ECLGS: Why Modi govt’s ambitious Rs 3 lakh cr credit scheme hasn’t grabbed MSMEs’ attention it warranted

Credit and Finance for MSMEs: The Modi government’s ambitious Rs 3 lakh crore emergency credit line guarantee scheme (ECLGS) launched in May this year as part of the Atmanirbhar Bharat package hasn’t quite hit the bullseye. The perspective attached to rolling out the mega credit guarantee scheme, which had the lion’s share of the overall Rs 3.7 lakh crore MSME support package, was to essentially help lockdown-battered MSMEs get back on their feet. The government’s presentation in May, which entailed benefits to MSMEs under the package, had stated that “45 lakh units can resume business activity and safeguard jobs” through the scheme that was to be availed till October 31, 2020. Particular to that target, the government, in fact, managed to overachieve it with 60.67 lakh borrowers availing credit as of November 2, 2020. However, the credit sanctioned — Rs 2.03 lakh crore – by banks fell short by nearly Rs 1 lakh crore of the scheme amount remaining unutilised while it managed to disburse Rs 1.48 lakh crore.

“There are multiple reasons for it. One of them is the interest among eligible MSMEs to access credit under the scheme. First, it was meant for those who have existing loans running of which only up to 20 per cent was to be given by banks. For the majority of borrowers, loan size is small between Rs 5 lakh to Rs 50 lakh. So, only 20 per cent of even Rs 50 lakh, which is Rs 10 lakh, wasn’t of much help. For borrowers who had bigger loans, their outstanding amount was very less,” Anil Bhardwaj, Secretary General, Federation of Indian Micro, Small & Medium Enterprises told Financial Express Online.

For instance, if a borrower has paid 80 per cent of the Rs 2 crore loan, then he/she would get the benefit of only 20 per cent of the Rs 1.6 crore outstanding which is Rs 3.2 lakh. “So many borrowers didn’t find it very lucrative. Secondly, interest rates were, anyway, there. It wasn’t that MSMEs would get this at zero per cent,” he added. Interest rates under ECLGS were capped at 9.25 per cent for banks and financial institutions and 14 per cent for NBFCs.

National Credit Guarantee Trustee Company (NCGTC), the guarantee provider under the ECLGS scheme declined to comment for this story.

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Among other reasons for the slower take-off of the scheme has been the overall uncertainty in business for MSMEs. According to a recent survey by NCGTC involving 1,857 respondents from MSMEs, the support would help sustain needs only for up to three months for 59 per cent of them. Only 32 per cent medium claimed that the credit would ease their financial challenge beyond three months while the even lesser proportions of small and micro units – 23 per cent and 18 per cent respectively believed the money would support them for more than three months.

“While the amount has been sanctioned but borrowers have not availed it due to reasons like uncertainty in business prospects. The underlying risk aversion is also there both on the borrower side in terms of adding to their existing liabilities and on the lender side as well. From other avenues as well like the debt market, fundraising is generally being less barring the highly rated ones from the corporate bond market. So generally, businesses are going slow when it comes to fundraising for working capital requirements,” Kavita Chacko, Senior Economist, CARE Ratings told Financial Express Online.

Apart from MSMEs and Mudra loan borrowers, the government had in August expanded the scope of the ECLGS scheme to cover individual loans for business purposes. However, that didn’t help in banks sanctioning the entire amount by October end. The government had later extended the scheme by a month till November 30 followed by a four-month-long extension till March 31, 2021, with the launch of ECLGS 2.0 tweaking the criteria around eligibility, turnover limit, moratorium, and repayment window to pique interest among potential borrowers. Disbursements under the ECLGS have been made by around 12 public sector banks (PSBs), 24 private sector banks, and 31 NBFCs.

“It is not that the scheme was not attractive. It was an opt-out scheme. So, those who don’t want to avail it, they can opt it out. The government has come out with an outlay with a broader aspect because once you decide on a macro level, you take the whole number into account that for this many businesses you might need that much amount but when the scheme is implemented, many may not be interested and that’s why the option was there to opt-out. It is also not that the scheme wasn’t extended to all, it was extended to all,” Sunil Mehta, CEO, Indian Banks’ Association told Financial Express Online.

State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, and Union Bank of India are among the leading banks lending to Covid-hit MSMEs under the ECLGS scheme. As of September 3, 2020, 12 public sector banks had cumulatively disbursed Rs 62,025.79 crore into 21,28,010 MSME accounts, as per the data tweeted by Finance Minister Nirmala Sitharaman’s office. The share of 24 private banks and 31 NBFCs in disbursement was Rs 51,687.36 crore.

The ECLGS 2.0, in order to perhaps ensure credit sanctioning of the entire Rs 3 lakh crore amount is completed, expanded the scope from MSMEs, Mudra, and individual borrowers to companies in 26 stressed sectors identified by the Kamath Committee and healthcare sector. The annual turnover limit was also scrapped in the revised version from Rs 250 crore in ECLGS 1.0 while credit outstanding could now be between Rs 50 crore and Rs 500 crore up from Rs 50 crore as of February 29, 2020. Also, the borrower accounts in ECLGS 2.0 should be less than or equal to 30 days past due as of February 29, 2020, that is, they should not have been classified as SMA 1, SMA 2, or NPA by any of the lenders as on February 29, 2020.

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SMAs are special mention accounts which show signs of incipient stress leading to the borrower defaulting in servicing the debt. SMA-0 are accounts having payments partially or wholly overdue for 1-30 days while SMA-1 and SMA-2 accounts have payments overdue for 31-60 days and 61-90 days respectively. The revised scheme also has a five-year repayment window up from four years in ECLGS 1.0.

“Hopefully they (banks) will be able to disburse. Roughly Rs 2 lakh crore has been sanctioned. Actually, the outer limit is for sanctions and not for disbursement. However, sometimes documents may be a problem, sometimes there are personal problems with borrowers or maybe some other reason. So, bottlenecks are always there when we implement anything but the response has definitely been good for the scheme while the gap will be bridged. Lack of awareness and mindset among borrowers may also be the case but ECLGS 2.0 will enable bankers to lend more aggressively,” said Mehta.

Banks, finally, may achieve the sanctioning of the entire Rs 3 lakh crore amount as the economic activity gradually improves ahead. Nonetheless, India’s economy shrank 7.5 per cent in Q2 FY21 after a record contraction of 23.9 per cent in Q1. The manufacturing and construction sectors saw a jump in the July-September quarter. The output of core industries shrank 2.5 per cent in October against a fall of 0.8 per cent in September. “They (banks) might disburse the entire amount as the economic activity is on an upswing. Businesses take loans when there is visibility on better future expectations. Three months back, things were not clear but now there are chances that by March there could be vaccine available. So, the positive business sentiment will be very helpful coupled with improvement in demand,” said Bhardwaj.