ECLGS 2.0 – Emergency Credit Line Guarantee Scheme
On the wake of reviving economic activities, Indian finance minister Ms. Nirmala Sitharaman announced that Emergency Credit Line Guarantee Scheme (ECLGS) has been extended till March 31st, 2021 under Atmanirbhar Bharat Package 3.0. This extortion is aimed to aid MSME’s in view of the economic distress caused by COVID19 Pandemic.
What is ECLGS?
Emergency Credit Line Guarantee Scheme provides 100% guarantee coverage by National Credit Guarantee Trustee Company (NCGTC) on Guarantee Emergency Credit Line (GECL) to INR 3 Lakh Crore to eligible MSMEs or Business Enterprises.
As of writing Loans worth INR 2,05,563 crore has already been sanctioned to about 81 lakh accounts that were disrupted due to the corona-virus pandemic. Out of which INR 1.52 Lakh crore is already disbursed under ECLGS1.0.
What is ECLGS 1.0 & ECLGS 2.0?
ECLGS-1.0 refers to the scheme for providing 100% Guarantee coverage by NCGTC to its Member Lending Institutions against extension of eligible credit to its existing borrowers whose total credit outstanding (fund based) across all lending institutions and days past due as on February 29, 2020 was up to Rs.50 crore and up to 60 days respectively.
ECLGS-2.0 refers to the scheme for providing100% Guarantee coverage by NCGTC to its Member Lending Institutions against extension of eligible credit to its existing borrowers in the 26 stressed sectors identified by the Kamath Committee on Resolution Framework and the Healthcare sector whose total credit outstanding (fund based) across all lending institutions and days past due as on February 29, 2020 was above Rs.50 crore and not exceeding Rs.500 crore and up to 30 days respectively.
Significance: With various measures to support Industry the scheme is an appealing option for Businesses which are still reluctant to opt for One Time Restructuring (OTR) which allows them to restructure existing debts.
Eligibility of ECLGS:
- MSMEs/ Business Enterprises which are constituted as Proprietorships, Partnerships, Registered Companies, Trusts and Limited Liability Partnerships (LLPs), and also interested borrowers under Pradhan Mantri Mudra Yojana (PMMY) borrowers can take benefit of ECLGS.
- Member Lending Institutions (MLIs) and all Scheduled Commercial Banks (SCBs) under MLIs would be able to disburse guarantee.
- All MSME Accounts with Combined outstanding loans across all MLIs should be less than (i.e., sum of all borrowing) INR 25 crore as on 29th February, 2020 and annual turnover up to INR 00 crore with exception of healthcare where credit limit for borrowing is up to INR 50 crore and annual turnover is capped up to INR 500 crores which is revised to upper limits for both ECLGS 1.0 & 2.0 schemes as mentioned above.
- The scheme is valid for existing books of MLIs, so no new entities can avail. the benefits
- Loans provided in individual capacity are not covered under the Scheme
Terms:
- The Scheme would be applicable to all loans sanctioned under GECL during the period from May 23, 2020 to 31st October, 2020, or till an amount of Rs. 3 lakh crores are sanctioned under GECL, whichever is earlier, this term has been extended till March 31st, 2021 as of ECLGS 2.0 under Atmanirbhar Bharat 3.0 Package.
- Credit under GECL would be up to 20% of the borrower’s total outstanding credit up to Rs. 25 crores, excluding off-balance sheet and non-fund-based exposure, as on 29th February, 2020, e., additional credit shall be up to Rs. 5 crores.
- Five years of tenor is provided to the loans under ECLGS 2.0 with 12 months moratorium on repayment of principal.
- Borrower accounts should be classified as regular, SMA-0 or SMA-1 as on 29.2.2020. Accounts classified as NPA or SMA-2 as on 29.2.2020 will not be eligible under the Scheme.
- For the purpose of this Scheme, it is not necessary that the existing loans of the borrowers should be covered under the existing NCGTC or CGTMSE Scheme
- The MSME borrower must be GST registered in all cases where such registration is mandatory. This condition will not apply to MSMEs that are not required to obtain GST registration.
- Loans provided in individual capacity will not be covered under the Scheme.
Example on Eligibility:
| Borrower | Overall Outstanding of the Borrower across MLIs (INR Crore) | Overall Outstanding of the Borrower with MLI (INR Crore) | DPD of borrower as on 29th Feb 2020(Days) | Turnover as per latest available financials (INR Crore) | Eligibility |
|---|---|---|---|---|---|
| A | 30 | 15 | 30 | 90 | NO |
| B | 30 | 15 | 62 | 90 | NO |
| C | 25 | 25 | 59 | 75 | YES |
| D | 15 | 10 | 0 | 80 | YES |
| E | 20 | 10 | 0 | 125 | NO |
Loan Sanctioning
As question arises that how much amount would be sanctioned to eligible applicants. The answer Is sanctioned loan would be 20% of the total outstanding credit of borrowers that can be sanctioned as a loan under the Guaranteed Emergency Credit Line (GECL), for those who having a loan as on Feb 29, 2020. Since these loans are pre-approved, Processing charges, foreclosure and prepayment charges will be waived. No collateral is required for this scheme.
Interest Rate under the ECLGS Scheme
The scheme allows borrows to borrow extra capital to resume operations under the similar framework as term loans with moratorium period so they can kick start economic activities and create sustainable workflow that was disrupted.
Interest rate on GECL shall be capped as:
- For Banks & Financial Intuitions, lending rates are linked to external benchmark rates prescribed by RBI + 1% subject to maximum 9.25% per annum and for NBFCs, interest rates on GECL shall not exceed 14% / annum.
- For Existing Customers, the additional pre-approved facility shall be provided without any additional charges by MLIs to borrowers.
- No penal interest due to any non-compliance of the already accepted covenants on the existing credit facilities may be charged on additional loans during the sanction time.
Effects on Existing Credit Ratings:
As any other borrowings, credits under ECLGS would be counted towards regular borrower framework and it may affect one’s ratings. However, since this scheme is introduced to eliminate unique situation due to pandemic, rating agencies are also complying with structural reforms and moratorium period would be beneficial to eliminate any side effects that may be caused with the introduction of scheme.
The scheme provisions borrowing from GECL under separate account with given terms, interest rates and 12 months of moratorium period along with 48 months of tenure to repay the debt. These borrowing are accounted towards total borrowing.
Since this scheme is specifically introduced to improvise MSMEs, the applicants degrading ratings due to unforeseen circumstances and hard decisions, ratings should improvise as economy recovers along with all business sectors foresee raise in demand.
OTR or ECLGS?
That’s tough decision to make. Businesses should consult and find their eligible options available. One-time restructuring (OTR) is introduced to enterprises that have sustainable capital but cannot utilize due to credit repayments and ever closing profit margins due to work inactivity. OTR is beneficial for enterprises that can sustain capital demands for limited period of time and is trying to recover losses.
ECLGS scheme on other hand introduces new capital can borrowing to existing portfolio. This scheme is good for key 26 sectors identified by committee, which are stressed and does not have working capital and are likely to default due to financial crisis. The scheme revives such MSMEs and businesses to make them profitable again in hope that it would help kick-start economy and credits would be repaid as a result. Since OTR is limited time opportunity (Last due is on 31st December, 2020), business which are still reluctant to opt for restructuring can avail. Extra capital under ECLGS would help them sustain for more time.
Either way both schemes are a very welcoming move to help businesses that employ thousands of workforce. Failing to help those businesses would result in a big chaos, resulting in all time high unemployment ultimately hurting struggling economy more.
Some Articles you may be interested in:
- Effects of sound repayment history on credit rating process
- One Time Restructuring (OTR) and It’s Impacts
