A credit guarantee scheme from the government will soon enable startups to avail loans up to Rs.5 crore, without collateral. The proposal is awaiting approval from the cabinet and will most likely be functional soon. The Department of Industrial Policy and Promotion will supervise the scheme.
The programme will help in addressing the most common challenge faced by startup companies in the country, i.e., the availability of capital. The corpus of the fund will be guaranteed by the government as well.
The credit guarantee scheme is expected to improve the flow of venture debt from the banking system. The government has proposed to offer up to 80% risk cover for loans (that are free of collateral) provided by banks to startups. Suggestions have been invited from stakeholders such as angel investors, venture capital funds, and startups on how the availability of credit for startups can be increased.
In January 2016, the Prime Minister had announced the Startup Action Plan. This scheme indicated that a credit guarantee mechanism is being envisaged through Small Industries Development Bank of India or National Credit Guarantee Trust Company with an annual fund corpus of Rs.500 crore each year for the following four years.
This fund was envisioned to leverage the reach of the credit structure to the underserved sectors of the country, such as women entrepreneurs, Scheduled Tribes, and Scheduled Castes. Startups were also expected to meet the defined criteria to access the benefits offered by the Startup India Action Plan in 2016.
In the budget for the financial year 2017-18, the government has relaxed tax for startups, allowing companies that were created after 31st March, 2016 to benefit from a 3-year tax holiday during the first seven years. Earlier, this provision was only for the first 5 years of existence of the company.
The government is also in discussion with public sector units, so that they do not exclude startups from their procurement tendering process on the basis of lack of experience. Additionally, the department is keeping track of the disbursal of funds for startups by SIDBI.