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Scope of Rs 3 lakh cr credit guarantee scheme expanded: What’s changed and why banks think it may work

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The government had first announced ECLGS in May as part of the Aatmanirbhar package primarily aimed at helping MSME who had been impacted due to the COVID-19 pandemic.

Scope of Rs 3 lakh cr credit guarantee scheme expanded: What’s changed and why banks think it may work
The government on Thursday expanded the scope of the Rs 3 lakh crores Emergency Credit Line Guarantee Scheme (ECLGS) to include 27 stressed sectors and extended its validity till March 2021, with a third of the scheme remaining unutilised so far.
“ECLGS 2.0 will provide much-needed relief to stressed sectors by helping entities sustain employment and meet liabilities. It will also benefit the MSME sector, which provides goods and services to eligible entities,” Finance Minister Nirmala Sitharaman said while announcing the changes to the scheme as part of the third tranche of the Aatmanirbhar Bharat package.
The government had first announced ECLGS in May as part of the Aatmanirbhar package primarily aimed at helping micro, small and medium enterprises (MSME) who had been impacted due to the COVID-19 pandemic. Under the scheme, eligible borrowers could avail collateral-free loans of up to 20 percent of their outstanding credit which were fully guaranteed by the government of India.
While the government had set a target of Rs 3 lakh crores of loans under ECLGS 1.0, banks had only sanctioned a total of Rs 2.05 lakh crores and disbursed Rs 1.52 lakh crores so far. This, despite ECLGS 1.0 being extended by a month from September to October, and other tweaks in turnover limits and categories of eligible borrowers being made.
With almost Rs 1 lakh crores of the Rs 3 lakh crores still unutilised, the government has expanded the scope to include the 26 stressed sectors identified by the KV Kamath Committee and also included the healthcare sector in ECLGS 2.0.
A research report by the State Bank of India said that as many as 40,000 entities could benefit from ECLGS 2.0. “ECLGS 2.0 can provide much-needed relief to stressed sectors including Auto Component, Construction, Gems & Jewellery, Hotel and Restaurants, Iron & Steel, Real Estate, Textiles, etc by helping entities sustain employment and meet liabilities. We believe potentially around 40,000 entities can benefit from the scheme,” the report said.
However, the report added, if the total amount stays at Rs 3 lakh crores, the overall corpus of ECLGS 2.0 could be a constraining factor.
ECLGS 1.0 vs ECLGS 2.0 
While the overarching framework of the scheme remains the same, certain relaxations have been provided for the 27 new sectors. Like RBI’s one-time restructuring scheme, the ECLGS 2.0 also only covers borrowers who were no more than 30 days overdue on their loan repayment as on February 29, 2020, compared to 60 days overdue allowed under ECLGS 1.0. The government has also done away with any annual turnover limit for the borrowers under ECLGS 2.0 and increased the repayment tenure.
Here’s how the two schemes compare. 
 CRITERIA 
ECLGS 1.0 ECLGS 2.0  
Eligible entitiesMSME units, Mundra Borrowers, Individual Loans for Biz (last amendment)Cos in 26 stressed sectors identified by Kamath Committee & Healthcare
Loan/Turnover Limit*Annual turnover of up to Rs 250 cr*Loans outstanding of up to Rs 50 cr as on Feb 29, 2020*No ceiling on annual turnover*Loans outstanding between Rs 50-500 crores
Days past due eligibility* 60 days past due or SMA-0 and SMA-1 as on Feb 29, 2020*30 days past due or SMA-0 as on Feb 29, 2020
Moratorium & Repayment* 1-year moratorium on principal* 4-year repayment window* 1-year moratorium on principal* 5-year repayment window
Scheme ValidityMarch 31, 2021March 31, 2021
Interest Rate cap* 9.25% for banks* 14% for NBFCs* 9.25% for banks* 14% for NBFCs
Why ECLGS 1.0 Remained Under-utilised  
The credit gap Indian MSMEs face is huge.  As per the MSME Ministry data, India has approximately 7 crore MSME units. An International Finance Corporation report from 2019 shows that of the overall MSME debt demand of Rs 69.3 trillion, 84 percent is financed from informal sources and only 16 percent from formal sources. Despite this, a third of the ECLGS 1.0 funds remained unutilised. Why?
Business nahi hai toh loan kya karenge?” remarked a banking official in a lighter vein. Another banker from a large public sector bank seemed to agree. He said, “Many MSMEs told us they don’t want the loan even though they are eligible because they don’t want to increase the burden of debt during such difficult times.” During the first few months of the lockdown, very few saw good businesses and therefore stayed away from over-leveraging.
This person added that it seems unlikely that any more MSMEs will come forward to avail credit under the scheme, and that most of it would now go towards the other stressed sectors under ECLGS 2.0. “We have sanctioned loans under ECLGS 1.0 to almost over 80 percent of the eligible MSMEs, and more than 90 percent of the amount has been disbursed,” added a bank official from a large bank.
Others believe that the Rs 3 lakh crore target was too ambitious from the start. As of March 2020, loans of about Rs 14 lakh crores were outstanding to the MSME sector. 20 percent of that would amount to about Rs 2.8 lakh crores, and even that would be exhausted if each and every MSME came forward to avail of loans under the scheme, which was unrealistic, said one of the people quoted earlier.
Will ECLGS 2.0 Do the Trick? 
“Rs 3 lakh crores is a substantial amount. We are relieved actually that the whole sum was not exhausted. Since the start of the lockdown, our ask had been that these funds be allowed to other stressed companies as well, and now the government has finally granted that.”  One of the other bankers CNBC-TV18 spoke to explained that allowing larger companies to also benefit under the scheme initially would defeat the purpose of helping the smallest units, as the large companies would crowd out the funds. Now, with the MSMEs almost exhausting the demand, larger companies could also benefit under ECLGS 2.0.
Almost Rs 37.72 lakh crores of banking sector debt have been impacted by COVID19, the KV Kamath led expert committee on restructuring had said. The committee found that Rs 15.52 lakh crores of debt, forming 29.4 percent of the total corporate debt, was impacted by the pandemic alone. Another Rs 22.20 lakh crores of impacted debt, forming 42.1 percent of total corporate debt examined, was already facing stress pre-COVID. Therefore, banks estimate there will be many takers for ECLGS 2.0, as long as they are able to meet the eligibility criteria.
While the Reserve Bank has allowed banks to restructure loans of stressed corporates, banks say that many corporates still want to avoid the “restructuring” tag and had therefore not come forward to apply for the restructuring scheme.  “Such companies may now be able to get additional money via ECLGS 2.0 instead of going for restructuring,” said one of the people quoted earlier. Therefore, banks are hopeful that the remaining Rs 1 lakh crore would be easily be utilised under the scheme.
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