The Rs 3 lakh crore Emergency Credit Line Guarantee Scheme: Opportunities and gaps

The Emergency Credit Line Guarantee Scheme (ECLGS), seen as lifeline from the Government of India (GOI), provides 100% guarantee coverage to banks and NBFCs to enable them to provide emergency credit facilities worth Rs 3 lakh crore to eligible borrowers to meet their working capital requirements.

The Scheme came as a relief to MSMEs, which have been grappling with multiple challenges like liquidity crisis, high default risks, supply shocks, shortage of labour and non-payments of dues which have been caused by the Covid-19 pandemic. As of November 12, 2020, Rs 2.05lakh crore of loans was sanctioned to 61 lakh borrowers.

The Scheme comes with a pre-approved credit sanction of 20% of the borrower’s total outstanding credit of up to Rs 50 crore as at February 20, 2020 and annual turnover of up to Rs 250 crore in financial year 2019-20, without any requirement of providing additional collateral. The tenor of the loans provided would be four years from the date of disbursement including a moratorium period of one year. In addition to MSMEs, individuals such as doctors, chartered accountants, lawyers, among others, are also eligible to take loans for professional purposes.

As part of the AatmaNirbhar Bharat reforms, the GOI extended the Scheme until March 31, 2021 and included 26 stressed (including aviation, power, construction, roads and real estate, as identified by the KV Kamath Committee) and healthcare sectors as beneficiaries under the Scheme. Companies with outstanding dues of Rs 50-200 crore as at February 29, 2020 are eligible to apply. Tenor of the additional credit will be five years including one-year moratorium. The Scheme, aimed at providing relief to the Indian economy, will assist MSMEs to control liquidity crisis, generate employment opportunities and revive their businesses.

As per recent survey titled ‘Study on the Impact of ECLGS’ (Survey) prepared by the National Institute of Bank Management for the National Credit Guarantee Trustee Company (which provided the credit guarantee coverage), whilst most respondents believed that the Scheme would ease short-term liquidity problems (for up to three months), the long-term concern, that is, increase in business volumes, still remains unaddressed. Most respondents wanted to utilise the funds to clear supplier dues and restart their operations. The Survey also highlighted key areas of concerns like: (a) inequitable distribution of funds – 80% of the total borrowers received only 30% of the total loan amount; (b) lower than average utilization rates for smaller borrowers; and (c) share of loans taken by manufacturing firms is the lowest, with less liquidity benefits.

Another issue raised by MSMEs is that the Scheme is beneficial for existing customers and not the first-time borrowers. Further, whilst the loans extended are collateral-free, the Scheme provides that the loans shall rank second charge with the existing credit facilities, which involve documentation, payment of registration fee and stamp duty charges.

Industry expects that the above concerns should be addressed at the earliest so that the benefits of the Scheme are distributed to a larger group. Measures to be taken as part of the next set of reforms should also include providing growth capital to stressed companies. It is notable that the works are already in the place as it is understood that the RBI is planning to announce steps to provide additional liquidity to stressed companies through banks and NBFCs.


The writer is Partner, Shardul Amarchand Mangaldas and Co)

The Rs 3 lakh crore Emergency Credit Line Guarantee Scheme: Opportunities and gaps The Rs 3 lakh crore Emergency Credit Line Guarantee Scheme: Opportunities and gaps Reviewed by TechCO on 12/16/2020 Rating: 5

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