Are ‘loan melas’ helpful?

Onus lies on the borrowers under the credit guarantee scheme to make it effective in economic recovery
Are ‘loan melas’ helpful?
Representational Photo

The Union Finance Minister, Nirmala Sitharaman, once again set a wave of hope for beleaguered economic sectors on Monday, when she announced the expansion of the government’s flagship emergency credit line guarantee scheme (ECLGS) to more sectors. By bringing in more sectors into its credit guarantee fold the government has now increased the total outlay of the ECLGS by ₹1.5 trillion to ₹4.5 trillion. In simpler terms, this is going to be a credit support to the businesses, more particularly to weak and small businesses to stay afloat after the deadly second Covid-19 wave derailed their recovery efforts in the aftermath of the first wave of the pandemic.

In order to mitigate the stress caused by the Covid-19 pandemic on several sectors across the country, the government announced an Emergency Credit Line Guarantee Scheme, which incorporates ECLGS 1.0, ECLGS 2.0, ECLGS 3.0 and now ECLGS 4.0.

Before deliberating upon the current credit guarantee package which is fourth in series let’s understand different aspects of the Emergency Credit Line Guarantee Scheme (ECLGS).

The ECLGS aims to provide 100 percent guaranteed coverage to the banks and other lending institutions in order to enable them to extend emergency credit to business entities that have suffered due to the Covid-19 pandemic and are struggling to meet their working capital requirements. Its first version was launched as part of the Rs 20 lakh crore Covid-19 relief package named the Aatmanirbhar Bharat Abhiyan. The scheme aimed to provide Rs 3 lakh crore worth of collateral-free, government-guaranteed loans to micro, small and medium enterprises (MSMEs) across India to mitigate the distress caused by the coronavirus-induced lockdown.

It was followed by another version (ECLGS 2.0) in November 2020, extending the Rs 3 lakh crore schemes to support 26 stressed sectors identified by the Kamath Committee and the healthcare sector. The ECLGS 3.0 version of the scheme was launched to extend credit support to the Hospitality, Travel and Tourism, Leisure, and Sporting sectors, which are among those most affected by the Covid-19 pandemic.

Even as the Covid-induced catastrophe has adversely impacted even strong business houses, the weak and small businesses stand the worst sufferers. It’s this segment of businesses which has been starving of funds to stay afloat. Now the Monday announcement of another version of the scheme (ECLGS 4.0) has widened the scope of the scheme and among other things brought the small businesses under its ambit. This tailor-made credit guarantee scheme with increased outlay has opened a window for them to get funds, offset the virus-induced pandemic impact and stay in business. Though banks have schemes in place for small businesses, the high rate of interest doesn’t suit their business interests.

Remarkably, the latest version of the scheme will help the businesses like hotels, civil aviation and tour operators, which are the hardest hit by the second wave of COVID-19. It will also support build-up of healthcare infrastructure, mainly oxygen availability, in tier-2 and beyond cities and the hinterland. Besides, the moratorium on principal repayment and overall loan tenure extended by a year, and this is going to provide much-needed support to the sectors to tide over the ongoing virus-induced volatility in the business scenario.

However, in the given scenario engulfing the business of banks, the free flow of credit to these weak and small borrowers under the ECLGS scheme would be an interesting situation to watch. In earlier versions, the demand had been encouraging for the banks and they had demanded for the target to be encouraged. Notably, banks and other lending institutions have disbursed ₹2.69 trillion worth of loans under all the three versions of the scheme.

The fruitful impact of the scheme would depend on how much money is borrowed through this route. Sectors like tourism should benefit provided the virus allows the targeted sectors to operate in a meaningful manner. However, the end0use of funds needs to be monitored. There is a possibility that the borrower will use the borrowed funds to repay earlier outstanding loans as the pandemic-induced lockdown forced the businesses shut across the sectors. The facility would be fruitful in economic recovery if such funds are utilized as investment in the businesses.

According to the Care Ratings agency, credit guarantees through ECLGS have made banks give out credit more freely. However, loans to micro and small businesses continue to remain tepid. “The overall banking sector’s credit growth has remained anemic around 6%. Businesses are deleveraging and the motivation to borrow and invest in projects is very low currently. Moreover, firms borrowing are doing so only to pay back costlier debt they have on their balance sheets. Analysts have pointed out that credit is a medium-term booster to firms that are actually starved of revenues. The measures are unlikely to boost small business operations immediately. At best, easier credit would prevent firms going bankrupt due to the pandemic.”

Now let me point towards the other side of the story. A lot of effort has gone in tailoring various versions of the ECLGS scheme, which is obvious through the features of the scheme. In a never-seen-before pandemic-induced situation which disrupted every economic sector globally, nationally & regionally and broke the economic supply chains, the government announced packages in terms of credit guarantees to make business functional is always commendable. Now the onus lies on the existing as well as prospective borrowers to make best out of the facility in the interest of their businesses and they should not divert the funds to any other activity other than the one for which loans have been sanctioned. It’s to be understood that the package is not a relief or any sort of freebies; it’s a loan which needs to be repaid along with interest.

Precisely, it’s a tricky situation and is loaded with a lot of risk. We have already witnessed millions of job losses and millions of households facing drastic cuts in their income resources, which has been a huge cause of concern on the demand side. The businesses will grow only when demand (consumption) picks.

To conclude, I would sum-up that the credit guarantee scheme is a ‘loan mela’ where banks have been made to allow free flow of credit to different sectors of the economy. The businesses have an excellent opportunity in hand to utilize the facility in an honest way and help a turnover in the overall economy. Meanwhile, there is a need to tailor an initiative where job melas are rolled out at least for poor and middle class segments. Jobs alone can generate demand and make the ‘loan melas’ fruitful.

(The views are of the author & not the institution he works for)

No stories found.
Greater Kashmir