MSMEs seen as next stress area as banks wary of loan repayments under ECLGS

Micro, small and medium enterprises (MSMEs) could turn out to be the next stress area for banks, with many lenders and analysts worried about loans given under the Emergency Credit Line Guarantee Scheme (ECLGS).

These loans have a 12-month moratorium, and many lenders say there is no clarity on how many of the borrowers would be able to repay.

A better understanding of the repayment behaviour and possible defaults is likely to emerge in the second half of the fiscal year, but could take at least another year for full clarity on the issue.

“There is a one-year moratorium on the loans. As the economy revives, there is expectation that the companies that take loans under this scheme will benefit. But no one knows what will happen one year down the lane,” noted a senior banker who did not wish to be quoted on the issue.

The cumulative amount sanctioned under ECLGS by January 25 was ₹2.39-lakh crore, according to a reply by Finance Minister Nirmala Sitharaman in Rajya Sabha to a question by Rajeev Chandrasekhar on Tuesday.

Guarantees issued

MSME Minister Nitin Gadkari had informed Parliament on Monday that around 91 lakh guarantees have been issued till January 25 this year under the scheme.

The scheme is available till March 31, 2021, or till guarantees for ₹3-lakh crore are sanctioned, whichever is earlier.

It is a key part of the government’s relief measures for Covid-19-led distress to help the MSME sector.

Most banks have been increasing provisions every quarter and say they are fully covered for losses.

Experts said small businesses are taking loans under the scheme either for working capital or alternatively to repay an existing loan that was taken at a higher interest rate. However, it is difficult to assess the recovery in businesses over the coming months, though the expectation is for a sharp rebound in the economy.

“There is some concern about stress in the sector when the moratorium ends. Banks will have to see how it plays out,” said a sectoral expert.

Anil Gupta, Vice-President, Financial Sector Ratings, ICRA, said the ECLGS has been very productive. “It has helped borrowers tide over temporary liquidity issues, but there is some question as to how many have overleveraged and will be able to repay the loans. Among banks, there is some anxiety about this portfolio and how it will behave over the next one to two years,” he said.

The Union Cabinet had, in May 2020, approved the ECLGS to help ease the Covid-19-led economic distress faced by MSMEs by providing them additional funding of up to ₹3-lakh crore in the form of a fully guaranteed emergency credit line. It was later extended through ECLGS 2.0 for the 26 sectors identified by the Kamath Committee and the healthcare sector. The loans provided under ECLGS 2.0 have a 5-year tenor, with a 12-month moratorium on repayment of principal.