What does this credit guarantee scheme mean for MSMEs?

Key takeaways: 

• ECLGS offers 100% guaranteed coverage against defaults to banks and NBFCs who extend emergency credit to MSMEs

• The Rs 3-lakh-crore scheme has helped incentivise member lending institutions (MLIs) to provide low-cost credit to MSMEs for their short-term operational needs.

• The scheme has been extended to 30.09.2021 or till the guarantees for an amount of Rs.3 lakh crore are issued. The disbursement under the scheme is also permitted up to 31.12.2021(1).

ECLGS stands for Emergency Credit Line Guarantee Scheme. Under this, the government of India offers banks and non-banking financial companies (NBFCs) 100% guarantee against defaults on the emergency credit they extend to micro, small and medium enterprises (MSMEs).

The Rs 3-lakh-crore scheme was launched last year to help the MSME sector raise emergency finance to tide over the crisis induced by the pandemic. By providing a 100% guarantee, Through ECLGS, the Government aims to incentivise member lending institutions (MLIs) to provide low-cost credit to MSMEs for their short-term operational needs. 

The emergency credit scheme has been revised and extended through ECLGS 1.0, 2.0, 3.0 and 4.0 The scheme’s validity has been extended until September 30, 2021, and the last date of disbursement of funds has been set as December 31, 2021

ECLGS interest rate and other features

MSMEs can get a term loan at an interest rate of 14% per annum under ECLGS. The loan is available only to existing customers of MLIs without any additional collateral. Other features include: zero processing fees and zero prepayment or foreclosure charges.

As an MSME you can get a term loan at fixed or floating interest rate. The interest rate has been capped at 9.25% for banks and 14% for NBFCs. The loan is available to existing customers of MLIs without the need for additional collateral with many MLIs even incentivising customers via lucrative offers.  

Who is covered under the scheme? 

All MSMEs set up as proprietorships, partnerships, registered companies, trusts and limited liability partnerships (LLPs), interested borrowers under the Pradhan Mantri MUDRA Yojana (PMMY), and individuals who have taken loans for business. 

All about ECLGS 1.0, 2.0 and 3.0

ECLGS 1.0: Under ECLGS 1.0, MSMEs could borrow additional funds of up to 20% of their outstanding credit as of February 29, 2020. The credit facility under ECLGS 1.0 came with a tenure of 4 years and a moratorium of 1 year. MSMEs with outstanding loans of up to Rs 25 crore and Rs 100 crore in turnover were eligible under ECLGS 1.0.

ECLGS 2.0:  ECLGS 2.0 extended cover to 26 stressed sectors identified by the Kamath Committee. 2.0 also increased the loan tenure to 5 years with a one-year moratorium. It removed the turnover cap and all businesses with an outstanding credit of Rs 50 crore-Rs 500 crore (as of February 29, 2020) were made eligible.

ECLGS 3.0: The latest version covers stressed service sectors like hospitality, travel & tourism, leisure and sporting. MSMEs can get additional credit of up to 40% of the total outstanding amount. 3.0 extends the tenure of loans to 6 years, with a moratorium of 2 years.

Eligibility criteria for MSMEs to get credit under ECLGS(2):

• All MSMEs with combined outstanding loans of up to Rs 50 crore (across all lenders) in any sector and up to Rs 500 crore for borrowers in the hospitality, travel and tourism, leisure and sporting sectors (as on February 29, 2020).

• All MSME borrowers in the 26 sectors identified by the Kamath Committee and in the healthcare sector with outstanding loans of more than Rs 50 crore and not exceeding Rs 500 crore across all lenders (as on February 29, 2020).

• To be eligible, the MSME must be a customer of an MLI and have GST registration (unless GST registration is not required for the business).

• Individuals who have taken loans for business

The Emergency Credit Line Guarantee Scheme has provided much needed low-cost credit to MSMEs. However, with the pandemic still in full-swing and a third wave expected in India, the impact on businesses around the country could be severe. Similar initiatives will be needed to ensure the long-term survival and eventual growth of MSMEs. Incentivising equity investments from the general public, prioritizing access to funding for MSMEs, and tax-friendly policies from the legislature could be the key to reviving the industry.