The government's new Credit Guarantee Scheme for Startups (CGSS) will provide collateral-free loans up to Rs 10 crore.
The Union government has announced the establishment of Credit Guarantee Scheme for Startups (CGSS). Through this scheme, the startups will get collateral-free loans up to Rs 10 crores. It will also help mitigate the risks for lending institutions.
In a press release, the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry said that loan/debt facilities sanctioned to eligible borrowers on or after 6 October, would be eligible for coverage under the scheme. It will be applicable to loans extended by Scheduled Commercial Banks, Non-Banking Financial Companies and Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds (AIFs).
The DPIIT further stated that the credit guarantee cover under the CGSS would be capped at Rs 10 crore or the actual outstanding credit amount, whichever is less. The cover is transaction-based, for single borrowers, and umbrella-based, for a group of borrowers.
This scheme comes amid a massive funding decline for Indian startups. As per a Tracxn report, Indian startups raised $ 752 million in September 2020, which is 83% lesser than the same period last year.
“Our quarterly startup report confirms that India is currently experiencing a funding slowdown which is expected to continue for the next 12-18 months and the effects of the funding slowdown are expected to intensify going forward. Executives across the world anticipate a recession in the near future and are making preparations to cut costs,” said Neha Singh, Co-Founder of Tracxn to YourStory.
In this scenario, a funding boost for startups is much required amidst the liquidity crunch.
“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 to Mint.
DPIIT will be constituting a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, supervising and overseeing the scheme. The National Credit Guarantee Trustee Company Limited (NCGTC) will be operating the Scheme.
The DPIIT in a press release said, “A dedicated credit guarantee for DPIIT recognised startups will address the issue of unavailability of collateral-free loans and enable the flow of financial assistance to innovative startups through their journey to becoming full-fledged business entities.”
Edited by Yoshita Rao, Feature Image Courtesy Shutterstock