• India
  • Jun 16

Explainer / ECLGS for MSMEs

Finance Minister Nirmala Sitharaman held a meeting with the heads of 20 major private sector banks, and asked them to ensure effective rollout of Rs 3-lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector, hit hard by coronavirus-induced lockdown.

“The finance minister chaired a meeting through video conference with major private banks and NBFCs to ensure effective rollout of ECLGS and uninterrupted/ smooth liquidity to Indian MSMEs in this difficult time,” the finance ministry said in a tweet.

As of June 11, public sector banks have sanctioned loans worth Rs 29,490.81 crore under the 100 per cent Emergency Credit Line Guarantee Scheme. Out of this, Rs 14,690.84 crore has already been disbursed.

What is Guaranteed Emergency Credit Line (GECL)?

The GECL is a loan for which 100 per cent guarantee would be provided by National Credit Guarantee Trustee Company (NCGTC) to Member Lending Institutions (MLIs), and which will be extended in the form of additional working capital term loan facility in case of scheduled commercial banks (SCBs) and financial institutions (FIs), and additional term loan facility in case of non-banking financial companies (NBFCs), to eligible MSMEs/ business enterprises and interested Pradhan Mantri Mudra Yojana (PMMY) borrowers. 

What is ECLGS?

The Emergency Credit Line Guarantee Scheme (ECLGS) has been formulated as a specific response to the unprecedented situation caused by COVID-19 and the consequent lockdown, which has severely impacted manufacturing and other activities in the MSME sector.

The scheme aims at mitigating the economic distress being faced by MSMEs by providing them additional funding of up to Rs 3 lakh crore in the form of a fully guaranteed emergency credit line. 

The main objective of the scheme is to provide an incentive to Member Lending Institutions (MLIs) — banks, financial institutions (FIs) and non-banking financial companies (NBFCs) to increase access to, and enable availability of additional funding facility to MSME borrowers, in view of the economic distress caused by the COVID-19 crisis, by providing them 100 per cent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers.

The scheme is the biggest fiscal component of the Rs 20 lakh crore Atmanirbhar Bharat Abhiyan economic package announced in May.

On May 21, the Cabinet had approved additional funding of up to Rs 3 lakh crore at a concessional rate of 9.25 per cent through ECLGS for the MSME sector.

The scheme would be applicable to all loans sanctioned under GECL during the period from the date of announcement of the scheme to October 31, 2020, or till an amount of Rs 3 lakh crore is sanctioned under the GECL, whichever is earlier.

Significance of the scheme

In view of the critical role of the MSME sector in the economy and in providing employment, the scheme is expected to provide much needed relief to the sector by incentivising MLIs to provide additional credit of up to Rs 3 lakh crore to the sector at low cost, thereby enabling MSMEs to meet their operational liabilities and restart their businesses. By supporting MSMEs to continue functioning during the current unprecedented situation, the scheme is also expected to have a positive impact on the economy and support its revival.

What is NCGTC?

National Credit Guarantee Trustee Company Ltd (NCGTC) was established by the department of financial services as a wholly owned company of the Government of India, to act as a common trustee company for multiple credit guarantee funds. It is a company incorporated under the Companies Act 1956 on March 28, 2014. 

Its main objective is to play a developmental role in supporting the country’s economic development agenda by assisting students and enterprises in obtaining finance from member lending institutions. NCGTC facilitates access to financing through the guarantee schemes under its management. 

The common architecture of NCGTC has been designed to handle multiple guarantee programmes under a single umbrella organisation. This is with a view to achieve operational efficiencies and economies of scale through sharing of resources such as technology, premises, manpower, risk management solutions and other support services. 

The intent of NCGTC is therefore, to manage multiple guarantee schemes as part of a larger financial inclusion programme of the government covering different cross-sections and segments of the economy like students, micro entrepreneurs, women entrepreneurs, SMEs, skill and vocational training needs, etc.

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