Emergency Credit Line Guarantee Scheme: Government Expands Size To Rs 4.5 Lakh Crore

Emergency credit line scheme expanded from Rs 3 lakh crore to Rs 4.5 lakh crore

A customer counts Indian rupee banknotes in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A customer counts Indian rupee banknotes in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The central government has expanded its emergency credit scheme for small businesses to Rs 4.5 lakh crore, increasing its size by half.

Making an announcement on Monday, as part of an economic support package, Finance Minister Nirmala Sitharaman said this facility will continue to support small and medium enterprises.

The emergency credit line guarantee scheme for medium and small businesses was launched in May 2020 under the government’s ‘Atmanirbhar’—or self-sufficiency—package to mitigate economic distress from the Covid-19 pandemic and subsequent lockdowns.

Under the scheme, the government had initially planned to offer guarantees to Rs 3 lakh crore in loans to stressed small businesses. Borrowers were allowed to borrow 20% over and above their credit facilities under the scheme.

So far, Rs 2.73 lakh crore in loans had been sanctioned and Rs 2.10 lakh crore disbursed, leaving little room to provide support to businesses hurt by the second wave of Covid infections.

In every iteration of the ECLGS scheme, new sectors were being added. But due to the outer limit of the scheme, the new sector were getting smaller allocations. The number of companies and sectors impacted by Covid are large. Now that the limit has been increased to Rs 4.5 lakh crore, those allocations can be increased and new segments can be included.
Sunil Mehta, CEO, IBA

The scheme over the past twelve months has been expanded to cover a host of sectors. Most recently, the eligible list of sectors was widened to include hospitals, nursing homes, clinics and oxygen generation plants. The civil aviation sector was also permitted to avail loans under the scheme and the conditions for the hospitality, travel and tourism, leisure and sporting sectors were eased.

The expanded scheme may allow borrowers to avail more than 20% of outstanding dues, the Finance Ministry said, adding that this would be reviewed across individual sectors.

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In addition, the government announced:

  • Rs 1.1 lakh-crore loan guarantee for Covid affected sectors.

  • Of this, Rs 50,000 crore is earmarked for health sector, with the interest rate capped at 7.95%.

  • The remaining Rs 60,000 crore is set aside for other sectors, with an interest rate cap of 8.25%

The guarantee support being provided to the health sector will be available for setting up and expanding health infrastructure in cities beyond the top eight metros. A guarantee cover of 50% will be provided for expansion of facilities and 75% for new facilities.

For "aspirational" cities, 75% guarantee cover will be provided for new and existing facilities.

The maximum amount of loan per facility is set at Rs 100 crore. The guarantee will be applicable for three years.

For the Rs 60,000 crore in guarantee support available across other sectors, decisions of individual loan limits, among other aspects will be decided at a later stage, the government's presentation said.

The measures announced should help stressed business to at least stay afloat till the economy recovers, said NR Bhanumurthy of the BR Ambedkar School of Economics. "In that sense, I would say well thought out steps were taken today."

Direct transfers maybe needed only where consumption can happen. If you go with cash transfers that would put more pressure on the fiscal situation for a longer time rather than when you go through the credit guarantee route. I think the whole multiplier process is sharper and faster on credit guarantees and it reduces the fiscal strain. I would say there is a combination of both credit and fiscal support like the food grain transfers.
NR Bhanumurthy, BR Ambedkar School of Economics

Relief For Micro Borrowers

In order to provide support to borrowers of micro finance institutions, the government has said it will introduce a new loan guarantee scheme.

  • Rs 7,500 crore in guarantee to be provided to banks for lending to microfinance institutions.

  • This is intended to support lending of up to Rs 1.25 lakh per household.

  • All borrowers, including those overdue by up to 89 days, will be eligible.

  • Loan rate will be capped at marginal cost lending rate of banks, plus 2%.

The scheme is applicable till March 31, 2022.

According to P Satish, executive director at industry organisation Sa-Dhan, the measures announced may help the flow of bank credit to smaller MFIs.

We had sought a guarantee scheme as part of our representation to the government. Bank funding was largely going toward large MFIs. The medium and small MFIs were just dependent on large non-bank lenders or SIDBI and NABARD for funding. With this guarantee, we expect that more banks can direct their on-lending toward smaller MFIs. The corpus could have been slightly higher.
P Satish, Executive Director, Sa-Dhan

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