The government of India recently extended the Emergency Credit Line Guarantee Scheme (ECLGS) for Micro Small and Medium Enterprises (MSMEs) by one month until 30th November. This extension was announced  by the Union Finance Minister via a series of tweets posted on Twitter.

This was decided because the Emergency Credit Line Guarantee Scheme (ECLGS) has so far not reached its target of disbursing loans worth Rs. 3 Lakhs Crore. Initially, keeping in mind the nationwide lockdown, the scheme was applicable till the end of October. Though the scheme has been extended till 30th November it might be wrapped up earlier if the target loan amount of Rs 3 Lakhs Crore is achieved before that. The extension of the scheme comes in the view of the festive season that usually sees uptick in business trends across the country. 

Scope of the Scheme

The central government launched the ECLGS as part of the Atma Nirbhar Bharat Abhiyan package announced in May. The primary aim of this scheme was to offset the impact of the Covid-19 pandemic lockdown, imposed by the government in the final week of March. The scheme offers a financial boost to ailing MSMEs and small businesses by providing financial credit at attractive interest rates. 

Experts are of the opinion that the extension of the scheme will provide a further opportunity to numerous first-time borrowers to obtain credit under the scheme. According to the data updated by the member banking institutions on the ECLGS portal, loans of Rs. 2.03 Lakhs Crore have been sanctioned under the scheme to 60.67 Lakhs borrowers so far. An amount of Rs. 1.48 Lakhs Crore has been shelled out.

Purpose of Emergency Credit Line Guarantee (ECLGS)

The Scheme may be a specific response to the unprecedented situation COVID-19. It seeks to supply much needed relief to the MSME sector by incentivizing MLIs to supply additional credit of up to Rs. 3 Lakh Crore at low cost, thereby enabling MSMEs to satisfy their operational liabilities and restart their businesses.

Benefits of Emergency Credit Line Guarantee (ECLGS)

The scheme provides fully guaranteed and collateral-free loans to MSMEs, or individuals for business purposes. MUDRA borrowers can also avail up to 20% of their credit outstanding. Borrowers with a credit outstanding up to Rs. 50 Crore as on 29th February 2020, and with an annual turnover of up to Rs. 250 Crore are eligible for credits under this scheme.

The tenure of loans that is provided under the scheme is for four years, it also includes a moratorium of one year on principal repayment. The scheme caps the interest rates at 9.25% for banks and financial is capped at 14% in the case of non-banking financial companies (NBFCs). 

The Emergency Credit Line Guarantee Scheme (ECLGS) provides 100% guarantee coverage by National Credit Guarantee Trustee Company (NCGTC) to Member Lending Institutions (MLIs) on Guarantee Emergency Credit Line (GECL) of upto Rs. 3 Lakhs Crore to eligible MSMEs. 

Banks have to meet the criteria of including MSMEs/Business Enterprises which are constituted as proprietorships, registered companies, partnerships, limited liability partnerships(LLPs), and Private Trusts. Interested borrowers can also apply under Pradhan Mantri Mudra Yojana (PMMY).

How does it work? 

A separate loan account shall be opened for the borrower for extending additional credit under GECL. This account is going to be distinct from the prevailing loan account(s) of the borrower.

This is a pre-approved loan. An offer from the MLI to eligible borrowers for a pre-approved loan which the borrower may prefer to accept. If the MSME accepts the offer, it'll be required to finish requisite documentation. Thus, an ‘opt-out’ option is going to be provided to eligible borrowers under the Scheme, i.e., if the borrower isn't curious about availing the loan, he/she may indicate accordingly.

Eligibility Criteria

The eligibility criteria under the Scheme are as under:

  • Loans under ECLGS are available to all MSME borrower accounts with a combined outstanding loan amount  across all MLIs of up to Rs. 25 crore as on 29.2.2020, and annual turnover of up to Rs. 100 crore for  FY 2019-20. In case accounts for FY 2019-20 that are yet to be audited/finalized, the MLI may depend on the borrower’s declaration of turnover.
  • The Scheme is valid only for existing customers on the books of the MLI.
  • 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 won't be eligible under the Scheme.
  • The MSME borrower must be GST registered in 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 won't be covered under the scheme.

Wrapping Up

The Emergency Credit Line Guarantee is offered in aid of the Micro, Small and Medium Enterprises (MSMEs) sector. It aims to address working capital needs, operational liabilities and restart businesses impacted due to the COVID-19 crisis. By extending the credit line for one more month, it proves more beneficial for small businesses, which is the need of the hour.