Govt's credit lifeline for small businesses can benefit a lot more: Here's how

We have to appreciate that unprecedented steps have been taken by the Government of India to revitalise the economy and the spirit behind the extraordinary initiatives being taken towards building an “AtmaNirbhar” Bharat. The steps are taken to support the MSMEs through various interventions, one such being through the Emergency Credit Line Guarantee Scheme (“ECLGS/Scheme”), which seeks to provide additional credit of up to Rs 3 lakh crore at low cost have enabled MSMEs to meet their operational liabilities and restart their businesses.

As of September 21, 2020, the total amount sanctioned under the 100 percent ECLGS by PSBs and private banks to MSMEs and individuals stands at Rs 1,77,353 crore, of which Rs 1,25,425 crore has already been disbursed.

A small tweak in the scheme may help many MSMEs that are currently not being able to benefit from ECLGS. These are the borrowers who are financed by small NBFCs which because of their own liquidity constraints are not being able to lend to them. The following tweaks can be made after which MSMEs who are not benefitting from the ECLGS can benefit from it.

As per the Operational Guidelines of the ECLGS, Member Lending Institutions (“MLIs”) can grant a pre-approved sanction limit of up to 20 percent of loan outstanding as of February 29, 2020, to eligible borrowers, in the form of additional term loan facility. Such a pre-approved facility can be granted only to existing borrowers with outstanding loan up to Rs 50 crore and annual turnover up to Rs. 250 crore in FY 2019-20.

In view of the above provision of the Scheme, MLIs can grant a loan to its existing borrowers only and not to other MSMEs who are not borrowers as of February 29, 2020.

NBFCs, especially, small and medium-sized, have been facing a liquidity crunch since 2018, after the IL&FS fiasco. The COVID-19 driven lockdown has aggravated the situation. This is despite sincere measures taken by the government to provide liquidity to NBFCs through TLTRO 2.0, PCG 2.0, Special Liquidity Scheme etc. The situation for small and medium-sized NBFCs has not changed significantly, and these companies continue to face difficulties in raising funds.

In view of the non-availability of sufficient capital, these NBFCs are unable to pass on the benefits under the Scheme to the deserving MSMEs and we feel that this gap can be filled by allowing MSME borrowers to avail the financing under ECLGS from other lenders who are existing MLIs.

If the below two changes are done in the ECLGS scheme we can make the scheme inclusive for MSMEs who are not benefiting from the scheme:

To amend the guideline and allow MLIs to lend to MSME borrowers of other NBFCs even if they were not borrowers on their own book as on February 28th, 2020 after taking no objection certificate from the other NBFCs.

Additionally, if the existing guidelines can be amended to give the effect that any Term Loan given by a Public Sector Banks (“PSBs”) and Private Sector Banks, which is utilised exclusively to onward lend to an MSME borrower to avail the facility under ECLGS would also be covered under the ECLGS Scheme. This would increase the availability of funds in the hands of an NBFC to lend to their MSME borrower under the scheme.