Emergency Loan Guarantee Scheme: Is The Modi Government's Bet Paying Off?

While it is early days yet, only a small share of guarantees given as part of the ECLGS scheme have been invoked.

Empty streets and closed stores in India during Covid-19 lockdown. Photographer: Prashanth Vishwanathan/Bloomberg
Empty streets and closed stores in India during Covid-19 lockdown. Photographer: Prashanth Vishwanathan/Bloomberg

When the Covid-19 pandemic hit and business came to a halt, one instant concern was regarding the survival of small businesses. With little or no capital buffer, several small businesses were likely to default on outstanding debt, get stuck in a financial quagmire and eventually shut shop.

The emergency credit line guarantee scheme, or ECLGS, similar to business rescue efforts being implemented in other countries like the U.K., was meant to serve as a lifeboat. The government would guarantee loans to small businesses, which would enable banks to lend them funds needed to stay afloat. Businesses would live to fight another day. The eventual cost for the government would be some fraction of the guarantee it gives -- on account of loans gone bad.

In total, the government has so far committed to guaranteeing upto Rs 5 lakh crore in loans. It's still early days in the post-pandemic recovery, but banks indicate only a small percentage of these guarantees are being invoked.

The guarantee invocation is not more than 5% and it is limited to those sectors which were severely impacted by the pandemic, said an official at a large public sector bank on the condition of anonymity. The cases where guarantees have been invoked are those where businesses were already facing challenges even before the pandemic this person said.

Only about 2% of guarantees have been invoked, said another PSU bank official, who also requested to remain unnamed. We don’t see any red flags or big numbers which could be a reason to worry, this banker said.

An official at a third public sector lender pegged the figure slightly higher at about 7%, while a private sector bank official said that he does not see more than 10% of guarantees being invoked.

The government does not see more than 15-20% of the guarantees given being invoked, said a government official familiar with the matter. The government is prepared for this and does not see it upset the fiscal math, this person added.

No official data on this is available. An email sent to the finance ministry was not answered.

How Useful? How Smooth?

The ECLGS has certainly helped in alleviating the financial stress in the MSME segment during the pandemic, Suman Chowdhury, chief analytical officer at Acuité Ratings & Research, said in a February report.

"In our ratings portfolio, we have noted that over 50% of the rated companies with a turnover of less than Rs 250 crore have availed the ECLGS facility," Chowdhury said, adding that this has helped MSMEs access liquidity and lower the cost of borrowings to an extent.

According to a December report by credit bureau TransUnion CIBIL, 58.5% borrowers under the first two phases of the scheme had a loan exposure of less than Rs 10 lakh. Borrowers with exposures ranging between Rs 10 lakh and Rs 1 crore constituted about one-third or 31.7% of all borrowers who availed loans under ECLGS.

Among key sectors that availed credit under the scheme, traders accounted for the highest share at 39% by count. Among traders, 90% of those who availed credit were retail traders, the CIBIL report showed. Services sector firms accounted for 35.8% of borrowers, with transport operators and other services making up the largest share within that segment.

The National Credit Guarantee Trustee Company is the nodal agency which provides guarantee to lending institutions like banks and non banking financial companies.

The process takes about three months to complete and the government pays in parts, said one of the bankers quoted above. 75% of the guarantee is paid upfront and the remaining 25% is paid only after all the legal processes have been completed, this person explained.

Generally it is smooth, added the banker.

Still Early Days

The emergency credit line scheme was rolled out in phases, starting May 2020. It provided a 100% government guarantee for 20% extra credit to MSMEs with outstanding loans up to Rs 50 crore. The scheme was extended and expanded in November 2020 and March 2021 to cover a host of high-contact service sectors which were the last to recover from pandemic-led shutdowns.

In February, as part of the union budget, the government announced that the scheme would be extended till March 2023.

“New borrowers in the sectors covered under ECLGS 3.0 who have borrowed after Mar. 31, 2021, and up to Jan. 31, 2022, will also now be eligible to avail of emergency credit facilities under ECLGS 3.0,” the government said.

Since borrowers under the ECLGS were allowed a 12-month moratorium on interest payments, it may be too early to celebrate low delinquencies.

In the coming six to eight months, businesses will start exiting the moratorium period and then the real picture will emerge, said one of bankers quoted above.

"In our internal studies we have found out that till October 2021, 40% MSMEs were struggling to get back on track," said Chandrakant Salunkhe, president of the SME Chamber of India. "This situation has improved a little bit in January but not drastically and sectors which directly help MSMEs like automotive, engineering and service sector have hardly improved." Salunkhe expects that the operating environment for these small businesses may only improve by the middle of the year.