Credit Guarantee Scheme For Startups (2025): Strengthening India’s Startup Financing Ecosystem

Policy Update
Mannat Abbot

Background

Startups in India face a range of finance related challenges which have an effect on their growth and sustainability. Financial constraints are one of the most important challenges in the growth path of startups. Getting enough funding is still a huge challenge, especially for early stage startups that do not have deep track records and collateral. Moreover, the financial stress on startups is combined with high operational costs, regulatory complexities, and macroeconomic uncertainties, which hinder their ability to expand and grow in a competitive environment.

From a legal perspective, startups often face regulatory and compliance issues that add more complexity to their financial matters. Startups have the challenge of navigating the complex regulatory environment around taxation, intellectual property rights, foreign investment and corporate governance, especially in highly regulated sectors such as fintech and healthcare. Failure to conform with legal requirements can lead to financial penalties for startups, as well as loss of investor confidence and long-term sustainability.

Here, a credit guarantee lowers the risk for the lender by bearing some of the default loss. This lets lenders lend money that otherwise might be considered too risky. This guarantee structure offers many benefits: it encourages lenders to diversify their startup portfolios, it complements equity financing and makes non-dilutive capital available, and it also supports job creation, R&D and innovation. Overall, CGSS is helping to create a more balanced environment where debt and equity can co-exist more effectively.

The Credit Guarantee Scheme for Startups (CGSS) was launched on 6 October 2022 with enhancements in 2025 to increase uptake. The revised scheme aligns closely with national priorities like deep-tech, manufacturing and import substitution and sends a signal to lenders that the government is committed to backing high-risk, high-impact ventures.

CGSS’s ultimate goal is to provide collateral-free debt financing to eligible startups through avenues such as working capital, term loans, and venture debt. The Union Budget 2025-26 has planned an enhancement of credit availability with guarantee cover for startups to stimulate entrepreneurship further by providing enhanced credit support to innovators and to encourage financial institutions in the ecosystem to provide early-stage debt funds to startups.

In an age of growing competition and evolving consumer demands, access to affordable funding is critical. The CGSS scheme removes the financial barrier and also builds the confidence of the entrepreneurs and the lenders. It drives sustainable business growth and aligns with the government’s vision of a strong and self-reliant startup ecosystem.

Functioning

The Credit Guarantee Scheme for Startups (CGSS) is a Government of India scheme aimed at providing financial support to eligible startups by way of collateral free credit. The scheme offers credit support to startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). The scheme works on the principle of credit guarantee coverage for startups under which the National Credit Guarantee Trustee Company (NCGTC) provides the guarantee to eligible lending institutions.

To provide easy access to credit for startups and to encourage innovation, the government has doubled the guarantee cover under the Credit Guarantee Scheme for Startups (CGSS). The limit per borrower has been increased from ₹10 crore to ₹20 crore.

The revised scheme also increases the extent of guarantee cover to 85% for loans up to ₹10 crore and 75% for loans above ₹10 crore. The expanded coverage enables startups to secure working capital, term loans, and venture debt, which are key to sustaining R&D and product development.

The Annual Guarantee Fee (AGF) for lenders in 27 identified champion sectors has been reduced from 2% to 1% per annum.The sectors identified under the ‘Make in India’ initiative include advanced manufacturing, electronics, defense, food processing and clean energy.

Launched in 2022, the CGSS aims to address the collateral bottleneck faced by startups by offering credit guarantees against loans sanctioned by eligible financial institutions. The scheme aims to provide access to debt financing for the startups who may not be able to get credit due to limited collateral, short credit history and higher risk perception.

The expansion of the scheme comes amid tightening funding conditions, with startups calling for stronger institutional support as private capital flows face constraints. By increasing the guarantee limit and coverage, CGSS seeks to strengthen the availability of institutional credit and support startups through different stages of their growth.

Performance

334 Loans had been guaranteed by CGSS as of 31st December 2025. The total amount assured under the scheme was Rs 808.18 crore. The scheme was introduced in 20 states and Union territories. The year-wise data shows that the value of loans guaranteed increased from ₹220.78 crore over 85 loans in 2023 to ₹381.08 crore over 172 loans in 2024. The figure was Rs 206.32 crore across 77 loans in data available till December 31, 2025.

Figure 1 shows this movement in the amount of loans guaranteed under CGSS. By the end of FY2025-26, the number of guaranteed loans grew to over 334 loans worth over ₹808.18 crore from 130 loans worth ₹305 crore in FY2024-25.

This represents a sharp rise in guarantee activity in FY2025-26. The expansion in 2025 is understandable as the scheme was revised by increasing the guarantee cover per borrower from Rs 10 crore to Rs 20 crore, enhancing the extent of guarantee coverage and reducing the annual guarantee fee for lenders in identified sectors. However, it is not possible to establish a causal relationship between the revised provisions and the increase in guarantees on the basis of the available data alone

Guarantee loans are geographically concentrated at the state level. As shown in Fig. 2, Maharashtra led the way with the highest cumulative amount of guaranteed loans at ₹170.27 crore during 2023-25, followed by Haryana at ₹120.69 crore and Karnataka at ₹96.52 crore (Fig. 2). Tamil Nadu came fourth with ₹84.60 crore.

Maharashtra alone accounted for around 21.1% of the total amount guaranteed, whereas the four leading states together accounted for 58.4%. The concentration in leading startup and industrial states highlights the uneven geographical reach of the scheme.. The relatively lower participation of other states and union territories underpins the importance of identifying the lack of reach, awareness, lender participation, and access to formal credit that remain uneven across the regions.

The sectoral distribution also offers a significant insight into the implementation of CGSS. As per Figure 3, the Aerospace and Defence sector received the highest amount of guaranteed loans, followed by Textiles and Apparels and IT–Software. Other major sectors were Agri & Allied Activities, Power, Commercial Services & Supplies, Food & Other Products, Construction, Transport Services and IT Services.

However, the concentration of guaranteed amounts in a small number of sectors highlights the need to ensure that the expanded guarantee framework covers a broader range of innovative and emerging companies. The overall performance of CGSS is reflective of a scheme that has grown significantly over time, with guarantees of more than ₹1,250 crore by the end of FY2025-26.

Its performance can be measured by the volume of credit guarantees it issues, the jobs created by the startups it supports and its reach across multiple states and sectors. At the same time, the concentration of guarantees in certain states and sectors. The success of CGSS should be measured not just by the number of guarantees issued, but also by how well it manages to reach startups facing the highest hurdles to traditional debt financing.

Impact

CGSS can be a game-changer for startups because it provides access to credit without the need for collateral, facilitates easier access to institutional funding, and encourages scaling, innovation, and formal growth.

With over 2 lakh startups registered as of November 2025, covering sectors ranging from AI to agri-tech, CGSS provides a much-needed boost to India’s diverse entrepreneurial landscape. As a result, businesses that may have previously faced difficulties in securing funding can gain better access to formal credit channels.

The scheme also minimises the financial risk faced by lenders. This risk-sharing mechanism promotes responsible lending while supporting the growth of startups. Since a portion of the credit risk is mitigated through the guarantee, Member Institutions, including banks, NBFCs, financial institutions, and AIF-based venture debt funds, are encouraged to lend more actively to startups. This strengthens lender confidence and contributes to greater stability in credit flows to the startup ecosystem.

Entrepreneurs have better access to credit and less dependence on collateral (Startup India+1) which puts them in a better position to start and grow their ventures. The money received from CGSS can cater to various business needs like buying machinery, expanding the business, managing working capital and adopting new technologies. This flexibility allows startups to adjust to changing market conditions and stay competitive in a dynamic business environment.

The scheme also helps in financial inclusion by providing institutional credit support to businesses across sectors such as manufacturing, services, retail and trading. More access to formal financing will help startups to grow their operations, invest in innovation and technology and generate jobs.

Overall, CGSS contributes to a better startup ecosystem by improving access to formal credit, helping innovative startups to grow and supporting their investment and job creation potential. The scheme can also promote increased participation of financial institutions in startup lending by lowering the risk that lenders bear and thereby creating a more favorable financing environment for entrepreneurship in India.

Emerging Issues

Lender monitoring and risk-sharing: The guarantee mechanism may reduce lenders’ incentives to closely supervise borrowers during and after disbursement, potentially shifting a greater portion of the risk to the guarantor.

Limited awareness: Many entrepreneurs remain unaware of government-backed credit guarantee mechanisms, particularly outside major metropolitan centres.

Creditworthiness requirements: CGSS reduces lender risk but does not eliminate the need for basic creditworthiness. Lenders continue to assess the commercial viability, financial discipline, and stability of startups before extending CGSS-backed debt.

Suitability for early-stage startups: Debt financing may still be unsuitable for early-stage or pre-revenue startups, even with a credit guarantee, as such startups may not yet have stable revenues or cash flows to support repayment.

CGSS applicability limited to DPIIT-recognised startups: CGSS is only available to DPIIT-recognised startups. This limits the applicability of CGSS to businesses that are not eligible for or do not retain DPIIT recognition.

Guarantee cap: The ₹20 crore guarantee cap may not be enough for larger or later-stage startups that need much more financing.

Partial risk coverage: Since the guarantee doesn’t cover 100% of losses, lenders still carry some credit risk, which could affect their appetite for lending to higher-risk startups.

Ambiguity regarding loss of DPIIT recognition: The scheme does not clearly address whether guarantee coverage continues if a startup loses its DPIIT recognition after the guarantee has been sanctioned or how lenders should treat such accounts.

Way Forward

The Credit Guarantee Scheme for Startups (CGSS) plays an important role in improving startups’ access to institutional credit by reducing collateral constraints and sharing credit risk with lenders. However, gaps in awareness, regional access, financing suitability and scheme implementation indicate the need for further strengthening. The following measures can help make CGSS more accessible, inclusive and responsive to the evolving needs of startups.

Digital and simplified access – Simplified online applications: Streamline and digitise the application process to reduce paperwork and make CGSS easier for eligible startups to access. Real-time tracking: Strengthen digital systems for tracking applications, identifying bottlenecks, and improving transparency in the lending process.

Review of coverage limits – Periodic review of the guarantee ceiling: As startups scale and financing requirements increase, the ₹20 crore guarantee limit could be periodically reviewed to ensure that the scheme remains relevant for larger and capital-intensive startups.

Broader and more inclusive access – Improve regional outreach: Strengthen access to CGSS beyond established startup hubs and metropolitan centres, particularly given the geographical concentration we identified in our analysis. Broaden participation among underserved startups: Greater outreach could help ensure that the benefits of the scheme extend to a wider range of eligible startups.

Enhanced awareness and financial preparedness – Awareness campaigns: Conduct targeted awareness programmes to improve understanding of CGSS eligibility, benefits and application procedures. Financial and institutional support: Provide greater advisory support to startups regarding financial planning, documentation, governance and credit readiness.

Focus on early-stage and innovation-driven startups – Stage-sensitive financing: Explore mechanisms that better address the financing needs of early-stage and pre-revenue startups, for whom conventional debt may not always be suitable. Support innovation-intensive ventures: Continue strengthening access to credit for technology-driven, R&D-intensive and strategically important startups.

Greater clarity in scheme implementation – Clarify DPIIT recognition. Establish clear rules regarding the continuation of guarantee coverage if a startup loses DPIIT recognition after the guarantee has been sanctioned. Clarify treatment of hybrid instruments: Provide clearer guidelines for financing structures involving conversion or hybrid features.

Going forward, strengthening CGSS will require a greater focus on simplifying access, expanding regional outreach, improving awareness, and addressing the financing needs of early-stage and innovation-driven startups. Periodic review of coverage limits and clearer implementation guidelines can further improve the scheme’s relevance and effectiveness. These measures can help make CGSS more accessible, inclusive and responsive to the evolving needs of India’s startup ecosystem.

Conclusion

The Credit Guarantee Scheme for Startups has strengthened access to institutional debt by reducing collateral constraints and sharing credit risk with lenders. Its expansion in 2025 has further increased the extent of support available to startups. However, uneven access, limited awareness, and implementation challenges remain.

Strengthening expansion and lender participation will be essential for CGSS to reach its full potential in supporting India’s growing startup ecosystem. Going forward, the effectiveness of the scheme will depend not only on expanding its coverage but also on ensuring that eligible startups across regions and stages can access it with greater ease. A more inclusive and responsive CGSS can play an important role in strengthening the financial resilience and long-term growth of India’s startup ecosystem.

References

Department for Promotion of Industry and Internal Trade (DPIIT). (2022). Credit Guarantee Scheme for Startups (CGSS). Government of India. NCGTC — Credit Guarantee Scheme for Startups (CGSS)

Department for Promotion of Industry and Internal Trade (DPIIT). (2025). Credit Guarantee Scheme for Startups (CGSS): Revised Framework. Government of India. Startup India — Credit Guarantee Scheme for Startups

National Credit Guarantee Trustee Company Limited (NCGTC). (2025). Startup India’s Credit Guarantee Scheme Explained: CGSS 2025. NCGTC — CGSS 2025

Department for Promotion of Industry and Internal Trade (DPIIT). (2026). State/UT-wise and sector/industry-wise details of loans guaranteed under the Credit Guarantee Scheme for Startups as on 31 December 2025. Lok Sabha Unstarred Question No. 526, answered 3 February 2026. Official Lok Sabha data — CGSS loans and sector-wise distribution

Press Information Bureau, Government of India. (2026). PIB — Startup India funding and CGSS update, December 2025 data

Press Information Bureau, Government of India. (2026). Government update on flagship startup schemes for FY 2025–26. PIB — FY 2025–26 CGSS performance

Press Information Bureau, Government of India. (2026). Details of startups supported under flagship schemes, including women-led startups. PIB — CGSS data as of 31 January 2026

ResearchGate. (2025). Finance Related Challenges for Startups in India and how to Overcome Them. ResearchGate — Finance Related Challenges for Startups in India

Livemint. (2025). Govt expands credit guarantee scheme to give startups a bigger financial runway. LiveMint — CGSS expansion

NovoJuris. (2025). Credit Guarantee Scheme for Startups: A Non-Dilutive Funding Approach. NovoJuris — CGSS and non-dilutive funding

IIFL. (n.d.). Credit Guarantee Scheme for MSMEs. IIFL — Credit Guarantee Scheme overview

About the Contributor

Mannat Abbot is pursuing a B.A. (Hons.) in Economics at the College of Vocational Studies, University of Delhi and serves as a Research & Editorial Intern at IMPRI. She is passionate about public policy research, economics and data-driven analysis, with interests in macroeconomics, economic policy, and evidence-based policymaking.

Acknowledgements

The author sincerely acknowledges the guidance and constructive feedback provided by Ambika Sharma and Vyomini Nathwani throughout the preparation of this article. Their valuable suggestions and thoughtful observations helped strengthen the analysis, improve the organisation of ideas, and enhance the overall quality of the manuscript. The author also extends gratitude to everyone whose support and encouragement contributed to the successful completion of this work.

Any remaining errors, omissions, or interpretations are solely the responsibility of the author and do not necessarily reflect the views of the reviewers or IMPRI.

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