“Government Expands Credit Guarantee Scheme for Startups to Boost Innovation and Capital Mobilization”

The Government of India has recently notified the expansion of the Credit Guarantee Scheme for Startups (CGSS), which aims to improve capital mobilization and provide enhanced financial support to startups. The expansion increases the ceiling on the guarantee cover for loans, encourages innovation, and reduces the risk for financial institutions lending to startups. This move is set to strengthen India’s startup ecosystem and contribute to its vision of becoming an innovation-driven economy.

Why in News?

This expansion is significant as it comes in the wake of India’s growing startup ecosystem, with a focus on enhancing access to credit for startups in innovative sectors. The revised scheme, with a higher loan guarantee ceiling and reduced fees for certain sectors, seeks to address financing gaps and encourage more lenders to support early-stage, high-risk startups. Additionally, it aligns with the government’s broader agenda of fostering self-reliance and innovation through initiatives like ‘Make in India’.

Key Details of the Expansion

• Increased Guarantee Cover: The ceiling on guarantee cover per borrower has been increased from Rs. 10 crore to Rs. 20 crore.
• Loans up to Rs. 10 crore: 85% of the amount in default will be covered.
• Loans above Rs. 10 crore: 75% of the amount in default will be covered.
• Reduction in Guarantee Fees: The Annual Guarantee Fee (AGF) for startups in 27 Champion Sectors has been reduced from 2% to 1% per annum. Champion Sectors are those identified under the ‘Make in India’ initiative, focusing on strengthening manufacturing and service sectors in India.
• Boost to Innovation and Financial Flow: With these changes, financial institutions will be more inclined to offer loans to startups, reducing the perceived risks of lending. This will lead to increased fund flow, supporting research, development, and cutting-edge innovation.

Objectives of the Scheme

• Catalyzing Innovation: The expanded scheme is designed to support innovation-driven startups by making funding more accessible.
• Reducing Financial Barriers: By providing guarantees against default, the scheme helps startups access collateral-free loans.
• Encouraging Lenders: By reducing the risk involved in lending to startups, the scheme aims to encourage more financial institutions to step forward with credit support.

Background of the Credit Guarantee Scheme for Startups (CGSS)

• The scheme was launched by the Government of India on October 6, 2022, under the Department for Promotion of Industry and Internal Trade (DPIIT).
• It provides collateral-free debt funding to startups through loans, venture debt, and working capital arrangements.
• The objective is to enhance access to finance for startups, especially those in the early stages of development.

Significance of the Expansion

• The expansion is in line with the government’s goal to create a vibrant and self-reliant startup ecosystem.
• It directly supports India’s vision of becoming a leader in innovation-driven economic growth.
• The scheme is expected to reduce financial barriers, leading to a more diversified startup landscape in India, particularly in emerging sectors.