Credit Guarantee Scheme for Startups

Recently, vide notification dated 6^th October 2022, the Ministry of Commerce and Industry notified the ‘Credit Guarantee Scheme for Startups. The broad objective of the ‘Credit Guarantee Scheme for Startups’ is to provide a guarantee to finance eligible startups up to a specified limit against the credit instruments extended by the Member Institutions. The said notified ‘Credit Guarantee Scheme for Startups’ (CGSS) is taken up and briefly explained in the present article.

Eligibility criteria of the borrower under ‘Credit Guarantee Scheme for Startups –

The startups willing to borrow under CGSS need to satisfy the following mandatory eligibility criteria –

The startup should be recognized by the Department for Promotion of Industry and Internal Trade (i.e., DPIIT);
The startup should have reached the stage of a stable revenue stream amenable to debt financing;
The startup should not be in default to any lending/ investing institution;
The startup should not be classified as Non-Performing Asset (NPA) as per RBI guidelines;
The startup’s eligibility criteria should be certified by the member institution for guarantee cover.

Eligibility criteria of lending/ investing institutions under ‘Credit Guarantee Scheme for Startups –

The eligibility criteria for the lending/ investing institutions under CGSS are highlighted hereunder –

Scheduled commercial banks;
Financial institutions;
RBI registered specific Non-Banking Financial Companies (NBFCs);
SEBI registered Alternative Investment Funds (AIFs).

Guarantee and ceiling limit thereof under ‘Credit Guarantee Scheme for Startups –

The credit guarantee cover available under CGSS will be on any of the following basis –

Transaction-based guarantee covers; and
Umbrella-based guarantee cover.

Importantly, Alternative Investment Funds are not eligible to avail of transaction-based guarantee cover under CGSS. Both the cover i.e. transaction-based and umbrella based are briefly explained hereunder. Notably, the maximum ceiling on guarantee cover per borrower under CGSS shall not exceed INR 10 Crores.

Transaction-based Guarantee cover –

Period of guarantee cover under transaction-based cover –

Begin from the date of payment of the guarantee fee; and
Shall run through the agreed period/ tenure of the loan/ debit facility.

The extent of guarantee cover under transaction-based cover – The trust will provide guaranteed coverage in the following manner –

Particulars	Details
To the extent of 80% of the amount in default	If the original loan sanction amount is up to INR 3 Crores
To the extent of 75% of the amount in default	If the original loan sanction amount is above INR 3 Crores and up to INR 5 Crores
To the extent of 65% of the amount in default	If the original loan sanction amount is above INR 5 Crores

Notably, the above limit is subject to a maximum of INR 10 Crore per borrower.

Umbrella-based Guarantee cover –

Here, the cover will be based on ‘Pooled Investment in Startups’. Notably, the term ‘Pooled Investment in Startups’ means a cumulative investment in DPIIT-recognized Startups during the life of the fund.

Period of guarantee cover under umbrella-based cover –

Begin from the date of payment of commitment charges; and
Shall run through the life of the Venture Debt Fund (VDF).

The extent of guarantee cover under umbrella-based cover –

The trust will provide guarantee covers up to lower of the following –

Actual losses; or
Up to a maximum of 5% of the pooled investment on which cover is taken from the fund in Startups.

Notably, the above limit is subject to a maximum of INR 10 Crore per borrower.

Management of ‘Credit Guarantee Scheme for Startups –

The entire CGSS will be managed by –

Management Committee;
Risk Evaluation Committee.

The basic functioning of both Committees is explained hereunder –

Management Committee –

It will be constituted by the Department for Promotion of Industry and Internal Trade (i.e., DPIIT);
It will oversee the affairs of the Trust;
It will be responsible for reviewing, monitoring, and supervising the functioning of the Trust;
The structure of the Management Committee will be –
- Chairperson – Secretary DPIIT;
- Member – Additional Secretary & Financial Advisor, DPIIT; Additional Secretary or Joint Secretary (Startups), DPIIT; and Joint Secretary, Department of Financial Services; and
- Member Secretary – Chief Executive Officer, NCGTC.

Risk Evaluation Committee –
- It will be constituted by the Department for Promotion of Industry and Internal Trade (i.e., DPIIT);
- It will have to report to the Management Committee;
- It will be a risk evaluation body;
- The members of the Risk Evaluation Committee will consist of retired bankers, credit guarantee experts, rating agencies, venture debt specialists, etc.