Detailing the Emergency Credit Line Guarantee Scheme (ECLGS)

The Emergency Credit Line Guarantee Scheme (ECLGS) is a relief measure announced by the government to help businesses cope with the extreme cash crunch due to COVID-19, which brought most production to a standstill, affected payment of wages, and caused the migration of labourers.

The scheme was extremely critical to the micro, small & medium enterprises (MSMEs) as they are the lifeline of the Indian Economy with over 29 percent contribution to its GDP, employing 11 crore workers and accounting for over half of the country’s exports.

1. The ECGLS scheme

The scheme was announced by the Finance Minister, Nirmala Sitharaman on May 13, 2020, to the tune of Rs 3 lakh crore in the form of a collateral-free loan to customers and government-guaranteed support to financial institutions. This 100 percent collateral-free scheme, the ECLGS, is to be forwarded by the National Credit Guarantee Trustee Company (NCGTC), to the banks and financial institutions. It is a part of the larger Rs 20 lakh crore Atmanirbhar Bharat Abhiyan package from the government to support the industries.

2. The criteria, eligibility, and duration

Businesses and MSMEs that have existing accounts with banks, financial institutions (FIs) and non-banking financial companies(NBFCs), having a combined outstanding across financial entities to the tune of Rs 25 crore as on February 29, 2020, and a turnover of Rs 100 crore (in 2018-2019) are eligible for the scheme. The outstanding due should be less than or equal to 60 days, and the borrower should not be classified as an NPA or SMA 2 by the lender as on February 29, 2020. It is also available to borrowers of the Pradhan Mantri Mudra Yojana (PMMY).

The maximum eligible amount is up to 20 percent of the total outstanding loans, up to Rs 25 crore, forwarded as working capital loans to Banks and FIs, and additional term loans to NBFCs.

Banks and FIs will be lending at interest rates linked to the Reserve Bank of India (RBI)-prescribed rate plus 1 percent limited to a maximum of 9.25 percent per annum. NBFCs will charge a maximum of 14 percent annual interest rate.

The loan is for four years from the date of disbursement with no processing fee. The borrower can make an early repayment of the loan without charges. It will accord a moratorium of one year on the principal amount alone, while the interest will have to be paid continuously. The principal will have to be repaid in equal installments over 36 months. It will be a separate loan account and not a top-up on existing loan accounts.

The scheme is available to a borrower from May 23, 2020, to October 31, 2020.

3. The disbursal process

The scheme is for existing borrowers only, in an automatic, simple, pre-approved process and the borrower need not personally approach the lender. Those who don’t need the loan have an ‘opt-out’ option. It is purely a loan for businesses, and personal loans are not granted.

The cost of the scheme has been kept low to benefit the borrowers, and the government guarantee reduces the risk of the lenders.

Most importantly, the scheme is available only for Udyog Aadhar registered MSMEs.