India’s credit guarantee scheme for startups can play a vital role in economic growth

Accordingly, with a view to building a strong ecosystem for nurturing innovation and encouraging investments in it, Prime Minister Narendra Modi launched the Startup India initiative in 2016.

The government unveiled a plan comprising 19 action points across areas such as “simplification and handholding”, “funding support and incentives” and “industry-academia partnership and incubation.” 

In the last 10 years, over 120,000 startups have been registered in India, making it the third largest startup ecosystem and home to the third highest number of startup unicorns (privately held ventures with valuations of over $1 billion), rising from just one in 2011.

Also Read: Eight years of Startup India: Is it really a runaway success?

The emerging trends in this rapidly evolving entrepreneurial ecosystem include (a) rising gender parity, (b) a mindset shift towards entrepreneurship and (c) digital public infrastructure that aids informal entrepreneurship. 

In terms of the broader business environment beyond technology, the gender gap between male and female entrepreneurship is narrowing. 

A confluence of government efforts and press coverage has helped bring about a wide mindset change from people being job seekers to job creators. 

Starting with school education, efforts in recent years have focused on creativity and innovation. Digital payment interfaces (QR codes) are being used to pay instead of cash by businesses in even remote locations. 

For India to realize its Viksit Bharat ambition of development by 2047, it needs to democratize entrepreneurship to reach more regions of the country.

The major components of “funding support and incentives” are (a) Fund of Fund Scheme (FFS), (b) Startup India Seed Fund Scheme (SISFS), and (c) Credit Guarantee Scheme for Startups (CGSS). 

The FFS, with a corpus of ₹10,000 crore, facilitates the equity funding needs of startups. 

The SISFS, with an outlay of ₹945 crore, aims to provide financial assistance in the form of grants to startups for proof of concept, prototype development, product trials, market entry and commercialization. 

The CGSS, with a corpus of ₹1,000 crore, enables startups to raise debt by providing guarantees to their lenders.

Also Read: Should taxpayers fund credit guarantee for start-ups?

Lately, venture capital (VC) funding has slowed as funders have turned more cautious and selective. Exit options for VCs tend to prove costly for startups. 

The banking sector too perceives high risk of mortality associated with startups, coupled with lack of collateral. Hence, risk mitigation through a credit guarantee structure arose as a demand. 

As loans from banks offer startups a cheaper way to meet their long-term capital needs, the CGSS launch was a welcome government move.

It came into effect on 6 October 2022 and backstops debt funding up to ₹10 crore per borrower, enabling startups to access much-needed collateral-free debt. 

This scheme’s key features include: (a) a completely digital and automated process; (b) member lending institutions (MLIs) checking if eligibility parameters are met; (c) collateral free loans to startups recognized by the Department for Promotion of Industry and Internal Trade; and (d) lending through two models, namely (i) transaction-based on a single borrower basis for banks/non-banking financial companies (NBFCs)/financial institutions (FIs), and (ii) umbrella lending on a portfolio basis for alternate investment funds (AIFs). 

The scheme catalyses entrepreneurship by providing credit support to innovators and encouraging financial institutions to provide early-stage debt funds.

Also Read: India’s venture capital firms are finding that leaner might be better

The scheme’s MLIs are scheduled commercial banks, financial institutions, NBFCs registered with the Reserve Bank of India with a minimum net worth of ₹100 crore and credit rating of BBB and above, and AIFs registered with the Securities and Exchange Board of India.

As on 31 December, the total number of lenders registered under the scheme stood at 28, which includes public sector banks, private sector lenders, all India financial institutions, foreign banks, NBFCs, small finance banks and AIFs. 

Cumulatively, 257 loans worth ₹601.86 crore have been guaranteed under the scheme so far and employment generation through these startups stands at 20,871 individuals. Women borrowers get special benefits.

The scheme covers 18 states across India, including Assam. 

More than 50 startups are located in Tier II (including Lucknow, Nashik, Jaipur, Cochin and Indore) and Tier III (including Akola, Medchal, Tonk and Rangareddy) cities, helping new businesses across the country. 

The list of borrowers supported include 19 export-oriented units and 19 import substitutive units. 

As many as 123 and 84 beneficiaries are from the manufacturing and services sectors, respectively. 

Major segments represented include IT (37), capital goods (26), textiles (22) and consumer services (20). 

As many as 17 startups have promoters from disadvantaged groups. Of the total portfolio, around 75% of the loans are for working capital support, helping startups meet their operational needs. 

This credit guarantee scheme, with customized changes over time, can help revolutionize India’s startup financing ecosystem.

These are the authors’ personal views.

The authors are, respectively, chief executive officer, National Credit Guarantee Trustee Company Limited (NCGTC); and director, ministry of finance as well as NCGTC. 

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