Covid-19 pandemic has disrupted the lives of many people all over the world. 2020 has been a year with limitless uncertainties revolving throughout the year. Businesses shutting down, loss of employment, losing hope over livelihood and many uncountable uncertainties had pushed the competitive spirit of Indians to below the ground level.
As a light of hope and to provide relief from the disruptions faced due to the pandemic, the Prime Minister of India, Narendra Modi announced the “Aatma-Nirbhar Abhiyan”, a mission of Self-Reliant India. As a part of the whopping Rs. 20 lakh crore packages, the Ministry of Finance announced the “Emergency Credit Line Guarantee Scheme” of Rs. 3 lakh crores on May 05, 2020 so as to provide economic help to Micro, Small and Medium Enterprises (MSME) to curb the distress.
Table of Contents
- What is ECLGS?
- Salient Features of the Scheme
- Who are Eligible Borrowers?
- Amount of Loan
- Interest Rate of Credit under the Scheme
- List of MLIs
- Tenor of Loan account under the Scheme
- Responsibilities of the MLIs under the Scheme
- Why the scheme was extended?
- Reasons for not availing GECL sanctioned
- Suggestions by MSMEs
What is ECLGS?
ECLGS stands for Emergency Credit Line Guarantee Scheme, announced by Ministry of Finance on May 13th , 2020. The total package is Rs. 3 lakh crores. Its objective is to incentivize the MSMEs by providing the economic relief. This relief target the MSMEs to restart their businesses with the new low-cost money-blood. Normally, the borrower is liable to provide guarantee in case it avails a credit line. In the business-disruptions caused due to Covid-19, no financial institution will rely on the guarantee provided by borrowers. Thus, as a matter of relief, the eligible MSMEs will avail the facility and the borrower (i.e. MSME) will not be required to provide any guarantee to the lender.
ECLGS 2.0 has been announced by finance Minister on in November 2020, which provide guaranteed credit support to 26 stressed sectors identified by Kamath Committee.
Now who will provide guarantee?
Under this scheme, 100% guarantee is provided by National Credit Guarantee Trustee Company (NCGTC) to the Member Lending Institutions (MLI).
Who are covered under MSMEs? As per sub-section (9) of section 7 of the ‘Micro, Small and Medium Enterprises Development Act, 2006, MSMEs are w.e.f..1st July 2020.
- A micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
- A small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
- A medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
Salient Features of The Scheme:
Providers of Working Capital Loan
The loan is in the form of working capital loan facility to be provided by Member Lending Institutions (MLIs). These MLIs (i.e. the lender) are Scheduled Commercial Banks (SCB) and Financial Institutions.
Normally the guarantee of repayment is provided by the borrower. However, due to Covid-19 banks do not rely on the borrowers for repayment. Thus, in this special case, the guarantee is provided by National Credit Guarantee Trustee Company (NCGTC). NCGTC is a wholly owned company of Government of India and plays the role of common trustee for the credit guarantee schemes backed by Government.
This scheme is applicable only to the eligible MSMEs (Micro, Small and Medium Enterprises).
The rate of interest would not exceed 14% in case. The actual interest would be lower. The details are enumerated in later part of this article.
Tenure of Repayment
For the first year, the scheme provides moratorium and the borrower needs to pay only interest on such principal amount. ECGLS 1.0 has 4 years repayment period and ECGLS 2.0 has 5 years repayment period. The repayment tenure thereafter, is up to 3 years. Thus, the total tenure of the loan is 4 years.
Window for the scheme
The scheme is applicable only to the loans approved within the time frame May 23, 2020 to October 31, 2020 or until an amount of Rs. 3 lakh crores will reached, whichever is earlier.
Extension of the window
The scheme is now extended by the Ministry of finance till March 31, 2021 through ECLGS 1.0
Further the scheme is extended to 26 stressed sectors through ECLGS 2.0. The stressed sectors are being identified by Kamath Committee.
Separate account of each borrower would be opened for the purpose of this scheme.
Amount that can be borrowed
ECLGS 1.0 provided additional credit up to 20% of the borrower’s total outstanding loans as on February 29, 2020, to entities with outstanding credit up to Rs 50 crore as on February 29, 2020, and an annual turnover of up to Rs 250 crore, ECLGS 2.0 will provide 100% guaranteed collateral-free additional credit to entities in the 26 stressed sectors, plus the health sector, with credit outstanding of above Rs 50 crore and up to Rs 500 crore as of February 29, 2020.However, the additional credit under the Scheme is 20% of outstanding credit.
The scheme is pretty clear about the banking charges to be levied. The scheme specifies:
- No guarantee fee can be charged by NCGTC
- No processing fee can be charged by the MFIs
- No penalty to be levied in case of prepayment of loan
Eligibility of the borrower
The scheme would apply only to eligible set of MSMEs only constituted as proprietorship. The details of the eligible borrowers is explained in the later part of the article.
- Borrowers having loans extended on or before February 29, 2020 under Pradhan Mantri Mudra Yojana and which are report on the portal of MUDRA, are also eligible to apply for this scheme subject to fulfilment of other conditions in this scheme.
- Since loan is to be provided to existing borrowers, the lenders take minimal time for due diligence.
Who are Eligible Borrowers?
Eligible borrower means a borrower filling all the below conditions:
- The borrower should be a registered MSME. It can be a proprietor, partnership, company, trust or LLP.
- The borrower should not have all outstanding loans across all MLIs of Rs. 50 crores as on February 29, 2020. This means for borrowers whose outstanding loan amount exceeds Rs 50 Crores (as amended) are not eligible.
- The annual turnover should not be more than Rs 250 crore for the financial year 2019-2020.
- Borrowers having past due of 60 days of less as on February 29, 2020 are eligible. This simply means that borrowers having past dues more than 60 days are defaulters in nature and therefore are not eligible under this scheme. Under ECGLS 2.0, entities up to 30 days past due (SMA0) will get additional credit for 5 years
- The loan account should not be classified as SMA2 or NPA by any of the MLI as on February 29, 2020.
- The borrower should hold GST registration, if the same is mandatory to it. So, this condition is not required in case the borrower is “not required” to get registered under GST Act.
Amount of Loan
- In case of banks and financial institutions, the amount of loan would be provided in the form of additional working capital term loan. In case of Non-Banking Financial Institutions, the amount of loan would be provided in the form of additional term loan facility.
- The amount of loan would be 20% of total outstanding dues to all MLIs as on February 29, 2020.
- Off-balance sheet exposures would be excluded in computing the total outstanding amount.
- In case the borrower needs funds more than the prescribed limit from any specific lender, the borrower is required to take No Objection Certificate from other MLIs.
Interest Rate of Credit under the Scheme
Rate of Interest
Benchmark Rate prescribed by RBI + 1%
9.25% per annum
As per credit evaluation of lender
14.00% per annum
Further, no additional processing is to be charged by the lender. Also, no penal interest can be levied by the lender.
List of MLIs
For the purpose of this scheme, MLIs includes all SCBs, NBFCs which have been in operation for at least 2 years as on 29.2.2020. The list is attached here.
Tenor of Loan account under the Scheme
- Total loan period would be 4 years from the date of loan disbursement.
- A moratorium period of 1 year is applicable to the scheme, wherein the borrower needs to pay only interest amount during the said period.
- The principal is required to repaid in balance 3 years (36 installments) post the moratorium period.
- In case a borrower makes prepayment of the loan, no penalty will be charged by the MLIs.
Responsibilities of the MLIs under the Scheme
MLIs are casted with certain responsibilities to ensure smooth & quick functioning of the scheme. The scheme is especially provided to stressed businesses in the economy and the objective is to provide sufficient liquidity to creditworthy borrowers. Following are some important points to be noted:
- MLIs are required to report certain figures to the NCGTC on frequent basis to help the NCGTC in tracking the usage of the scheme. Such information includes following:
- Number of borrowers falling under the category of business enterprises, MSME and PMMY to whom the amount is sanctioned.
- Number of borrowers falling under the category of business enterprises, MSME and PMMY to whom the amount is disbursed.
- Number of borrowers and the total amount outstanding as on February 29, 2020.
- Amount sanctioned & disbursed till date with breakup into term loan and working capital term loan.
- Existing default ratio and NPA ratio of the borrowers.
- MLIs should provide awareness to or educate the eligible borrowers about the benefits and facilities under this scheme. Such communication can be through SMS, emails, information on their respective websites or banners in the bank premises.
- MLIs are required to ensure smoothly functioning of the account post disbursement of funds.
- MLIs need to evaluate the credit worthiness of the eligible borrowers with the standard banking prudence and respective judgements. They have been provided discretion to reject any loan application wherein the credit evaluation is not apt.
- At the same time, the MLIs are required to ensure that the due diligence conducted is quick and seamless since the borrower are existing customers.
- MLIs should ensure that the NCGTC is timely informed in case of higher guarantee claims resulting from a defaulter by the borrower.
- Even if the payment is guaranteed by the NCGTC, the MLI is still eligible to recover the entire dues from the borrower. Thus, the due diligence should be strict enough to access the repayment capacity of the borrower.
Why the scheme was extended?
The scheme offered on February 29, 2020 is said to be ECLGS 1.0. It offered collateral free guarantee to MSMEs having outstanding loan up to Rs. 50 crores. In case of companies having outstanding loan exceeding Rs. 50 crores had no option but to go for normal banking loan. Such companies were required to restructure the loan outstanding. Big corporates generally have no problem in providing collateral security.
Now through public announcement dated November 12, 2020 the Finance Ministry has considered extending the scheme to 26 stressed sectors and health sector. Such stressed sectors include small companies. some sectors out of 26 sectors identified by Kamath Committee are as follows:
- Aviation and Shipping
- Consumer Durables
- Real Estate
- Roads, etc.
Also, the allocated guarantee amounts of Rs. 3 lakh crores were not reached up till October 31, 2020. This is another reason for extending the period till March 31, 2021.
Reasons For Not Availing GECL Sanctioned
As per the survey conducted by the National Institute of Bank Management, Pune (NIBM) on behalf of the National Credit Guarantee Trustee Company (NCGTC), NIBM has taken note of reasons for not availing the sanctioned amount, suggestions by stakeholders, etc. The survey was a part and parcel of “Study of Impact of ECLGS” dated August 26, 2020.
- Businesses were shut down due the lock down period and there was no need of funds for operational expenses. Operational employees were also shifted to their native places in different states. Thus, many borrowers did not consider taking the facility.
- The amount of loan offered was lower than the expectations.
- The stamp duty liability on such loans was higher than the benefits passed on. Thus, many borrowers did not avail the loan facility.
- Even there was liquidity crunches over many companies, many borrowers restricted themselves from over leveraging.
- Also, the bank branches were closed or open for limited hours with limited resources or there were mobility restrictions to reach out to the banker. These things did not allow the sanctioned amount to be used.
- Few borrowers were reluctant to avail the loan with the fear that the banker would use this scheme to recover the existing loans.
Even if the Central Government took policy decisions to provide liquidity in the economy, people restricted availing the credit facilities and utilized savings to manage the operational expenses.
Suggestions by MSMEs
- Many MSMEs felt that the rate of interest should have been on much lower side considering the hardships faced by the businesses. If the Central Government was really concerned about the liquidity issues, it should have waived the interest levied during the moratorium.
- The scheme should have provided additional funding support if the lockdown is extended.
- Many MSMEs felt that the amount of loan offered was very low considering the objective of the scheme.
- The scheme should have been operated through online process to spread the awareness.
- The process of providing the documentation could have been much easier like uploading the set of documents online.
- A higher cash credit facility was expected.
Covid-19 pandemic was unexpected for the world. The pandemic has caused sufficient disruptions to lives and relationships of people over the globe. Due to so much uncertainty over the existence of normal life, the business person had lost interest in the economy. Stock market reflects the early indications of the economy. This was reason why Sensex fell from 40k levels to 25k level. Such disruptions cause people to reduce their expenses and to save more. This habit of saving is not good during economic downturn. The more people spend the more liquidity issues are handled diligently. Thus, Ministry of Finance provided liquidity to business entities so that their sustainability will ensure smooth flow of money in the market. So as to boost consumer spending, the scheme was introduced.