The Department of Financial Services (DFS) in the Finance Ministry will Wednesday undertake a crucial inter-ministerial consultation to review the ₹ 5 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS), which is an MSME support initiative launched by the Government during the Covid-19 pandemic times. 

The meeting will also see participation by chief executives of all commercial banks, including four large private sector banks, and will also review the Loan Guarantee Scheme for Covid-19 Affected Sectors (LGSCAS), sources familiar with the development said. 

The upcoming meeting will not only review the progress under the scheme and challenges, if any, but it will also look at the extension of ECLGS beyond March 31, they added.  This review comes in a year when as many as eight States will go in for assembly polls ahead of the general elections in 2024.

The review meeting will also see representatives from thef Department of Expenditure, MSME Ministry, Tourism Ministry, Civil Aviation Ministry and Health Ministry.

Read also: Revenue dept not in favour of ECLGS extension beyond March 31: Revenue Secretary Malhotra

The objective of ECLGS was to provide additional liquidity to such units to help them cope with the crisis arising out of Covid-19. The DFS convened meeting is crucial as the validity of ECLGS expires on March 31 this year. MSMEs have already pitched for the extension of ECLGS, noting that their NPAs have not really increased during the scheme’s tenure and units are using this additional credit window to be more productive.

So far, only about ₹3.6 lakh crore of guarantees out of the total ₹5 lakh crore allocated for the scheme have been utilised.

LOANS TO MSME

Under this ECLGS scheme, loans extended to MSMEs by banks and NBFCs are 100 per cent guaranteed by the National Credit Guarantee Trustee Company (NCGTC). The loan is being extended in the form of an additional working capital term loan facility in the case of banks and an additional term loan in the case of NBFCs to MSMEs and interested Pradhan Mantri Mudra Yojana borrowers.

The ECLGS has so far been extended twice — the first time in September 2021 when the government extended the validity of ECLGS till March 31, 2022, or till guarantees for an amount of ₹4.5-lakh crore are issued under the scheme, whichever is earlier. 

Last year, in Union Budget 2022-23, it was announced to extend the validity of ECLGS up to March 2023, and the limit of the guaranteed cover was increased by ₹50,000 crore to a total cover of ₹5 lakh crore, with the additional amount being earmarked exclusively for the enterprises in hospitality and related sectors. 

REVENUE DEPARTMENT VIEW

The meeting assumes significance as the Revenue Secretary Sanjay Malhotra had recently, in a post-budget meeting, indicated that the Revenue department in the Finance Ministry does not see any need to extend ECLGS beyond March 31. 

Although the Centre is going with a view that the economy has seen a “full recovery” from Covid-19, several bankers   feel that the position on the ground is not that comfortable and apprehend quite a lot of NPAs may hit the banks. Banks think that position is alright because of the ongoing ECLGS support. “The ground reality is that we are still not out of the woods. Reason is interest rates are still going up and there is a strain among MSMEs”, said a former chief executive of a public sector bank. 

Experts said that when interest rates go up, strain goes up in the banking system and whether everybody is in a position to absorb this is to be seen.

Another factor that policymakers need to consider is the market sentiments for businesses to raise capital, especially post the Adani-Hindenburg saga.  Given the muted sentiments in stock markets and the cost of capital going up, it is a moot point if mid-sized companies will have good access to capital. Raising money in foreign countries is also getting difficult when interest rates are on a tightening cycle, experts said. 

BUDGET PROPOSAL 

The recent budget unveiled by Finance Minister Nirmala Sitharaman had several measures to promote MSMEs, which are the growth engines of the Indian economy. To ensure timely payments to MSMEs, the Centre proposes to amend the income tax law to include payments made to MSMEs within the scope of Section 43B of the Income Tax Act.  This would mean businesses can claim a deduction for goods and services purchased from MSMEs only when the payments are made (within 15 days). This time limit can go up to 45 days if the contract in writing explicitly provides for it, experts said.

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