Is loan guarantee scheme serving the purpose?

Madan Sabnavis | Updated on November 17, 2020

MSMEs are using funds from the Emergency Credit Line Guarantee Scheme more to pay off earlier loans than as growth capital

The Emergency Credit Line Guarantee Scheme (ECLGS) was one of the highlights of the economic package announced by the government in May, and it became operational on May 23. The scheme is basically a loan guarantee for all MSMEs which were operational as on February 29 with an outstanding of ₹25 crore (now ₹50 crore), where 20 per cent incremental credit up to ₹5 crore (now ₹10 crore) would be covered. These could be taken from banks, NBFCs and FIs. There have been regular updates provided on the progress of these loans. As of November 2, ₹2.03 lakh crore was sanctioned, of which, ₹1.48 lakh crore has been disbursed to 66.67 lakh units. This is impressive.

Some interesting observations can be made on this scheme and its progress. The first is that the scheme was to be on 20 per cent of outstanding loans, which as of end-February were around ₹12 lakh crore for banks. Hence banks can theoretically sanction around ₹2.4 lakh crore to this segment. NBFCs as of September 2019 had around ₹80,000 crore as outstanding to MSMEs in industry. Therefore, the sum of ₹3 lakh crore was quite generous. Given that the outstanding to sanction limits are around 75 per cent, a maximum of ₹2.25 lakh crore could be disbursed during this period which has been extended to end-November from end-October.

Second, the progress of this scheme based on tweets from the Ministry are given below.

Table 1 shows two contrasting pictures. The first is that the incremental sanctions have slowed month on month from ₹74,000 crore in the first month to ₹16,000 crore in October. This could mean that most of the MSMEs which fit the criteria and required funds have been covered making the marginal increase much lower now. The second is that the disbursements to sanctions ratio has gone up to the average level of 75 per cent which is sign of normalcy.



A concern of SMEs has been that this scheme works only for those which have exposures with banks and first-time borrowers are excluded. Besides, these loans must be SMA-0 or SMA-1 and hence the non-performing ones are axiomatically ruled out.

The third interesting facet, which is also puzzling, is presented in Table 2, which gives banks’ outstanding credit to the MSME sector which includes both manufacturing and services.


The data on disbursements made under this scheme shows that there has been an increase progressively albeit at a slower rate. However, banks which accounted for over 90 per cent of these sanctions in October have witnessed an increase of just ₹49,000 crore between May and September. During the same period there was an increase in disbursements of ₹1.13-1.37 lakh crore. How can this be reconciled?

The difference between the two is ₹64,000-88,000 crore. One possibility is that large-scale repayments have been made by the borrowers which looks unlikely given the conditions in the economy and this segment being the most affected by the pandemic. The alternative is that since these guaranteed loans have been given to existing borrowers who have outstanding performing credit as of February 2020, these funds may have been used for repaying earlier loans. This works well for SMEs as these would be at a lower interest rate; as they have been capped at 9.5 per cent or 1 per cent above the external benchmark followed by the banks.

This argument looks plausible because this has been a phase where SMEs were affected the most as they were buffeted by a combination of migration of labour, supply bottlenecks, credit availability, high default probability, and non-payments of dues among others. Such support through the guarantee would have helped many units service existing loans, which is why there is a gap between disbursements under the scheme and the relatively low incremental credit over the four-month period ending September.

Will the extension of the scheme till November help? Most certainly, as there is still a lot of funding space left — of around ₹1 lakh crore. It would however depend on how the demand-supply forces work. There has to be demand from the SMEs which can pick up as overall manufacturing has picked up, which will require additional funding. However, it should be remembered that within bank credit to MSMEs, the share of manufacturing is around one-third with the balance going to the services sector which is still not operational in a big way. Hence, the demand for credit from this segment could remain muted.

In fact, the reason behind the decreasing incremental sanctions under ECLGS can be traced to the services sector being closed in general. As the unlocking norms for November have not been altered from those in October, it is possible that this extension may not result in a significant increase in demand. On the supply side, banks have a lot of liquidity and hence can go ahead with lending provided there are borrowers. The issue of credit risk aversion to this class has been addressed by the ECLGS.

Restricted beneficiaries

The Finance Minister has now extended the scheme to 26 sectors and healthcare, which were identified for one-time restructuring. It is estimated that 4-5 per cent of the total loans may qualify for OTR and hence there is room for expansion beyond ₹2 lakh crore. However, as the condition is that they have to be SMA-0 on February 29, 2020, it would be the creditworthy units that would benefit. They too may be inclined to repay outstanding loans at this lower cost.

The target of ₹3 lakh crore will be met, but it would not be capital used for growth but for lowering interest cost.

The writer is Chief Economist, CARE Ratings. Views are personal

Published on November 17, 2020

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