commonly known as DPIIT, is a department under the Ministry of Commerce and Industry, working towards the promotion and acceleration of industrial development of the country through facilitating investment in new and upcoming technology, FDI and support balanced development of industries. 

DPIIT notified a new scheme on 6th October 2022, namely the Credit Guarantee Scheme for Start-Ups, which shall be discussed in this article to provide a better understanding of the same.

What is Credit Guarantee Scheme for Start-Ups?

The Credit Guarantee Scheme for Start-Ups aims to provide credit guarantees for loans without any collateral to the start-ups by the lending firms, i.e. Member Institutions (MI), wherein the exposure to individual cases shall be capped at Rs. 10 crores per case or the actual outstanding credit amount, whichever is less.

Which are the Eligible Start-ups under the Credit Guarantee Scheme for Start-ups 2022?

The credit guarantee scheme can be availed by start-ups that are –

• Recognised by DPIIT
• Successfully reached a secure stream of income which shall be measured by the audited bank statements over a period of one yr (12 months), being capable of debt financing.
• Not falling in the category of credit defaulters by the investing or lending institution or the classification of Non-Performing Assets (NPA) by RBI guidelines
• Approved by the Member Institutions (MI)

Which are the Eligible Lending Firms under the Credit Guarantee Scheme for Start-ups 2022?

The eligible lending firms are

• Lending Institutions and Schedule Commercial Banks
• NBFCs registered under RBI or the ones with a net worth of at least 100 Cr. along with BBB rating or above as provided by an agency accredited by RBI. It must ne noted that in case the NBFCs experience a dip in the rating, such NBFCs won’t be eligible for this scheme till the time it acquires the prescribed rating again
• Alternate Investment Funds registered under SEBI

In addition to this, there are certain banks that are on the official list of Commercial Lenders, which are

• Small Industries Development Bank of India
• EXIM Banks 
• 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

What are the Documents required for applying under Credit Guarantee Scheme? 

The essential documents for applying under the scheme are –

• Applicant’s Aadhar Card
• Income certificate
• Ration card
• GST details
• Income tax return
• Bank account details
• A recently clicked passport-size photo
• Bank account details

What is the Guarantee and Ceiling Limit under the Scheme?

The credit guarantee covered under the Credit Guarantee Scheme shall be provided on the following basis.

On the basis of Transaction

In order to avail the guarantee cover on the basis of transaction, the Member Intuitions are required to pay an Annual Guarantee Fee of 2% of the disbursement/ outstanding to the Trust from the date as specified in the Credit Guarantee Demand Advice Note (CGDAN)^[1] of the guarantee fee.

In case the start-up is situated in the North East Regions and  unit handled by female entrepreneurs, the Member Institutions must pay an annual guarantee fee of 1.5 % of the disbursement/ outstanding to the Trust from the date as specified in the Credit Guarantee Demand Advice Note (CGDAN) of the guarantee fee.

The estimate of the upcoming Annual Guarantee Fee would be on the basis of outstanding loan/venture debt at the time of starting of the financial year along with the additional grant made during the first and the upcoming yrs out of the

total approved amount pro-rata basis

The guarantee shall commence from the day when the Member Institutions shall credit the proceeds of the Annual Guarantee Fee to the bank account of the Trust 

Umbrella-Based Guarantee Cover

• To avail this type of guarantee cover, the Member Institutions will be required to make a payment of 0.15% of the Annual Commitment Charge of the Pooled Investment in Start-ups. However, if the proposed investment threshold shall be extended, the Member Institutions shall be required to pay an additional guarantee fee for the same.
• The Pooled Investment in Start-ups refers to the cumulative investment in the start-ups recognised by DPIIT during the life of the fund
• The Annual Commitment Charge shall be estimated on the basis of pooled investment in start-ups of the Venture Debt Fund (VDF). In order to avail the guarantee cover, the member Institutions are required to pay the fees within 30 days on or prior to 30th April every yr till the end of the tenure of Venture Debt Fund. It must be noted that the Annual Commitment Charge by Venture Debt Fund and  such charge is  non-refundable
• The Member Institutions must pay 1 % of the pooled investment as a one-time guarantee at the time of requesting a guarantee claim; however, if such institutions don’t entertain any claim, it shall be required to make a payment of 0.25% of the pooled investment in the form of guarantee of the closure expenses within 30 days of the closure date of Venture Debt Fund (VDF)
• Such guarantee shall cover the actual losses or upto 5% of the pooled investment on which cover is taken from the fund in Startups. 

However, the above limit shall be a maximum of INR 10 Crore per borrower.

Who shall manage the Credit Guarantee Scheme for Start-ups?

The following shall do the management of the scheme 

Management Committee 

The Management Committee shall be constituted by the DPIIT , which shall manage the affairs of the trust as well as its supervision, review and monitoring. 

 The Management Committee shall constitute the following members 

• The chairperson who would be the secretary of DPIIT 
• Member being the Financial Advisor and Additional Secretary 
• DPIIT Additional Secretary or Joint Secretary for Start-ups
• DPIIT; and Joint Secretary, Department of Financial Services; and
• Member Secretary – Chief Executive Officer, NCGTC.

Risk Evaluation Committee

 The Department for Promotion of Industry and Internal Trade, will constitute the Risk Evaluation Committee  which shall report to the Management Committee. The members of the Risk Evaluation Committee would consist of retired bankers, credit guarantee experts, rating agencies, and venture debt specialists, among others. 

Key Considerations Regarding the Credit Guarantee Scheme for Start-ups

The following must be noted while applying for the Credit Guarantee Scheme for Start-ups.

• The Member Institutions shall verify the  application under the credit guarantee scheme for start-up by taking into account the bank review along with vigilantly monitoring the accounts of the borrowers.
• The Member Institutes shall give priority to commercial value for proposals seeking financial aid.
• MIs are obligated to follow the directions prescribed by the trustees for the facilitation of recoveries in the guarantee account, and the credit protocol must not be outside the ambit of the directions of the trustee.
• The Trustee has the authority to inspect the  copies of books accounts and records of the member institutes as well as the borrower, and such inspection shall be conducted by a designated officer.
• The Venture Debt fund must share updates regarding the performance of the portfolios every quarter in the case of the umbrella guarantee scheme.

• The management certificate must be shared by the member institutes with the Trust within 3 months of the closing of the fiscal year, which must reflect the cumulative outstanding and outstanding NPA and failure in the same can lead to the non-extension of the guarantee cover.
• The member institutes must share efforts made by them regarding the recovery and realizations with the trustees when demanded by them.
• The delay in the credit recovery or deferred payment to the Trust shall attract monetary penalties by way of interest.
• The guarantees under this scheme shall be provided on the basis of portfolios where every portfolio shall consist of 10 or more start-up loans for every FY
• A credit of up to 75% shall be provided under the scheme  up to a limit of Rs.150 lakh

• Micro enterprises willing to obtain loans of an amount below Rs.5 lakh shall be offered up to 85% credit amount so requested by the borrower 
• A credit of up to 80% will be provided to MSMEs operated or owned by women and NER (including Sikkim).
• A guarantee cover of up to 50% of the amount, subject to a limit of Rs.50 lakh, will be offered for MSME retail trade.

Guarantee Period under CGSS

 The guarantee cover will be provided for the period agreed upon for the credit facility. For working capital, guarantee cover is provided for a block of 5 years. Along with GST @ 18% shall apply on banking services and products.  

Conclusion

Credit Guarantee Scheme for Startups 2022 can provide the much-required boost to the startup ecosystem and encourage start-ups  having  new business ideas requiring funding to flourish. It can be considered as an attempt of the Government of India towards providing financial assistance to the financially aggrieved startups together with creating a better funding environment for startups.

Read our Article: Guidelines for Credit Guarantee Scheme for Subordinate Debt