The union government announced on Friday the launch of the Credit Guarantee Scheme for Startups (CGSS) to increase the availability of collateral-free loans to startups amid tightening liquidity conditions in the nation.
This is happening as funding for Indian companies has drastically decreased this year. According to some estimates, funding for startups dramatically decreased, from $4.6 billion in January 2022 to $885 million in August.
The scheme's credit guarantee coverage would be "transaction-based” and exposure to individual instances would be limited to 10 crore rupees per case or the actual amount of outstanding credit, whichever is smaller, according to a statement from the ministry of commerce and industry.
“The amount of transaction-based cover will be 80% of the deferred amount if the original loan sanction amount is up to Rs. 3 crore, 75% of the deferred amount if it is above Rs. 3 crore, and up to Rs. 5 crore, and 65% of the deferred amount if it is above Rs. 5 crore (up to Rs. 10 crore per borrower)," said the ministry.
The National Credit Guarantee Trustee Company Limited (NCGTC) will run the scheme, it was further stated, and in addition to institutional mechanisms for operationalizing the Scheme, DPIIT will establish a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, overseeing, and operational oversight of the Scheme.
"In the middle of a liquidity crunch, the money itself is the largest obstacle that a company runs up and falls short of. Even the most committed individuals could be discouraged by the harsh response from banks that view startups as high-risk investments and the never-ending rounds of pitches to venture capitalists or angel investors, according to Arham Pratap Jain, founder, and CTO of Trucknetic.
Jain continued by saying that the collateral-free loan plan is a desperately needed intervention and will benefit the nation's startup culture. CGSS would be applicable to loans provided by SEBI-registered Alternative Investment Funds, Scheduled Commercial Banks, and Non-Banking Financial Companies (AIFs).
