ECLGS Supports Credit Flow in MSME Sector to Bring Financial Stability

The Emergency Credit Linked Guarantee Scheme (ECLGS) scheme announcement made for MSME’s.

To shield the MSME’s from unexpected financial distress and support their operational activities as it is important to note, MSME’s play a significant role and contribute majorly into our country’s GDP, the Finance minister, Nirmala Sitharaman, announced a revamped credit guarantee scheme to provide MSMEs with more collateral-free credit in her 5th budget in the Union Budget 2023.

Credit flow in small and medium scale business has improved and gone up significantly and this has been assisted by the introduction of the Emergency Credit Linked Guarantee Scheme (ECLGS). ECLGS was introduced to meet the operational liabilities and structuring the MSME business that was drastically affected by the covid 19 pandemic.

The scheme covers all the sector of economy as then stated by the Union Minister of State for Finance Dr Bhagwat Kisanrao Karad.

The ECLGS scheme aims to provide Credit facility” means financial assistance provided under the scheme by way of additional term loan or working capital term loan facility to eligible Business Enterprises in Micro, Small and Medium Enterprise (MSME). This will be disbursed to borrowers as individuals who have availed loan for business purposes. The financial assistance provided as part of the Scheme is to be operated as a separate loan account.

ECLGS is a part of the credit flow scheme announced by the government, and implementation of ECLGS in the MSME business helped MSME’s recover from losses incurred during the pandemic.

There are number of factors that lead to ECLGS in improving credit flow and include, macroeconomic conditions, sectoral issues with the MSME business, global business environment, governance issues in the borrowing entities etc.

ECLGS Improving Credit health in MSME sector

• As per survey research report dated 23.1.2023 of the State Bank of India on ECLGS, almost 14.6 lakh MSME accounts, of which about 98.3% of the accounts were in the micro and small enterprises categories, were saved.
• In terms of loan that were disbursed, MSME loan accounts worth Rs. 2.2 lakh crore improved since inception of ECLGS for entire banking industry.
• 12% of the outstanding MSME credit has been saved from slipping into non-performing asset (NPA) classification due to ECLGS.
• The Economic Survey 2022-23 states that the credit growth to the Micro, Small, and Medium Enterprises (MSME) sector has been remarkably high, over 30.6 % on average during Jan-Nov 2022 and supported by the extended Emergency Credit Line Guarantee Scheme (ECLGS) of the Government of India.
• Further recovery of MSMEs is proceeding at pace and evident in the amounts of Goods and Services Tax (GST) they pay, while the ECGLS is easing their debt servicing concerns.

As per CIBIL report says 83% of the borrowers were micro-enterprises, and more than 51% of these borrowers had an exposure of less than ₹10 lakh. The NPA rate in banks for the category of MSME borrowers who availed of ECLGS was lower than the category that did not avail of the scheme.

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ECLGS cover in MSME sector

ECLGS 3.0(Extension) refers to the scheme for providing additional support to existing borrowers of ECLGS 3.0 or new borrowers eligible under ECLGS 3.0 based on revised reference date of March 31, 2021 or January 31, 2022.

ECLGS 4.0 refers to the scheme for providing 100% guarantee to member lending institutions in respect of eligible credit facility extended by them to eligible hospitals, nursing homes or clinics and medical colleges, units engaged in manufacturing of liquid oxygen, oxygen cylinders etc. For setting up of on-site oxygen producing plants.

In the budget that was announced 2023  the government announced to increase Rs 9,000 crore for revamping another ‘non-emergency’ credit guarantee scheme for MSMEs, to facilitate additional credit of Rs 2 lakh crore.

But as per reports the government has stated that extending the ECLGS further makes no senses as there is no emergency unlike the pandemic scenario.

India has around more than 6 crore micro, small and medium enterprises (MSME) that employ close to 12 crore workers across sectors and industries that contribute to nearly 35% to the country’s gross domestic product (GDP).

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