Emergency Credit Line Guarantee Scheme for Small and Medium Businesses in India

30/08/2021

What is an Emergency Credit Line Guarantee Scheme?

In 2020, the Indian government launched the Emergency Credit Line Guarantee Scheme as a response to the economic disruption caused by the COVID-19 outbreak. This scheme aims to provide some relief to Micro, Small & Medium Enterprises (MSMEs) that may have witnessed shortage of labor, liquidity issues, non-payment of dues, and supply crisis due the pandemic.

The Emergency Credit Line Guarantee Scheme allows banks and non-banking financial institutions (NBFIs) to provide additional emergency loans up to INR 3 lakh crore to MSME borrowers at low cost. These loans or credits can be used by MSMEs to address their operational challenges and restart their businesses.

According to the Ministry of Finance India, INR 2.03 lakh crore has already been sanctioned to 60.67 lakh borrowers as on November 02, 2020 under the Emergency Credit Line Guarantee Scheme.

Meanwhile, the National Credit Guarantee Trustee Company (NCGTC) is giving lending institutions a 100% guarantee coverage for the loans sanctioned under this scheme. The guarantee coverage, which is offered in the form of a Guaranteed Emergency Credit Line (GECL) facility, will cover any losses incurred by banks and NBFIs due to loan non-payment by MSME borrowers.

Eligibility Criteria for Applicants:

MSME borrowers with combined outstanding loans of up to INR 50 crore as on February 29, 2020, can apply for emergency credits under the Emergency Credit Line Guarantee Scheme.
MSME borrowers with annual turnover of up to INR 250 crore in Fiscal Year 2019-2020 are also eligible.
MSMEs founded as Partnership, Registered Company, Proprietorship, Trusts and Limited Liability Partnerships (LLPs) are eligible.
All existing customers of banks and non-banking financial institutions are eligible. The Emergency Credit Line Guarantee Scheme is not available for new borrowers.
Not all MSME borrower accounts with NPA or SMA-2 status as on February 29, 2020, can avail the GECL loan scheme.
MSME borrowers need to be registered under GST, unless they are exempted from having a GST registration.

Credit Limit:

Under this scheme, MSME borrowers can receive a GECL loan that is up to 20% of their total outstanding credit up to INR 50 crore as on February 29, 2020. This loan can be in the form of additional term loans or working capital term loans.

Interest Rate:

Under the Emergency Credit Line Guarantee Scheme, interest rates are capped at 14% for NBFIs and 9.25% for banks.

Repayment:

The tenor of loans provided under the Emergency Credit Line Guarantee Scheme is four years from the date of disbursement. Borrowers will also have a moratorium period of one year on the principal loan amount. During a moratorium period, the borrower is not obligated to repay his/her loan. However, interest needs to be paid during this period.

After the moratorium period, the borrowers will have to repay the principal amount in 36 equal instalments.

Scheme Validity:

It will be available up to March 31, 2021, or until the INR 3 lakh crore threshold, set by the Indian Government under the Emergency Credit Line Guarantee Scheme is reached. Initially, the Government had decided to terminate the scheme on October 31, 2020 or until the utilization of the sanctioned money, whichever was earlier. However, the scheme validity was recently extended.

Features of Emergency Credit Line Guarantee Scheme:

Loans offered under the Emergency Credit Line Guarantee Scheme are pre-approved loans. Under this scheme, banks and NBFIs automatically send a pre-approved loan offer to eligible MSME borrowers. The borrower can either accept the loan offer or select an ‘opt-out’ option to decline the offer. The MSME will have to go through the documentation process if it accepts the offer.
Under this scheme, a separate loan account will be opened for the MSME borrower. This account will be separate from the borrower’s existing loan accounts.
The NCGTC, banks and NBFIs will not charge any guarantee fee for providing a GECL loan.
There is no foreclosure or pre-payment penalty under this scheme.
A MSME borrower’s credit rating will not influence its eligibility for securing a GECL loan.
Banks and NBFIs will not charge any additional processing fee for sanctioning loans to MSMEs under this scheme.
Lenders will not ask any additional collateral for additional credit offered under the GECL loan scheme.
Besides Banks and NBFIs, Regional Rural Banks can also provide emergency loans to MSME borrowers. They are eligible for coverage under the scheme.
This scheme is also available to interested Pradhan Mantri Mudra Yojana (PMMY) borrowers.
Under this GECL scheme for MSME, NCGTC is providing 100% credit guarantee coverage for the entire funding provided under the Emergency Credit Line Guarantee Scheme.
This scheme does not cover loans provided in individual or personal capacity.

Conclusion

According to a survey, MSME borrowers have utilized the GECL loans to ease their short-term liquidity problems, clear supplier dues and restart their businesses.

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