Budget 2022: Banks seek 1-year extension of ECLGS for MSMEs, relaxed eligibility criteria for wider reach

Banks have sought an extension of the Rs 4.5 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for micro, small and medium enterprises (MSMEs) by at least another year to provide some relief to the COVID-hit sector, several banking executives in the know told CNBC-TV18.

The Indian Banks Association (IBA) recently reached out to the government with the request to extend the scheme amid the third wave of coronavirus infections which may further hit small businesses which are still in a fragile financial position.

The central government introduced the Emergency Credit Line Guarantee Scheme (ECLGS) in May 2020, intending to provide financial assistance to the pandemic hit MSME sector, and later expanded the scheme to cover other stressed industries as well. The government had expanded the funds allotted under ECLGS from Rs 3 lakh crore initially to Rs 4.5 lakh crore and also extended the scheme until March 2022.

“We have asked them (government) to consider a one year extension for ECLGS, because there is going to be stress unless we provide additional support,” said a person directly in the know.

Besides requesting an extension in the scheme’s validity, banks have also requested the government to consider easing the conditions of the scheme to make it available to a wider set of MSMEs, according to banking executives in the know.

“There are a few things we have requested. One, eligible borrowers who have already availed credit under the scheme should be allowed upto 10 percent additional credit. Two, SMA-2 (special mention account) borrowers should also be made eligible because the stress build up is due to external factors outside their control. We have also asked that the Rs 50 crore cap on outstanding loan be done away with. All MSMEs should be eligible, big and small,” said one of the people quoted earlier.

The scheme in its current form provides 100 percent guarantee coverage for additional working capital term loans upto 20 percent of the entire outstanding credit. Only those MSME borrowers with outstanding loans of upto Rs 50 crore as on February 29, 2020 were eligible, subject to account being less than or equal to 60 days past due as on that date. Banks want this ceiling to be removed now.

When asked whether the allotted funds under the scheme are sufficient, a senior executive from the Indian Banks Association said that so far only about Rs 3.10 lakh crore of the Rs 4.5 lakh crore allocated has been utilised. This person added that the remaining funds would be sufficient to take care of the credit needs of MSMEs for now, and that no additional funds would be required.

While MSME business activities picked up in the second half for the year, they still remain below pre-pandemic levels.

“Pressure on MSMEs will increase as the government’s Emergency Credit Line Guarantee Scheme (ECLGS), first launched in May 2020, winds down in the coming months. Most beneficiaries of the scheme have been micro and small businesses, and new disbursements under it will cease by end-June 2022. Any non-performing loans (NPL) under the scheme’s various iterations will start showing up as the applicable moratoriums on principal repayments expire over the next one to two years,” ratings and research agency Fitch said in a recent note.

Fitch expects stresses in the MSME and microfinance segments to culminate in higher NPLs, particularly as tightened impairment recognition norms come into effect by March 2022.

“The severity of further asset-quality deterioration and impairment costs will depend on the pace of economic recovery. We believe the authorities are likely to step in with further forbearance if impairments climb too quickly,” Fitch said.

The Reserve Bank of India in its latest Financial Stability Report released at the end of December warned that there are emerging signs of stress in the MSME segment, which called for a closer monitoring of the portfolio.