In the wake of PM Narendra Modi’s Startup India Action Plan, the government has now moved a step closer to its credit guarantee scheme. The government has proposed the disbursement of $760K (INR 5 Cr) collateral free loan to the startups.
The scheme will be functional under the supervision of the Department of Industrial Policy and Promotion, after Cabinet approval.
As stated by an ET report, “The credit guarantee scheme would help the flow of venture debt from the formal banking system. The government will provide up to 80% risk cover for collateral-free credit given by banks to startups.”
Startup ecosystem stakeholders such as venture capitalists, angel investors and startups have also been invited to suggest ways of increase availability of credit for startups.
Credit Guarantee Fund For Startups: A Brief Overview
The credit guarantee scheme was announced on January 16, 2016, as part of Startup India Action Plan, with a budget allocation of INR 2,000 Cr – to be disbursed in four tranches of INR 500 Cr in four years.
The initiative aims to catalyse entrepreneurship by providing credit to innovators across all sections of society, specifically the underserved including Scheduled Castes and Scheduled Tribes and women entrepreneur. The credits were proposed to be processed through the National Credit Guarantee Trust Company (NCGTC)/SIDBI.
The scheme also intended to work towards overcoming traditional Indian stigma associated with failure of startup enterprises in general. The ultimate goal is to help with the flow of venture debt from the formal Banking System and provide an easy access to startup capital.
A month later, in February 2016, the government also came up with a uniform definition of startups to clear the confusion. As per the prescribed definition, an entity is a ‘Startup’ if:
- It is less than 5 years old, from the date of inception/registration
- Incorporated as either a Private Limited Company or a Registered Partnership Firm or a Limited Liability Partnership.
- Turnover for any fiscal year has not exceeded INR 25 Cr.
- Entity should not have been formed by splitting up or reconstruction of a business already in existence.
- Working towards innovation, development, deployment or commercialisation of new product, processes or services driven by technology or intellectual property.
As mentioned on the Startup India portal, 592 entities have gained the ‘Startup’ status. The entire list can be accessed here. However, the Startup India Action Plan status report (till February 16, 2017) reveals that out of 1662 applications received, 636 have been recognised as the Startups.
While we continue to dig more on the actual status of selected startup entities, let’s have a look on the importance of credit guarantee scheme, other measures taken to boost the startup ecosystem, and the deformities in the system.
The Importance Of Government-Backed Loans
As Dr. Som Singh, Co-Trustee & Director, Centre for Entrepreneurial Excellence (CEE), stated in an earlier statement, “VCs are reliant on individuals or international banks to pool in money, form a corpus, and then disburse the money. Additionally, VCs only fund tech, product-based companies. On the other hand, banks are a great alternative because they are less invasive than VCs.”
She further added, “Because they are backed by the government, chances of getting a loan-based on your credit history increases multi-fold. Finally, in the case of a loan from banks, they do not ask for a stake. All you have to do is pay the principal amount back plus the interest. Thus, raising money from banks is a great choice.”
Dr. Som Singh also shared with us a few other methods to raise collateral-free loans. These are:
SIDBI Growth Capital and Equity Assistance: The funds can be used for marketing, brand building, creation of distribution network, technical know-how, R&D, and software purchase.
SIDBI Revolving Fund for Technology Innovation (SRIJAN Scheme): This plan provides financial assistance to MSMEs towards development, upscaling etc.
Lean Manufacturing Scheme for MSMEs: This plan helps to enhance the manufacturing competitiveness of micro, small and medium enterprises (MSMEs) by applying lean techniques to identify and eliminate waste in the manufacturing process.
Credit Linked Capital Subsidy Scheme (CLCSS): This scheme is for technology upgrading of Micro and Small Enterprises for purchase of plant & machinery.
Other Measures Taken So Far
One of the majorly-hyped initiatives under Startup India Action Plan is the establishment of ‘Funds of Funds’ with a corpus of INR 10,000 Cr. Apart from this, there were several other measures taken to boost up startup ecosystem of the country such as Startup India hub, tax, and patent benefits, Atal Innovation mission and more. As of February 16, 2017, the government claims of the following achievements in the startup India action plan status report disclosed:
- The Startup India hub has been able to handle 32,587 queries and facilitate more than 190 startups by providing advisory on business plans, pitching support, etc.
- A four-week free Learning & Development programme covering six modules was launched. 14,692 applicants signed up for the course and 17,105 hours of content was consumed within two weeks of launch.
- 257 Tinkering Labs have been approved and six challenges have been shortlisted under the Atal Grand Challenge.
- Of the 3,658 applications received, 15 new incubators would be set up, while six existing incubators have been sanctioned a scale-up grant. The aim was to set up 35 incubators.
- Of the seven research parks to be set up, one was already functional at IIT Kharagpur, while a new research park has been established at IIT Gandhinagar. For this purpose, the DST has also sanctioned INR 90 Cr and disbursed an initial installment of INR 40 Cr.
- INR 475 Cr for 2016-18 has been earmarked under the Ucchatar Aavishkar Yojana (UAY) and 92 research proposals from IITs have been approved under the same.
The Deformities Cited In the Execution of Startup India Action Plan
Initially announced with high expectations, eventually, the Startup India plan seems to have become a set of futile promises. Like recently, a Business Standard report revealed that out of $1.4 Bn (INR 10,000 Cr) corpus, to date, only $848K (INR 5.66 Cr) has been disbursed.
Earlier in March 2016, when applications were invited from the startups to receive funding under the Startup India action plan, only one out of the 250 startup applications was approved, till June 2016.
Not only this, even after a year of announcement, debates are still on regarding the feasibility of the plan.
As Shailesh Vikram Singh, Executive Director at Seedfund Ventures, stated, “Startups/investors are loaded with paper work at every step and every paper work results in extra costs as well as breeding of corruptions.” He further added, “Startups as defined by an inter-ministerial group, approval from a government approved incubator, tax exemptions, State-sponsored Fund of funds – all these measures will not reduce but increase interaction and intervention by State multi-fold, and will create multiple layers of fault-lines and defeat the very purpose of startup policy as well as act against the vision of PM Modi.”
Also, the approval of only 636 applications (assuming this to be the right figure) out of 1662, indicates how cumbersome the processes are. Instead of dwelling upon unique ideas, and how well they can be executed, the startups are busy collecting valid documents in order to avail the benefits under the Startup action plan.