Opinion

Extended lifeline

| Updated on June 03, 2021

ECLGS is a useful lifeline to stressed borrowers, but its expanding scope calls for checks and balances

As the Centre weighs the need for a fresh fiscal stimulus after Covid’s second wave, it is good that it has acted immediately on expanding the scope of the Emergency Credit Line Guarantee Scheme (ECLGS) that it implemented last year. Initially designed to help MSMEs battered by the lockdown to quickly resume operations, the ECLGS has since gone through three iterations that have opened it up to both individuals and larger firms in select sectors. Initially applicable only to MSMEs with loans of up to ₹50 crore rated as ‘standard’ as of February 2020, ECLGS offered a sovereign credit guarantee to banks if they raised these firms’ working capital limits by 20 per cent. Later versions however allowed larger borrowers with loans up to ₹500 crore and firms from 26 new stressed sectors to tap in. The latest version removes even the ₹500 crore cap and offers the guaranteed credit line to aviation players and hospitals/clinics looking to set up oxygen facilities. The repayment period for original MSME borrowers has been pushed back by a year, with 10 per cent additional accommodation. While the government’s willingness to tweak ECLGS to make it more useful to borrowers is welcome, its expanding scope may call for safeguards to ensure that it reaches the most deserving borrowers.

Though banks have already sanctioned ₹2.54 lakh crore of the ₹3 lakh crore credit limit, there’s evidence that much of this may have been cornered by medium/large borrowers rather than micro/small enterprises. In the year to March 2021, while bank credit to medium enterprises surged 57.8 per cent, probably driven by the ECLGS, small enterprises saw credit growth flatline at 2.5 per cent. With the scheme’s scope widened even further now, monitoring of disbursal patterns and increasing the headroom beyond ₹3 lakh crore may be in order to ensure that deserving firms are not crowded out. One condition that restricts the utility of ECLGS to small borrowers is the rule pegging the new credit line to their existing loan outstandings. As this curtails benefits to those who had paid down their dues or were conservative with credit, smaller ticket loans must perhaps be freed from this stipulation. Right now, the storm clouds hovering over the demand outlook after the second wave may also make smaller borrowers or those in troubled sectors reluctant to take on fresh credit. This may call for the Centre to supplement this scheme with demand-side stimulus measures.

Offering accommodation to a wide set of private borrowers and sectors in the form of a government-guaranteed credit line may be acceptable in a pandemic situation. But the moral hazard of such a move cannot be ignored. Given that Indian banks are just emerging from a bad loan crisis of mammoth proportions, they can ill-afford a repeat. Both the end-use of ECLGS loans and the ability of borrowers to stick to revised schedules thus needs to be carefully monitored.

Published on June 03, 2021

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