The Credit Guarantee Scheme for Startups has finally received the approval of the Central Government and is ready to serve aspiring entrepreneurs. It aims to render credit guarantees to loans extended by MIs (Member Institutions) to finance qualified startups. Let’s dive into the key aspects of Credit Guarantee Scheme for Startups and discover how beneficial it will be for eligible startups in India.
Who are Eligible to Apply for Credit Guarantee Scheme for Startups?
- DPIIT recognized startups.
- Startups with a stable revenue stream as justified by the audited monthly statements over a year, capable of debt financing
- Startups that are not earmarked by the lending/investing institution as credit defaulters
- Startups that are not classified as NPA or Non-Performing Asset as per the Reserve Bank Guidelines[1]
- Member institutions’ approved startups
Who can lend credit under Credit Guarantee Scheme for Startups?
According to the Credit Guarantee Scheme for Startups 2022, the following lending institutions can lend credibility to eligible startups across the country.
- Schedule Commercial banks and lending institutions
- RBI registered NFBCs or Non-Banking Financial Companies with a minimum net worth of Rs 100 crore and having BBB rating and above given by RBI accredited agency. If some institutions encounter a dip in their rating in the future, they will no longer remain eligible for further guarantee cover. However, once they manage to acquire the desired rating, they can continue granting the same.
- SEBI registered AIFs, i.e. Alternative Investment Funds.
Key Takeaways of Credit Guarantee Scheme For Startups 2022
Following are some key takeaways of the Credit Guarantee Scheme for Startups 2022:
- ​​The Board of National Credit Guarantee Trustee Company Limited will serve the role of a trustee under the scheme.
- The DPIIIT will set up a management committee to oversee the affairs of Trust and MIs to create a healthy environment for funding.
- Under no circumstance, the eligible lending partners ensure guarantee cover against the loan granted by them unless they have a trustee’s permission.
- The MI shall scrutinize credit applications by taking banking review into account. Also, they will keep a close eye on borrower accounts.
- The MIs shall prioritize the commercial value for proposals seeking financial aid.
- MIs must adhere to the Trustee’s directions for facilitating recoveries in the guarantee account.
- The credit recovery protocol to be followed by MIs should not fall outside the ambit of the Trustee’s directions.
- MIs must respect the interest of the Trust and the borrowers and should follow an underline protocol before ensuring the guarantee cover.
- The Trustee can inspect the copies of the book of account and records of MI and the borrower. Such inspection will be carried out by a designated officer.
- Under an umbrella-based guarantee, updates about the portfolio’s performance shall be shared by the Venture debt fund every quarter.
- The MIs shall share a Management Certificate with the Trust within three months of the close of the fiscal year. The said certificate should reflect the cumulative outstanding and outstanding Non-Performing Assets. Failure to do so can refrain them from extending the guarantee cover.
- The MI must share their effort about recovery and realizations with the Trustee, as and when demanded.
- The late recovery of credit and deferred payment to trust will be subjected to monetary penalties in the form of interest.
Norms around the Guarantee fee to be paid by MIs
Following are some norms around the Guarantee fee to be paid by MIs:
For Transaction-based guarantee cover:
- To secure the guarantee cover, the MIs shall pay AGF (Annual Guarantee Fee) of 2 percent of the outstanding/disbursement amount to the Trust from the date of CGDAN (Credit Guarantee Demand Advice Note) of the guarantee fee.
- For startups in Northeast regions and units handled by female entrepreneurs, the MIs shall pay AGF of 1.5 percent of the outstanding/disbursement amount to the Trust from the date of CGDAN, i.e. Credit Guarantee Demand Advice Note of guarantee fee.
- The estimation of upcoming AGFs would be based on the outstanding loan/venture debt at the commencement of the FY and additional grant made during the first and coming years out of the overall approved amount on a pro-rata basis.
- The commencement of the guarantee would come to life on the day when the MIs credit AGF’s proceeds to the Trust’s bank account.
- The AGF renewal would come into effect only after the MIs payout required amount to the Trust’s bank account.
For Umbrella-based guarantee cover:
- To secure the guarantee cover, the MI shall pay a fee in the form of ACC, i.e. Annual Commitment Charge of 0.15 percent of the intended pooled investment in the startup to Trust within thirty days from the date of CGDAN, i.e. Credit Guarantee Demand Advice Note of the commission charge. An additional guarantee fee should be paid on time whenever the proposed investment threshold is extended to what was proposed earlier.
- The estimation of imminent ACCs shall be based on the pooled investment in startups of VDF and for guarantee cover, MIs should pay the ACC within thirty days on or before Apr 30, of every year till the entire tenure of VDF. ACCs remitted by the Venture Debt Fund are non-refundable.
- Member institute shall pay one percent of the pooled investment as one-time guarantee fees at the time of request of a guarantee claim. If MI doesn’t entertain any claim, it shall pay 0.25 percent of the pooled investment as a guarantee of closure expenses within thirty days of the closure date of VDF.
Conclusion
Credit Guarantee Scheme for Startups 2022 can be a significant boost to the startup ecosystem. The scheme will expedite the influx of new business ideas that need funding to flourish. It’s a welcome step from GOI to provide much-needed financial bolster to financially aggrieved startups. The scheme has enough potential to create a viable and transparent funding environment for startups.
