Government Guaranteed Credit (ECLGS) Loans: Another Achilles Heel for Banks?

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On 20 May 2020, in the immediate backdrop of COVID-induced lockdowns, the government approved an Emergency Credit Line Guarantee Scheme (ECLGS) to guarantee bank and NBFC (Non-Banking Financial Company) credit of up to Rs 3 trillion to MSMEs (Micro, Small and Medium Enterprises) and MUDRA (Micro Units Development and Refinance Agency) borrowers.

Initially, the government guarantee was meant to cover only NPA (Non-Performing Asset) MSME borrowers and additional credit was limited to 20 percent of the outstanding loans, not exceeding Rs 25 crore as of 29 February 2020.

The scheme, initially meant to expire on 31 October 2020, was extended several times before it finally closed on 31 March 2023. The guarantee amount was increased to Rs 5 trillion and the extent of credit was raised to 100 percent of the outstanding amount for some borrowers.

What is the situation of the credit extended under the ECGLS? Will it lead to another spurt of NPAs?

ECLGS Kept Getting Diluted to Guarantee Riskier Loans

Many pulls and pressures led to numerous relaxations, concessions, and extensions in the scheme's conditions and coverage, in as many as seven versions of the scheme.

A Rs 25 crore limit of outstanding loan limit was raised to Rs 50 crore for the originally envisaged ECLGS 1.0 borrowers. A limit of 20 percent was raised to 30 percent of outstanding loans and the reference date was changed to 31 March 2021, ostensibly for permitting larger loans.

For as many as 26 sectors identified by the Kamath Committee as stressed sectors, the ECGLS loans, to the extent of 30 percent, were permitted on higher outstanding loans of Rs 50-500 crore (ECLGS 2.0) with a later reference date of 31 March 2021.

ECGLS was extended to borrowers in the hospitality sector and related sectors, and the civil aviation sector to a still higher extent of up to 40 percent of their credit, outstanding up to a maximum of Rs 200 crores as of 31 March 2021 (ECGLS 3.0).

ECGLS was extended to hospitals/ nursing homes/ clinics/ medical colleges/ units engaged in manufacturing liquid oxygen and oxygen cylinders etc., for setting up on-site oxygen-producing plants (ECGLS 4.0).

On 30 March 2021, major relaxations were made for the travel, tourism, and hospitality sectors. All eligible borrowers were permitted to avail up to 50 percent of their highest fund-based credit outstanding on any of three reference dates (29 February 2020, 31 March 2021, and 31 March 2022), as against the earlier limit of 40 percent of the higher of their fund-based outstanding on either of the two reference dates (29 February 2020 and 31 March 2021).

The civil aviation sector was one of the worst stressed sectors making some companies in it virtually bankrupt. Still, the government kept relaxing ECGLS conditions bordering on recklessness to nudge banks to provide credit to them.

On 30 March 2022, borrowers in the civil aviation sector were permitted to avail non-fund-based emergency credit facilities up to 50 percent of their highest total fund and non-fund-based credit outstanding subject to a maximum of Rs 400 crore.

Additionally, bank guarantees, letters of credit, and other non-fund-based facilities were permitted to be issued without any cash margin and subject to a cap of 0.5 percent per annum on the fee/commission.

On 6 October 2022, the government further liberalised this credit support up to 100 percent of total credit outstanding (both fund-based and non-fund-based), subject to a cap of Rs 1,500 crores per borrower. Of this, only Rs 500 crore (over Rs 1,000 crore) was made subject to promoters/owners infusing proportionate equity contributions.

ECLGS Credit is a Time Bomb 

The scheme took some time to take off. The loans sanctioned under the scheme could cross Rs 2.86 trillion as of 24 September 2021 and Rs 3.19 trillion on 25 March 2022.

The government informed Parliament that, as of 31 January 2023, guarantees amounting to Rs 3.61 trillion had been issued under ECLGS; of which guarantees sanctioned to MSMEs were Rs 2.39 trillion (66.16 percent).

As part of the scheme, the government had mandated that no credit risk assessment would be required and no collateral would be taken for sanctioning credit under ECLGS. It was also mandated that no guarantee fee would be charged. There was a complete moratorium on the repayment of principal for the first 24 months.

The RBI (Reserve Bank of India) was also quick (on 21 June 2020) to assign zero percent risk weight on the credit facilities extended under this scheme to the extent of government guarantee coverage.

Barring the government guarantee, the credit extended under ECGLS has no protection for the banks and is certainly the riskiest for them; riskier than the unsecured personal loans. Extending a 100 percent government guarantee to such large credit to bankrupt airlines was nothing short of knowingly underwriting loans almost certain to default.

The Financial Stability Report of RBI (December 2022) acknowledged that, of the Rs 2.82 trillion ECLGS loans disbursed till September 2022, about one-sixth were likely to turn into NPAs.

An evaluation report commissioned by the ECLGS guarantee administering body - NCGTC (National Credit Guarantee Trustee Company) - found that in March 2023, that loans worth Rs 15,478 crore disbursed had already been marked NPAs in the ECGLS database; the claims lodged were Rs 2,374 crore, but the ones settled were only Rs 1,102 crores.

The PSBs (Public Sector Banks), always in the vanguard of pushing government schemes, had marked more loans (Rs 6,090 crore) as NPAs than private banks (Rs 5,296 crore) although loans disbursed by the PSBs were smaller (Rs 1.03 trillion) against Rs 1.42 trillion disbursed by private banks.

Fasten Your Seatbelts

In January 2023, the media reported major defaults in the civil aviation sector. Go First reportedly defaulted on ECLGS loans of Rs 682 crore loans sanctioned by the Central Bank of India. Other PSBs and private banks had also lent funds to Go First under ECGLG.

These defaults are likely to spiral up.

For the ECGLS loans secured by a 100 percent guarantee of the central government, there are non-government guaranteed outstanding loans of up to 80 percent of the total loan outstanding provided by banks and NBFCs. The banks and NBFCs will face the music on these non-guaranteed loans in times to come.

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(The author is a former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)