Startups are a key source of innovation, employment, and economic growth in any country. Even in India, startups have emerged as the forces behind innovation-led new product development, digitisation, and solving many social and economic issues. To acknowledge the importance of startups, the government of India has taken a number of initiatives to encourage and support the ecosystem.
The government started Startup India in 2016, a scheme aimed at developing a strong process of business growth by providing financial, regulatory, and infrastructure services. These initiatives involve ease of registration of businesses, tax benefits, speedy patent registration, funding through schemes like the Fund of Funds for Startups (FFS) and the Credit Guarantee Scheme for Startups (CGSS), and ease in complying with regulations.
In addition, ministries and departments have launched sectoral schemes with a specialization in technology, industry, health care, agriculture, and services. The scheme of Startup India Seed Fund Scheme (SISFS) and startup policies promoted by the state government complement these efforts.
By offering such general support, the government is seeking to cut down barriers for future entrepreneurs, stimulate growth driven by innovation, and place India among the leading startup destinations in the world. Through such an all-around strategy, Indian startups can improve their competitiveness both at the domestic and international levels.
Credit Guarantee Scheme for Startups
Credit Guarantee Scheme for Startups (CGSS) is a government financial scheme launched by the Government of India under the Startup India Action Plan. The basic aim of the scheme is to provide collateral-free credit to eligible startups by financing credit guarantees to banks and other financial institutions so that they can provide credit without conventional security.
National Credit Guarantee Trustee Company (NCGTC), the implementing agency of CGSS, provides a guarantee cover of up to ₹10 crore per borrower. Both fund-based and non-fund-based credit facilities under this program include working capital loans, term loans, and letter of credit guarantees.
To be eligible, startups should have DPIIT recognition and take financing from a Member Lending Institution (MLI) registered in the system, including scheduled commercial banks, non-bank financial institutions, and others. The loan account of the startup should be categorised as standard when guarantee cover is issued.
The process of registration involves the MLI qualifying for a loan from the startup, making an application for guarantee cover via the CGSS website, paying guarantee and service charges, and getting guarantee cover from NCGTC. The process alleviates credit risk for lenders while assuring entrepreneurs of essential financial aid.
CGSS plays an important role in promoting entrepreneurship, innovation, and employment generation through the augmented access to formal credit channels for startup groups. It also supports the development of a strong startup ecosystem in India through reduced reliance on personal or promoter collateral to invest in a business.
Eligibility Criteria Under CGSS
- Startup Recognition: The applicants must be DPIIT-recognised startups under the scheme of Startup India. A proper recognition certificate should be submitted.
- Business Activity: Startups must lay their focus on research and development activities, product development, and product enhancement, as well as scalable business models for the generation of employment and income-generating streams.
- Credit Facility Limit: Startups are encouraged to avail credit facilities of up to ₹10 crore per borrower. This includes options like working capital loans, term loans, and other funding or non-fund-based credit support.
- Who Can Apply: CGSS supports startups that show financial stability and a promising business idea. Before offering collateral-free funding, the lending institution carefully assesses the startup’s business potential and financial health.
- Who Is Not Eligible: Startups won’t qualify for CGSS if they fall under the Non-Performing Asset (NPA) category as per RBI guidelines, have a history of willful defaults, or are involved in speculative or legally non-permitted activities.
- Member Lending Institutions (MLIs): The startup is required to raise funds from banks, NBFCs, or financial institutions which are listed as MLIs under CGSS.
- No Existing Guarantee Cover: No other existing credit guarantee scheme should have covered the credit facility.
Registration Process Under CGSS
1. Confirm Eligibility
Before commencing the registration process, ensure the startup is recognised by DPIIT (Department for Promotion of Industry and Internal Trade). Confirm that the loan value is below the ₹10 crore limit. Ensure that the lending institution is a registered Member Lending Institution (MLI) with CGSS.
2. Approach a Member Lending Institution (MLI)
The startup must approach a bank, NBFC, or financial institution approved by CGSS. Present a loan application with required documents, business plan, and DPIIT recognition certificate.
3. Loan Assessment and Approval by MLI
The MLI evaluates loan applications for creditworthiness and viability. In case of approval, the MLI will sanction the financing for the startup.
4. MLI Applies for Guarantee Cover via the CGSS Portal
The MLI enters the lending facility on the CGSS online portal under the supervision of the National Credit Guarantee Trustee Company (NCGTC). Information of the borrower, such as name, loan value, tenor, and terms, is entered.
5. Signing of the Guarantee Agreement
The MLI and CGSS Trust sign a guarantee agreement. The MLI undertakes to pay the fees stipulated and comply with the scheme guidelines.
6. Payment of Guarantee Fee and Annual Service Charge
MLI makes a one-time payment of the guarantee fee based on the amount of the credit facility and an annual service charge as per CGSS regulations.
7. Issuance of Guarantee Cover
Once all the information is verified and the fee is received, the CGSS Trust issues a credit guarantee cover to the MLI. This cover protects the MLI in case of defaults by the startup borrower.
8. Disbursal of the Loan to the Startup
After establishing the guarantee cover, the MLI disburses the loan amount to the startup as per the terms agreed to.
9. Post-Registration Compliance
The MLI must keep the CGSS Trust informed about the status of the loan account at regular intervals. The startup is expected to maintain repayment schedules and other regulatory compliance.
Benefits of CGSS
The Credit Guarantee Scheme for Startups drives India’s startup ecosystem to new levels by not only fulfilling the financial needs of startups but also acting to fulfil greater economic objectives like innovation, entrepreneurship, and job generation. It does this through providing collateral-free credit guarantees, mitigating the risk for the lender, and increasing the availability of capital. The advantages of CGSS make it a wonderful resource for young entrepreneurs and start-ups seeking to propel their businesses in a sustainable manner.
1. Collateral-Free Credit for Startups
One major Indian startup challenge is the lack of collateral to obtain loans. The CGSS allows startups to obtain loans without providing any security or third-party guarantee. This feature allows early-stage and growth-stage businesses to access traditional financing sources that they would otherwise be disqualified from based on their asset-light business model.
2. Encourages Lending by Financial Institutions
The CGSS is such a scheme which is not just a government-backed guarantee to financial institutions such as banks, non-banking finance companies (NBFCs), and alternative investment funds (AIFs), but it also mitigates the lenders’ risk exposure and encourages them to give loans to companies that otherwise would have been considered high-risk based on traditional lending criteria. The lenders’ confidence is boosted by the government’s guarantee of repayment.
3. Streamlined Access and Inclusion
In contrast with conventional channels of financing that are protracted and involve stringent procedures and eligibility standards, CGSS is a more inclusive and startup-friendly facility. DPIIT-approved startups with eligibility for the scheme are made available this facility without having to go through stringent collateral and credit rating requirements, making it easier.
4. Job Creation Boost
Startups are crucial contributors to job creation. Generation and growth of employment opportunities are witnessed due to startups being offered access to capital with ease through the CGSS. Startups are able to grow, employ personnel, and spearhead the development of new employment opportunities, thereby enabling the government to achieve its overall economic development aspirations.
5. Flexible Coverage Across Sectors
The scheme does not limit startups based on sector or nature of business. Provided a startup is identified by DPIIT and fulfils the conditions of eligibility, it can utilise credit under CGSS, irrespective of whether it deals in IT, manufacturing, agriculture, logistics, fintech, or social enterprises.
6. Encouragement of Entrepreneurship and Innovation
CGSS actively encourages entrepreneurship and innovation in India by making finance readily accessible. Start-ups from sectors such as education, healthcare, renewable energy, and technology can utilise this funding in creating new products, raising their capacity, and competing at home and abroad.
7. Reduction of Financial Burden
Since startups need not post third-party collateral or guarantees, they are able to keep their money for business expansion and not invest assets or cash as collateral against lending. This brings liquidity and operational flexibility in business to founders and management teams.
8. Alignment with Government Startup Programs
CGSS is complemented by other government programs like Startup India registration, Stand-Up India, and MUDRA loans. It focuses on a concerted initiative by the Government of India to develop a startup ecosystem that supports startup development, innovation, and competitiveness.
Conclusion
The Credit Guarantee Scheme for businesses (CGSS) is one policy initiative that the Government of India has pursued to enhance access to credit by businesses without collateral.
Through offering an organised guarantee coverage to Member Lending Institutions, this scheme minimises lenders’ credit risk while simultaneously encouraging financial institutions to lend to new businesses.
CGSS overcomes one of the biggest challenges facing startups, access to finance, where there is no traditional collateral, and fosters innovation, entrepreneurship, and employment generation all over the country.
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