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MUST READ: ALL ABOUT START-UPS: https://www.iasgyan.in/daily-current-affairs/start-ups-in-india

 

Context

• The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry has notified the establishment of the Credit Guarantee Scheme for Startups (CGSS).

 

CGSS

• Lack of adequate funding when required, and the high-risk perception of the banks towards this segment, has most often been the two major reasons why startups have found it so difficult to even set up shop.
• The Government of India, to give a much-needed boost to the startup industry, hence notified a special scheme, known as the Credit Guarantee Scheme for Startups or Credit Guarantee Fund Scheme or CGSS. An offshoot of the Startup India plan this scheme, will enable startups to obtain collateral-free loans for starting business.
• CGSS is aimed at providing credit guarantee up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers Startups as defined in the Gazette Notification issued by DPIIT and amended from time to time.

Details

• In this, credit guarantees to loans are extended by Scheduled Commercial Banks, Non-Banking Financial Companies and Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds (AIFs). 
• The credit guarantee cover under the Scheme would be transaction based and umbrella based. The exposure to individual cases would be capped at Rs. 10 crore per case or the actual outstanding credit amount, whichever is less.

Transaction-Based Guarantee Cover

• In respect of transaction-based guarantee cover, the guarantee cover is obtained by the MIs on single eligible borrower basis.
• Transaction based guarantees will promote lending by Banks/ NBFCs to eligible startups. The extent of transaction-based cover will be 80% of the amount in default if the original loan sanction amount is up to Rs. 3 crore, 75% of the amount in default if the original loan sanction amount is above Rs. 3 crore, and up to Rs. 5 crore, and 65% of the amount in default if the original loan sanction amount is above Rs. 5 crore (up to Rs. 10 crore per borrower).

 

Umbrella-Based Guarantee Cover

• The umbrella-based guarantee cover will provide guarantee to Venture Debt Funds (VDF) registered under AIF regulations of SEBI (a growing segment of funding in Indian startup ecosystem), in view of the nature of funds raised by them and debt funding provided by them.
• The extent of umbrella-based cover will be the actual losses or up to a maximum of 5% of Pooled Investment on which cover is being taken from the fund in eligible startups, whichever is lower, subject to a maximum of Rs.10 crore per borrower.

 

Role of DPIIT

• Along with institutional mechanisms for operationalizing the Scheme, DPIIT will be constituting a Management Committee (MC) and a Risk Evaluation Committee (REC) for reviewing, supervising and operational oversight of the Scheme.
• The National Credit Guarantee Trustee Company Limited (NCGTC) will be operating the Scheme.

Significance

• A dedicated credit guarantee for DPIIT recognised startups will address the issue of unavailability of collateral free loan and enable flow of financial assistance to innovative startups through their journey to becoming full-fledged business entities.
• The Scheme further reiterates Government’s focus towards promoting innovation and fostering entrepreneurship for making Indian startup ecosystem the best in the world.

National Credit Guarantee Trustee Company Ltd (NCGTC) National Credit Guarantee Trustee Company Ltd (NCGTC) is a private limited company incorporated under the Companies Act 1956 on March 28, 2014, established by the Department of Financial Services, Ministry of Finance, as a wholly owned company of the Government of India, to act as a common trustee company for multiple credit guarantee funds. Credit guarantee programmers are designed to share the lending risk of the lenders and in turn, facilitate access to finance for the prospective borrowers. The common architecture of NCGTC has been designed to handle multiple guarantee programmes under a single umbrella organization. The intent of NCGTC is to manage multiple guarantee schemes as part of a larger financial inclusion programme of the government covering different cross-sections and segments of the economy like students, micro entrepreneurs, women entrepreneurs, SMEs, skill and vocational training needs, etc. Presently, there are five dedicated credit guarantee Trusts under the Management of NCGTC viz. Credit Guarantee Fund Scheme for Educational Loans (CGFEL), Credit Guarantee Fund Scheme for Skill Development (CGFSD), Credit Guarantee Fund Scheme for Factoring (CGFF), Credit Guarantee Fund for Micro Units (CGFMU) and Credit Guarantee Fund for Stand Up India (CGFSI), Emergency Credit Line Guarantee Scheme (ECLGS), Credit Guarantee Scheme for MFIs (CGSMFI), Loan Guarantee Scheme for COVID Affected Sectors (LGSCAS).

 

DPIIT The Department for Promotion of Industry and Internal Trade (DPIIT) is a central government department under the Ministry of Commerce and Industry in India. It is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives. While individual administrative ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for the overall industrial policy. It is also responsible for facilitating and increasing the foreign direct investment (FDI) flows to the country. The department in its current form came into being in 2019, when the erstwhile Department of Industrial Policy & Promotion was renamed to Department for Promotion of Industry and Internal Trade (DPIIT) after internal trade was added to its mandate.

 

https://pib.gov.in/PressReleasePage.aspx?PRID=1865796