The government has notified a credit guarantee scheme for start-ups (CGSS) under which lenders will extend collateral-free loans up to Rs 10 crore to each eligible borrower.
Loans or debt facilities sanctioned to an eligible start-up on or after October 6 can be covered under the scheme, the Department for Promotion of Industry and Internal Trade (DPIIT) said in a notification. The loans will be backed by sovereign guarantee.
The move is aimed at supporting start-ups that are hit hard by the pandemic and are now going to be impacted further by the rising interest rate scenario when liquidity is unlikely to be easily available to new entrepreneurs. Already, the government has rolled out the Rs 5-trillion Emergency Credit Line Guarantee Scheme (ECLGS) for Covid-hit businesses. The latest scheme, albeit for only start-ups, will complement the government’s efforts, through various programmes, to ensure smooth credit flow to businesses in the aftermath of the pandemic.
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The funds raised by Indian startups between January and September dropped 19% on year to $22 billion, according to Inc42’s Indian Startup Funding Report Q3 2022. Moreover, as analysts often say, most of the funds are cornered by start-ups with relatively sound footing. Over 75,000 start-ups that are recognised by the DPIIT can tap the scheme if they fulfil certain conditions.
The DPIIT-recognised startups that have attained stable revenue stream, as assessed from audited monthly statements over 12 months, and are amenable to debt financing will be eligible for such loans. However, they must not be in default to any lending/investing institution and must not have been classified as non-performing assets. Also, they must not have obtained benefits from any other guarantee scheme, according to the DPIIT notification.
The lenders that will provide the much-needed collateral-free debt funding to start-ups include financial intermediaries, such as banks, financial institutions, non-banking financial companies and alternate investment funds.
To implement the scheme, the government will set up a trust or fund with the objective of guaranteeing payment against default in loans. The Board of National Credit Guarantee Trustee Company will be the trustee of such a fund.
According to the notification, lenders will have to evaluate credit applications by using prudent banking judgement. They must use their business discretion and due diligence in selecting commercially-viable proposals and conduct the accounts of the borrowers with normal banking prudence. They also need to closely monitor the borrower account.
Further, the DPIIT will form a management committee to oversee the affairs of the trust.