Startups need for no-dilution funding.
India’s startup ecosystem has expanded rapidly over the last decade, but debt financing remains a significant gap. Traditional lenders rely heavily on collateral, predictable cash flows, and proven track records—factors that most early-stage startups lack. As a result, startups often rely disproportionately on equity, which can dilute founders early.
To address this structural barrier, the Government of India introduced the Credit Guarantee Scheme for Startups (“CGSS”). The scheme aims to unlock collateral-free debt for eligible startups by sharing lender risk through a government-backed guarantee. Managed by the National Credit Guarantee Trustee Company Limited (“NCGTC”), the scheme is designed to bridge lenders’ risk aversion and startups’ need for timely working capital and growth capital.
A substantial revision to CGSS was announced in May 2025, increasing coverage limits and strengthening incentives.
Need for Credit Guarantee Scheme for Startups
Startups, especially technology startups, create intellectual property, create new technology platform, operate with untested business models, limited revenues, and limited physical assets. As a result:
- Banks perceive high default risk.
- Loan pricing becomes unattractive.
- Approvals take longer and are subject to stringent conditions or not available at all
A credit guarantee reduces the lender’s downside by absorbing a portion of the default loss. This allows lenders to extend credit that might otherwise be deemed too risky.
Policy context in India
India’s focus on promoting innovation-led growth, digital entrepreneurship, and domestic manufacturing has placed startups as an important player in the economic strategy. The Startup India initiative, DPIIT recognition framework, and various financing schemes complement this effort.
CGSS was originally notified on 6 October 2022, with enhancements in 2025 aimed at increasing uptake. The revised scheme aligns with national priorities such as deep-tech, manufacturing, and import substitution, and signals to lenders that the government is committed to supporting high-risk, high-impact ventures.
A structured guarantee framework brings multiple benefits:
- Encourages lenders to expand startup portfolios.
- Complements equity financing by enabling non-dilutive capital.
- Supports job creation, R&D, and innovation.
Overall, CGSS helps create a more balanced ecosystem where debt and equity coexist effectively.
Components of Credit Guarantee Scheme
CGSS operates through a Credit Guarantee Fund for Startups, managed by National Credit Guarantee Trustee Company (NCGTC). The guarantee is extended to the Member Institution (“MI”)—not to the startup directly—against eligible credit facilities sanctioned to DPIIT-recognised startups.
Eligible instruments include term loans, working capital facilities, venture debt, subordinated/mezzanine debt, debentures, optionally convertible instruments, etc.
Guarantee cover is available through two models:
- Transaction – based guarantee (individual loans)
- Umbrella-based guarantee (pooled investments, typically through AIFs)
Eligibility criteria
a. For Startups:
- Must be recognised by DPIIT at the time of sanction.
- Must not be in default with any lender or classified as an NPA
- Eligibility must be certified by the MI
b. For Member Institutions:
- Scheduled Commercial Banks and Financial Institutions.
- RBI-registered NBFCs with a minimum BBB credit rating and ₹100 crore net worth.
- SEBI-registered Alternative Investment Funds (AIFs).
Quantum and extent of coverage: The maximum debt eligible per borrower is ₹20 crore (revised from ₹10 crore in 2025).
Under the transaction-based model:
- Up to ₹10 crore: 85% guarantee
- Above ₹10 crore: 75% guarantee
Under the umbrella model:
- Coverage equals actual losses or 5% of pooled investment, whichever is lower (subject to ₹20 crore cap per borrower).
Fees under CGSS
Transaction-based model
- Annual Guarantee Fee (AGF) of 2% p.a., payable upfront.
- Reduced AGF: 1.5% for startups in North East and women-led units.
- 1% for 27 identified Champion Sectors.
- Guarantee becomes effective only once AGF is fully paid.
Umbrella-based model
- Annual Commitment Charge (ACC) of 0.15% p.a. on pooled investment.
- At claim invocation: 1% one-time fee.
- Closure without claim: 0.25% closure charge.
- Delays attract penal interest.
The process for Startups to avail the CGSS benefits:
- Startup approaches an eligible MI.
- MI evaluates the proposal under its internal credit norms.
- MI verifies CGSS eligibility and applies to NCGTC.
- Guarantee is issued automatically once parameters are met.
- MI disburses the loan.
- In case of default, MI invokes the guarantee.
The system aims for efficient processing, though operational delays may occur due to documentation or MI readiness.
Key enhancements under the 2025 revision
The 2025 update materially improves the scheme’s attractiveness:
- Borrower ceiling increased from ₹10 crore to ₹20 crore.
- Higher guarantee coverage percentages (85% and 75%).
- Significant fee reduction for priority sectors.
- Stronger incentives for venture-debt players and AIFs.
These changes are expected to broaden access, deepen lender participation, and support larger ticket sizes for scaling startups.
Practical considerations and challenges
Startups must meet basic creditworthiness thresholds before lenders will consider extending CGSS-backed debt. Even with a guarantee in place, lenders expect to see fundamental indicators of business stability and financial discipline. While the scheme reduces lender risk, it does not eliminate the need for fundamental creditworthiness. Startups must demonstrate:
- Viable business model
- Reasonable cash flow visibility
- Governance standards
- Clean credit history
An important point to note is that early stage or pre-revenue companoes may still find debt unsuitable as an option to raise capital.
Operational challenges for Mis: Member Institutions face several ongoing operational challenges that impact timely disbursement and efficient use of CGSS. These challenges often stem from compliance requirements and internal capacity limits.
- Documentation requirements are strict.
- Guarantee lapses if fees are unpaid or deadlines missed.
- Continuous monitoring and recovery responsibilities remain with the MI.
- Umbrella-based structures require sophisticated product design.
Even after claim settlement, MIs must pursue full recovery with the same diligence as a non-guaranteed account.
Scheme limitations
While CGSS provides significant benefits, it also contains structural limitations that restrict its applicability for certain categories of startups and lenders.
- Only available to DPIIT-recognised startups.
- ₹20 crore cap may be inadequate for late-stage startups.
- Guarantee does not cover 100% of losses.
- Awareness gaps persist, especially outside metropolitan Indian cities.
- Complexities arise when instruments involve conversion or hybrid structures.
What happens if DPIIT recognition is revoked?
A notable ambiguity within the scheme is its silence on the impact of a startup losing DPIIT recognition after receiving a guarantee. While eligibility is required at the time of sanction, the scheme is silent on - whether guarantee coverage continues after the expiry of registration status or how the lenders should treat such accounts.
Our observations: The Credit Guarantee Scheme for Startups is a good initiative aimed at addressing the gap in India’s startup financing landscape. By offering risk-sharing mechanisms and enabling collateral-free borrowing, CGSS empowers startup ventures to access debt that would otherwise be unavailable. The enhancements introduced in 2025 further strengthen the scheme’s relevance, expanding coverage, reducing fees for strategic sectors, and supporting larger ticket sizes.
However, the scheme’s impact will depend heavily on execution. Lender readiness and risk appetite, startup governance, legal clarity, and awareness across India’s diverse startup ecosystem will determine how effectively CGSS fulfils its purpose.
If implemented with discipline and supported by strong advisory and institutional frameworks, CGSS can play a transformative role in deepening the venture-debt market, reducing overdependence on equity, and accelerating India’s innovation-driven economic growth.
Author - Nitin Thomas Associate
