Credit Guarantee Scheme for Start-ups notified by the Department for Promotion of Industry and Internal Trade

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Credit Guarantee Scheme for Start-ups notified by the Department for Promotion of Industry and Internal Trade

Garima Prakash

@GarimaP

October 17, 2022

Public Policy

226

Start-ups typically don’t have any collateral to pledge to avail loans, thus they end up relying on cash-flow and receivables to avail loans. The high default-risk means that the loans are difficult to avail, or they come at a high interest rate. In a first of its kind scheme, the Credit Guarantee Scheme for Startups (CGSS) notified by the Department for Promotion of Industry and Internal Trade (DPIIT) aims to address this challenge. The scheme is available to 80,727 DPIIT registered start-ups (as on October 14, 2022). The scheme aims to make it easier for the start-ups to get loans of up-to INR 10 crore from commercial banks, venture debt funds and Non-Banking Financial Companies (NBFC). The scheme does this by guaranteeing repayment of the loan to the lender in the event of a default by startups, in exchange of a fee.

Unique Features:

This is the only credit guarantee scheme for DPIIT recognised start-ups. As against this, the existing credit guarantee scheme for MSMEs can be availed by startups if they are registered as a Micro, Small or Medium Enterprise (MSME).[i]
The CGSS extends cover to venture debt funds registered with the Securities Exchange Board of India (SEBI). As against this, the existing credit guarantee scheme for MSMEs is applicable only to scheduled commercial banks, Small Industries Development Bank of India (SIDBI), rural banks etc.
The CGSS permits a guarantee cover of up to INR 10 crores per borrower as compared to the scheme for MSMEs where the cover is up to 1.5 crores.

Eligibility:

Eligible startup:
- Start-up should be recognised by DPIIT.
- Start-up should have reached a stage of stable revenue stream, as assessed from audited monthly statements over a 12-month period.
- Start-up should not in default to any lending/investing institution and not classified as a non-performing asset.
- The eligibility of the borrower start-up should be certified by the Member Institution (MI) for the purpose of guarantee cover.

MI means an eligible lending/investing institution. It includes:
- Scheduled Commercial Banks and Financial Institutions
- Reserve Bank of India (RBI) registered NBFCs having a rating of BBB and above as rated by external credit rating agencies accredited by RBI and having minimum net-worth of INR 100 crores.
- SEBI registered Alternative Investment Funds (AIFs).

Responsibilities of MI include:
- Evaluate credit applications using prudent banking judgement.
- Exercise the same diligence in recovering the dues and safeguarding the interest of the Trust as it might have exercised if no guarantee had been furnished by the Trust.

Guarantee under the scheme:

Guarantee Fees:
- For transaction-based guarantee (i.e., for loans) = A guarantee fee must be paid by MI, at the rate of 2% per annum (pa) of the disbursement/outstanding amount; 1.5% in case of units from North-East or women entrepreneurs.
- For umbrella-based guarantee (i.e., for venture debts) = A guarantee fee must be paid upfront by MI, in the form of an Annual Commitment Charge of 0.15% pa of the proposed pooled investment in start-ups. Thereafter, 1% of the pooled investment in start-ups must be paid as a one-time fee, at the time of invocation of guarantee claim. The guarantee cover will commence from the date of payment of commitment charges and shall run through the life of the venture debt fund, provided the borrowers being covered are eligible for coverage under the scheme and commitment charges are paid from the first year of operations of venture debt fund annually till its closure.

Types of guarantees:
- Transaction-based guarantee cover means guarantee cover obtained by the lending/investing institution on single eligible borrower basis. This cover is mainly designed for loans by banks, NBFCs etc.
- Umbrella-based guarantee cover means guarantee cover obtained by the lending/investing institution for a group of eligible borrowers. This cover is mainly designed for venture debt funds.

Types of credit eligible for guarantee cover: working capital, subordinated debt/mezzanine debt, debentures, optionally convertible debt and other fund-based or non-fund-based facility which has crystallised as a debt obligation.

Guarantee cover:
- For transaction-based, cover is to the extent of 65-80% of the default amount (depending on the original loan sanction amount), subject to a maximum of INR 10 crores per borrower.
- For umbrella-based, cover is to the extent of actual losses or up to 5% of pooled investment on which cover is being taken (whichever is lower), subject to a maximum of INR 10 crores per borrower.
- Only the unsecured part of a credit will be covered.

Management of the Trust:

The National Credit Guarantee Trustee Company Ltd. (NCGTC) will manage the day-to-day operations of the CGSS as the Trustee.
Management Committee to be constituted by DPIIT to overlook the affairs of the trust.
Composition of the Management Committee - DPIIT Secretary, DPIIT Additional Secretary, DPIIT Joint Secretary (startups), Department of Financial Services Joint Secretary, Chief Executive Officer of NCGTC, experts from the ecosystem as may be nominated by DPIIT.

For more information or discussion on this topic, kindly write to garima@nasscom.in or tejasvi@nasscom.in with a copy to policy@nasscom.in.

[i] https://msme.gov.in/sites/default/files/CredirGuranteeFundScheme_1.pdf.

Start-ups credit credit guarantee DPIIT

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Garima Prakash

Manager, Public Policy and Government Affairs

Reach out to me for all things policy about e-commerce, international trade, export controls, start-ups and fintech