Credit and Finance for MSMEs: Working capital term loans secured by Covid-hit micro, tiny, and medium enterprises (MSMEs) below the Rs 3-lakh-crore Emergency Credit Line Guarantee Scheme (ECLGS) have been in a position to enable beneficiaries meet their operational liabilities and resume corporations. MSMEs, which have been staring at shutdown post lockdown in March last year with a runway of not more than 3-4 months for a majority of them, have been in a position to extend it by at least the finish of 2020 by means of credit through ECLGS, according to professionals TheSpuzz Online spoke to.
“ECLGS has been helpful for MSMEs, which were shut or inactive, to resume their operations by clearing payments to suppliers, salaries to employees, etc. In August, India’s manufacturing sector had witnessed growth after the preceding five months. Also, goods and services tax (GST) collections were up in September after six months of decline. One of the reasons for this was MSMEs resuming their businesses,” Govind Lele, National General Secretary at MSME body Laghu Udyog Bharati told TheSpuzz Online. The association has about 30,000 members across India.
India’s manufacturing PMI had expanded for the very first time in August 2020 to 52 immediately after contracting for 5 months in 2020, compared to 46 in July 2020 largely on the back of higher client demand for Indian goods and the resumption of business enterprise operations, according to the IHS Markit report. GST collections grew 4 per cent to Rs 95,000 crore in September, immediately after the preceding six months of decline, hinting at financial activity recovery. The government had launched the ECLGS scheme in May 2020, as element of the Atmanirbhar Bharat package to provide emergency credit to corporations from banks and NBFCs up to 20 per cent of the complete outstanding credit as of February 20, 2020.
According to the information from the National Credit Guarantee Trustee Company (NCGTC) – the implementing agency of the ECLGS scheme, the quantity of loan sanctioned below the scheme stood at Rs 2.46 lakh crore as of February 28, 2021, MSME Minister Nitin Gadkari had stated in a written reply to a query in the Rajya Sabha last month. The total borrowers have been 92.27 lakh as of February 28 out of which 87.50 lakh (95 per cent) have been MSMEs.
“Lot of this money was used for repayment of an existing debt by MSMEs as the interest rate charged under ECLGS by banks was capped at 9.25 per cent instead of the usual 14-15 per cent in a regular bank loan. So, MSME used ECLGS credit to repay their existing loans as they were not receiving their payments from buyers and were not able to pay their debts. But how much of that money went for growth capital and how much for servicing of old debt is not known,” Madan Sabnavis, Chief Economist, CARE Ratings told TheSpuzz Online.
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Importantly, ECLGS was amended on November 26, 2020, and extended till March 31, 2020, with the introduction of ECLGS 2. that was expanded in scope. Under 1., an emergency credit line is supplied to MSMEs and other corporations from banks and NBFCs up to 20 per cent of their complete credit outstanding as of February 29, 2020. MSMEs with up to Rs 25 crore outstanding and Rs one hundred crore turnover have been eligible. However, the turnover cap was removed post amendment in November. The amended version focused on entities in 26 stressed sectors identified by the Kamath Committee along with the healthcare sector with credit outstanding of more than Rs 50 crore and up to Rs 500 crore as of February 29, 2020. The scheme also mandated borrower accounts to be much less than or equal to 30 days previous due as of February 29, 2020, that is, they must not have been classified as SMA 1, SMA 2, or NPA by any of the lenders as of February 29, 2020.
“We had availed the scheme and it helped us in terms of additional working capital requirement as due to Covid our customers were not able to pay us on time and we were also held up with additional stock. That was when additional working capital was required and from that point, ECLGS helped a lot. We lost business for the initial 1.5-month post lockdown as workers were not available due to lockdown and other restrictions. We had availed the entire 20 per cent of the limit,” Sanjay Bhatia, Managing Director at Can maker Hindustan Tin Works and previous President at FICCI-CMSME told TheSpuzz Online.
In March 2021, the government had also announced the launch of ECLGS 3. to cover enterprises in hospitality, travel & tourism, leisure & sporting sectors as effectively and had extended the all round emergency credit scheme which includes the earlier two versions by 3 months from March 31, 2021, till June 30, 2021, or till guarantees for the complete Rs 3 lakh crore quantity are issued. Last week, the Finance Ministry had additional extended its scope to cover stressed corporations that have loan dues for up to 60 days (SMA-1 accounts), vis-a-vis 30 days earlier (SMA-). SMAs are unique mention accounts displaying indicators of incipient strain that lead to the borrower defaulting in servicing loan.
“Even if MSMEs were able to reduce their cost by 5 per cent then also it is a huge relief. The scheme has certainly helped in the viability of the unit as the entire financials of a business became stronger. Moreover, they would have also been able to attract labour back. If I close my unit, my labour disappears and if I keep my unit open, my labour also comes back,” added Sabnavis.