Government Guaranteed MSME Loan Programme Runs Into Early Glitches

The Rs 3 lakh crore MSME loan guarantee scheme was announced in May as part of the government’s Rs 20 lakh crore economic package.

Water is sprayed on red hot steel slabs at a steel factory in India. (Photographer: Dhiraj Singh/Bloomberg)
Water is sprayed on red hot steel slabs at a steel factory in India. (Photographer: Dhiraj Singh/Bloomberg)

A government guaranteed loan programme for small businesses, which is intended to support Rs 3 lakh crore in credit, has run into early trouble, according to a series of conversations BloombergQuint had with borrowers and lenders.

Complaints range from stiff targets set by banks for disbursals, to demands that borrowers repay existing loans with the fresh credit, and instances of collateral being attached even though the credit is intended to be collateral-free. To be sure, these may be teething troubles which would be difficult to completely eliminate in a scheme of this size.

The Rs 3 lakh crore loan guarantee scheme was announced in May as part of the government’s Rs 20 lakh crore economic package intended to counter the impact of Covid-19.

As of June 5, state-run banks had sanctioned Rs 17,706 crore worth of collateral-free loans under the Emergency Credit Line Guarantee Scheme, according to data from the Finance Ministry. According to finance ministry data, State Bank of India, Punjab National Bank, Union Bank of India, Bank of Baroda and Canara Bank have sanctioned the highest amount of ECLGS loans till date.

Meeting Disbursement Targets

While the National Credit Guarantee Trustee Company operates the scheme, lenders have been asked to create lists of MSME borrowers that are eligible for these loans based on the scheme’s criteria and reach out to them.

CS Setty, managing director at State Bank of India, which has the largest sanctions, said the bank has been able to identify and contact 8.14 lakh eligible borrowers, all of whom were sent SMSes and offer letters starting from the beginning of this month. Over one lakh customers have given their consent and loans aggregating Rs 12,905 crore have been sanctioned. Disbursements, amounting to Rs 7,030 crore have gone to 60,674 MSMEs, he said.

Disbursement may be lower right now because some borrowers may want to utilise the limits as they need and SBI has given the borrower the option to withdraw the money in tranches over time.
CS Setty, Managing Director, SBI

While aggregate number are being monitoring by top bank officials, a trickle down impact of that is being felt at the branch level.

Three credit officers at different public sector banks told BloombergQuint that banks have set internal targets for each region and deadlines for disbursements as well, since the government has set a deadline of October 31 for the scheme. These officers spoke on condition of anonymity as they are not authorised to speak to the media.

Loan officers and branch staff have to make multiple calls everyday to the MSME borrowers identified in the area and convince them to opt for the loan. There is a lot of pressure to implement this scheme and it is the only thing we are focusing on, said one of the officers quoted above.

Using Fresh Credit To Repay Existing Loans

While banks are eager to meet the disbursement targets, which can often lead to looser credit standards, they are eager to keep a check on their asset quality track record.

One unintended way in which this is being done is that loan officers are instructing borrowers to repay their existing dues with the fresh credit availed under the credit guarantee scheme.

The credit officers quoted above said that some loan officers are taking no chance of future defaults and resorting to these tactics because ultimately they will be held accountable for bad loans. By placing these conditions on the borrower, the overall default rate for that manager or that branch will appear lower when returns are filed with the head office, one of the credit officers said.

A second credit officer explained that using the fresh credit to repay loans is not official bank policy or a pre-condition. However, loan officers and bank managers have been told to identity borrowers with a bad repayment record and impose this condition, this officer said. We have been advising some borrowers to use the loan to repay their dues, instead of leaving the funds in the account. If the money is not utilised, we can be questioned as to why we sanctioned the loan in the first place, this person said.

Setty of SBI says such instances may be aberrations driven by over-enthusiasm of some credit officers. No banks have asked their staff to impose such conditions, he said. “It is in the interest of the lenders to utilise this tool of ECLGS. If the borrowers business operations do not restart, with the help of these loans, neither will they pay their over-dues nor this loan,” he said.

Are The Loans Really Collateral Free?

Another complaint emerging from some quarters is that the loans being offered are not really collateral free, as intended under the scheme.

"As a process, a separate loan account is created for ECLGS loan, however, banks are extending the existing collateral, provided under an overdraft or working capital loan of a borrower, to the ECLGS loan as well. This is not a subordinate charge but an extension of the collateral lien on the borrowers entire loan outstanding, including the ECLGS loan,” said Vishal Kumar, co-founder and chief operating officer of MSMEx, an advisory firm for small businesses.

For instance, if a borrower wants a top-up loan in addition to the 20% limit under the ECLGS, the banks are not giving these top-up loans as they are considering the 20% ECLGS limit also while evaluating the total debt exposure against existing collateral, he said.

Slow Response?

The totaled sanctioned amount of a little over Rs 17,000 crore by public sector banks accounts for just about 5% of the scheme size. Data for private sector banks and non-bank lenders is not yet available but is seen to be lower than the loans sanctioned by government-owned lenders.

“At the ground level, there is still confusion surrounding the ECLGS scheme and conditions for availing this automated loan, 20 days after it was announced. Many bank branches in rural areas, for instance, are still awaiting fund allocation and required instructions under the scheme,” said Kumar of MSMEx.

Another constraint is uncertainty over survival of businesses.

“Micro and small businesses are not opting for these loans en masse as 35% of such businesses are starting at closure because they do not see their business reviving. Since small services firms have small operations their demand for these loans is less compared to manufacturing unit,” said Manguirish Pai Raiker, chairman, National Council for MSME of Associated Chambers of Commerce and Industry of India.

While the changed definition of MSMEs has widened the ambit of the scheme, banks are not willing to provide these loans to mid-sized units particularly in the manufacturing sector, Raiker added.

Meanwhile a number of private banks and NBFCs are still in the process of kicking off the scheme.

“All institutions need to apply to NCGTC for registration to make use of ECLGS scheme. Once registration is done, disbursements can be started under it. The trust has to be updated every 15 days about the loans that an institution has given under this scheme,” said Harshvardhan Lunia, co-founder and chief executive officer, Lendingkart.

Lunia says that there would have been a larger pick-up in disbursements if the RBI permitted moratorium on loan repayments had not been extended.