India’s Startup ecosystem has grown significantly over the past decade, and a major factor contributing to this boom has been the government’s continued support in the form of financial schemes, policy support, and infrastructure initiatives. Of these, the Credit Guarantee Scheme for Startups (CGSS) is an important tool to empower Startups by providing access to collateral-free loans. The scheme enables financial institutions to provide guaranteed loans against default to eligible Startups, reducing risk for lenders and making it easier for entrepreneurs to secure the funds they need.

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What is the Credit Guarantee Scheme for Startups (CGSS)?

The Credit Guarantee Scheme for Startups (CGSS) was launched by the Government of India with the objective of promoting the growth of the Startup ecosystem by providing credit guarantees for loans extended by member institutions (MIs) to eligible Startups. The scheme is part of the government’s effort to meet the financial needs of Startups, which may not have enough collateral to secure loans from traditional lending institutions. The primary purpose of the CGSS is to offer a financial safety net for lenders, which encourages them to lend to Startups that may be considered high-risk due to a lack of assets or business track record. The scheme guarantees a portion of the loan, reducing the repayment risk for the lender and facilitating the flow of credit to Startups across various sectors.

Key Components of the Credit Guarantee Scheme for Startups (CGSS)

The components of the Credit Guarantee Scheme for Startups are:

1. Title and Date of Commencement: The scheme is known as the Credit Guarantee Scheme for Startups (CGSS), and it became effective from the date of notification by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India. The scheme is applicable to loans sanctioned on or after the date of the notification.

2. Objective of the Scheme: The main objective of the CGSS is to provide credit guarantees for loans given to eligible Startups, enabling them to access debt financing without the need to offer collateral. This guarantee cover will encourage financial institutions to lend to Startups with innovative ideas, boosting the growth of new businesses and boosting innovation in the economy.

3. Definitions: For the purpose of this Scheme:

• Trust or Fund means the Credit Guarantee Fund for Startups (CGFS) proposed to be set up by Government of India with the purpose of guaranteeing payment against default in loans or debt extended to eligible borrowers by eligible Member Institutions, managed by the Board of National Credit Guarantee Trustee Company Limited as the Trustee of the Fund.
• NCGTC means National Credit Guarantee Trustee Company Limited set up on March 28, 2014 by Government of India under the Companies Act 1956 to act as the Trustee to operate various Credit Guarantee Funds/Trusts, set up/to be set up by Government of India from time to time.
• Non-Performing Asset means an asset classified as a non-performing asset based on the instructions and guidelines issued by the Reserve Bank of India from time to time.
• Amount in Default means the loan amount outstanding in the loan account(s) of the borrower inclusive of accrued interest, as on the date of the account becoming NPA, or the date of lodgment of claim application whichever is lower or such other amount as may be specified by the Fund.
• Primary security in respect of a credit facility shall mean the assets (tangible and intangible) created out of the credit facility so extended and/or existing unencumbered assets (tangible and intangible) which are directly associated with the project or business for which the credit facility has been extended.
• Collateral security means the security provided in addition to primary security.
• Transaction based Guarantee Cover means guarantee cover obtained by the lending/investing institution on single eligible borrower basis.
• Umbrella based Guarantee Cover means guarantee cover obtained by the lending/investing institution for a group of eligible borrowers. 
• Lock in period - means the period during which no invocation of guarantee can be made.
• Repo Rate is the interest rate at which Reserve Bank of India (RBI) lends to commercial banks.
• Member Institutions (MI) means a financial intermediary (Banks, FIs, NBFCs, AIFs) engaged in lending/investing and conforming to the eligibility criteria duly approved under the scheme and as modified by the Trust, from time to time, and who have entered into an agreement with/submitted Undertaking to the Trust for availing the guarantee.
• Venture Debt Fund (VDF) means Debt Fund registered under Alternative Investment Fund (AIF) regulations of SEBI.
• Pooled Investment in Startups (PIS) by a VDF mean cumulative Investments in DPIIT recognized Startups during the life of a fund.
• Life of VDF means the period from the date of first Close (date of raising of first tranche of resources towards the Corpus) to the terminal date of VDF.
• Champion Sectors: The 27 Champion Sectors as identified by the Ministry of Commerce and Industry under the “Make in India” and any amendments thereof, from time to time.

4. Guarantee: The CGSS provides two types of guarantee covers:

• Transaction-Based Guarantee Cover: Applied to specific loans taken by individual Startups.
• Umbrella-Based Guarantee Cover: Applied to pooled investments made by venture debt funds (VDFs) in multiple Startups.

5. Miscellaneous Provisions: An important feature of the scheme is that member institutions (MIs) are required to submit annual reports and certificates to ensure compliance with the credit management policy. Any failure to submit these documents or to maintain the expected level of performance may result in penalties or disqualification for further guarantee coverage.

6. Returns and Inspections: The scheme provides member institutions with regular reports on their performance and allows the trust to inspect their records. The aim is to ensure transparency and integrity in the implementation of the plan, allowing for continuous monitoring and adjustment where necessary.

Also Read: Carbon Credit Trading Platform Market

Benefits of the Credit Guarantee Scheme for Startups

The benefits of this scheme include:

• Access to Collateral-Free Loans: CGSS provides Startups with access to loans without the need for collateral, helping them to focus on business growth rather than asset acquisition.
• Risk Reduction for Lenders: By guaranteeing a portion of the loan amount, the scheme reduces risk for financial institutions, encouraging them to support Startups with high potential.
• Fostering Innovation: By making it easier for Startups to access financing, the CGSS encourages innovation in sectors that require high upfront investment, such as technology, healthcare, and manufacturing.
• Fostering the Entrepreneurial Ecosystem: The scheme plays an important role in supporting the wider entrepreneurial ecosystem by facilitating financial inclusion and enabling Startups to scale faster.

Responsibilities of Member Institutions (MI) under the Scheme

Member institutions (MIs), including banks, financial institutions, NBFCs and AIFs, play an important role in the implementation of the CGSS. Their primary responsibilities include:

• Evaluation of Borrower Applications: MI should use practical credit management policy compliance to assess the viability of loan applications and ensure that borrowers meet eligibility criteria.
• Loan Monitoring: Once a loan is disbursed, the MI should monitor the borrower’s progress and financial health, ensuring that appropriate recovery actions are taken if necessary.
• Filing a Claim: In the event of a default, MI must file a claim with the trustee under the plan and follow the claims process, including keeping appropriate records and initiating legal recovery proceedings.
• Reporting of Defaults: Member institutions should notify the Trust of defaults and submit regular reports on loan performance, including details of NPAs and recovery efforts.

Eligibility Criteria for Borrowers and Lending/Investing Institutions

Eligibility criteria differ for borrowers and lending/investing institutions, but are:

Eligibility for Borrowers 

To qualify for the CGSS, the borrower (Startup) must meet the following requirements:

1. DPIIT Recognition: Under the prevailing gazette notifications, the Department of Industry and Internal Trade Promotion (DPIIT) is required to recognize the Startup.
2. No Default: The borrower should not be in default towards any lending institution and should not be classified as an NPA under RBI norms.
3. Certified by MI: A borrower’s eligibility must be certified by a member institution in order to qualify for guarantee cover.

Eligibility for Lending/Investing Institutions

Institutions eligible under the scheme include:

1. Scheduled Commercial Banks: Banks regulated by RBI.
2. Non-Banking Financial Companies (NBFCs): NBFCs registered with the RBI, having a credit rating of BBB or above, and having total assets of at least ₹100 crore.
3. Alternative Investment Funds (AIFs): Venture debt funds registered under SEBI regulations that invest in DPIIT-accredited Startups.

Claims Process

The claims process under the CGSS involves several steps:

1. Claim Invocation: The claim can be invoked only when the loan account becomes an NPA and the lock-in period of 12 months has elapsed.
2. Recovery Action: Before filing a claim, the MI should initiate recovery action under the applicable legal framework such as the IBC, SARFAIC, or DRT.
3. Claim Submission: Once recovery efforts are concluded, MI can file a claim with the trust. The claim must include all necessary documentation and evidence.
4. Claim Settlement: Once a claim is accepted, the trust will release 75% of the guaranteed amount within 60 days. The remaining 25% will be paid upon completion of the collection proceedings or debt write-off.

Also Read: MSME Loan Scheme 2025

Fee Structure

The fee structure under the CGSS is divided into two categories:

Transaction-Based Guarantee Cover

• Annual Guarantee Fee (AGF): The AGF is calculated based on the loan amount. The standard fee is 2% per annum, but fees have been reduced in areas such as North East Units, Women Entrepreneurs and Champion Areas.
• Payment Terms: The AGF is paid within 30 days of the Credit Guarantee Demand Advice Note (CGDAN).

Umbrella-Based Guarantee Cover

• Annual Commitment Fee (ACC): The ACC is 0.15% of the pooled investment in Startups and is paid upfront within 30 days of CGDAN.
• Call/Termination Charges: At the time of claim call, a charge of 1% of the pool investment is levied, while a charge of 0.25% applies if the guarantee is closed without a claim.

Management of the Scheme

The Management Committee (MC) oversees the scheme, which is responsible for reviewing the operational and financial performance of CGSS. The MC is chaired by the Secretary of DPIIT and comprises representatives from the Department of Financial Services, NCGTC and experts from the Startup ecosystem. In addition, the Risk Evaluation Committee (REC) assesses the scheme’s risk factors and ensures that it operates within a robust risk framework. The committee also evaluates conflicts of interest and ethical hazards to ensure plan integrity.

Conclusion

The Credit Guarantee Scheme for Startups (CGSS) plays an important role in supporting India’s Startup ecosystem. By providing credit guarantees for loans extended by member institutions, it helps Startups access much-needed capital while reducing the risk for lenders. With clear eligibility criteria, responsibilities for member institutions and a well-defined claims process, the scheme encourages more institutions to fund innovative businesses. For Startups looking to scale, CGSS offers an excellent opportunity to secure funding without the burden of collateral. Similarly, for lenders, the scheme provides a safety net, making it easier to take on high-risk borrowers and contribute to the growth of India’s entrepreneurial ecosystem. By aligning plan requirements and adhering to debt management policies, both borrowers and lenders can foster a thriving business environment that fosters innovation and economic growth in India.