Government of India has prepared a Credit Guarantee Scheme for startups under which Startups will soon be able to take loans of up to Rs 5 crore without collateral. Notably, in financial terms -- Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses.

Basically, the corpus of the fund will be guaranteed by the government for startups and thus help flow of venture debt from banks to startups.

The government will provide up to 80% risk cover for collateral-free credit given by banks to startups.

The scheme is awaiting cabinet approval and is likely to become functional soon under the supervision of the Department of Industrial Policy and Promotion (DIPP).

If everything fall in right place this scheme could help address the most basic challenge of startups: access to capital & initial funds.

DIPP had invited suggestions from stakeholders including startups, venture capital funds and angel investors on ways to increase availability of credit for startups.

The Startup Action Plan announced by Prime Minister Narendra Modi in January 2016 mentioned that a credit guarantee mechanism through the National Credit Guarantee Trust Company or the Small Industries Development Bank of India (SIDBI) will have a budgetary corpus of Rs 500 crore per year for the next four years.

To recall, amid many schemes and plans for startups in last one year since Startup India announcement only one startup has been given benefit of 10,000 startup fund of funds by SIDBI -- Rs 5.66 crore has reached to just one new venture, said a reply to an RTI.

Notably, in December 2016 Prime Minister Narendra Modi had already announced the enhancement of credit guarantee scheme for small, medium and micro enterprises (SME) for loans up to Rs 2 crore.

And before this, in September 2016, Haryana govt. had announced that it would give collateral-free loans up to Rs 1 crore to startups in the state however no further updates or progress has been heard since then.

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