Summary & Analysis of Emergency Credit Link Guarantee Scheme (ECLGS)

About the ECLGS:

-Under the Scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company Limited (NCGTC) for additional funding of up to Rs. 3 lakh crore to eligible MSMEs and other small business enterprises

-The Scheme aims at reduce the economic distress faced by MSMEs and other small business enterprises by providing them additional funding in the form of a fully guaranteed credit line.

-The Scheme also provide support to Lending Institutions by giving 100% guarantee for any losses suffered by them due to non-repayment the funds provided to the MSMEs and other small business enterprises under this scheme, so that the Lending Institutions can burden-free maximize the reach of this scheme and many MSMEs and other small business enterprises could get benefit from this scheme.

Which borrowers are eligible to avail funding under the scheme?

The MSME/Business enterprises meeting the following criteria are eligible to avail funding under the scheme:

a. The outstanding loan as on 29 February 2020 is less than or equal to Rs. 25 crore

b. The annual turnover in FY 2019-20 is less than or equal to Rs. 100 crore

c. No loan account is not overdue over 60 days as on 29 February 2020 (i.e. loan accounts are not classified as SMA2 or NPA by any lending institution}

Following Loan will be included in calculating total outstanding loan:

i. All Borrowings / On-balance sheet exposures like WC loans, TL, WCTL

ii. Govt scheme loans PM Mudra Yojana / PMEGP

Following Loan will not be included in calculating total outstanding loan:

i. Loan taken by promoter or director in personal/individual capacity

ii. Off balance sheet exposure

iii. Non fund based exposure

Example of Borrower Eligibility

Borrower	Total loan as on 29 Feb 20 (Rs. Cr.)	No. of days account overdue as on 29 Feb 20 (days)	Turnover in FY 2019-20 (Rs. Cr.)	Eligibility
A	35	30	90	Not eligible
B	27	62	90	Not eligible
C	25	59	75	Eligible
D	15	0	80	Eligible
E	20	0	125	Not eligible

Comment:

The scheme used Business enterprises along with MSME institutions everywhere in the guidelines. MSME term includes manufacturing and service activity but doesnot include traders or standalone trading activity. Business enterprise is a generic term and is not defined in the scheme guidelines. So as per common meaning this will include traders as well as trading along with manufacturing and service activity. The initial announcement related to this scheme by FM referred only MSME, so it was initially interpreted as not applicable to traders. However with the use of the term business enterprise in the detailed guidelines this scheme is even applicable to trader. Also a senior Finance Ministry official to certain new agencies this scheme will be available for retailers and other businesses too even if they are not registered as Micro, Small and Medium Enterprises (MSME).

How much Funding is available under the scheme?

The MSME/Business enterprises can avail loan upto 20% of outstanding loan as on 29 February 2020

Which lending institutions are eligible to provide additional finance under the scheme?

Following lending institution are eligible to provide additional finance under the scheme:

a. All Schedule Banks

b. Financial Institutions u/s 45-I (c) of RBI Act

c. NBFC (operating over 2 years as on 29 February 2020)

• The borrower can make application only with the lending institution whose loan is outstanding as on 29 February 2020 and on the date of application.
• In case a borrower has existing limits with multiple lenders, the additional funds under the scheme may be availed either through one lender or multiple lenders depending upon the agreement between the borrower and the MLI.
• In case the borrower wishes to take from any lender an amount more than the proportional 20% of the outstanding credit that the borrower has with that particular lender, a No Objection Certificate (NOC) would be required from all other lenders.
• No NOC will, however, be required if the additional fund availed from a particular lender is limited to the proportional 20% of the outstanding credit that the borrower has with that lender.

Examples to calculate the loan amount covered under the Guarantee coverage:

Borrower	Overall Outstanding of the Borrower cross different lenders (Rs. Cr.)	Overall Outstanding of the Borrower with a particular lender (Rs. Cr.)	Total Maximum Loan Amount allowed under the scheme (Rs. Cr.)	Total Maximum Loan Amount allowed without NOC (Rs. Cr.)
	I	II	III=I x 20%	IV=II x 20%
A	20	15	4	3
B	5	2	1	0.4
C	25	25	5	0.5
D	15	15	3	2

Comment:

The addition funding under this scheme cannot be made, in respect of loans outstanding with Co-operative Banks (Non Scheduled ). As these lending institution are not the eligible lending institution.

Interest rate and other charges:

1. Interest rates are capped :

a. Banks and FIs can charge interest rate at External Benchmark rate +1 (not exceeding 9.25%)

b. NBFC can charge upto 14%

2. No additional processing fees

3. No penal interest to be charged for non compliance of terms of existing loans during the sanction of this additional loan

4. No prepayment penalty

5. No guarantee charges

6. Interest subvention applicable as far as feasible

What is the Duration of the scheme?

The scheme is open till earlier of the following:

a. 31^st October 2020 or

b. Sanctions under the scheme completes Rs. 300000 crores

Comment:

Duration of scheme is earlier of (a) 31 October 2020 or (b) Scantion under scheme completes Rs. 300000 crores. So it is advisable to to avail the loan early as scheme may get closed before 31 October 2020 if budgeted amount of loans gets sanctioned.

What is the Tenor of the Loan ?

a. Period : 4 years from date of disbursement

What are the repayment terms ?

a. In case of Principal :

Moratorium on principal repayment is for 1 year. Thereafter principal shall be repayment in 36 instalments. However prepayment is allowed and there are no prepayment penalty charges payable on that

b. In case of Interest :

No moratorium on interest, interest payable in as applicable.

What are the Security to be offered?

a. This additional credit facility rank paripasu with existing credit facilities in terms of cash flows and security

b. This additional credit facility also have charge on the assets financed under the Scheme to be created within a period of three months from the date of disbursal.

c. No additional collateral shall be asked for additional funding under the scheme.

Other Features of this Scheme:

a. it is not necessary that the existing loans of the borrowers should be covered under the existing NCGTC or CGTMSE Scheme

b. Loans extended through current Government schemes such as PMEGP, PMMY etc. would continue to be categorized under that scheme as earlier. WCTL/Term Loans under this Scheme shall be over and above the existing loan.

c. Lending Institutions can invoke guarantee on becoming the account NPA, Lending institutions are required to intimate the trustee company within 90days. The Trustee Company will pay 75% guaranteed amount within 30 days of intimation is documents and records found in order and balance 25% on completion of recovery proceedings or limitation of time.

d. Lending Institutions are expected to be liberal in sanctioning loans. They are, however, expected to evaluate credit proposals by using prudent banking judgement and use their business discretion / due diligence in selecting commercially viable proposals and conduct the account(s) of the borowers with normal banking prudence.

Conclusion:

• The loan approval will be a bit libraralised as it is back by govt. guarantee however banks are expected to evaluate it on merit.
• Though no collateral security is required but it has paripasu charge with existing credit facilities in terms of cash flows and security.
• Lending institutions are expected to take necessary steps to ensure recovery of loan as like they do it for regular loan.
• ECLGS scheme is a guarantee support provided based on which the MSME/Business Enterprises can raise addition funds as like a regular loan upto 20% from their existing lenders at concessional rate.