Extending the repayment period under ECLGS will help MSMEs – TEXPROCIL President

Extending the repayment period under ECLGS will help MSMEs – TEXPROCIL President

Parliamentary Committee to Government: Extension of ECLGS loan repayment period for MSMEs to 7-8 years. The Commission also recommends increasing the limit on unsecured loans, including term loans or working capital loans under the CGTMSE scheme, from Rs 2 crore to Rs. 5 crores.

What is ECLGS? 

  • A scheme announced under Atma Nirbhar Bharat Package in 2020
  • The objective is to help businesses, including MSMEs, to meet their operational liabilities and resume business after the COVID19 crisis. 
  • Under the scheme, borrowers could avail of additional credit of up to 20% of their overall outstanding credit as of February 29, 2020.
  • The government provides member credit institutions (MLIs) with a 100% guarantee against any losses they incur due to borrowers not repaying ECLGS funding.
  • ECLGS is an on-demand program. As such, sanction/disbursement measures are taken by the credit institution based on an assessment of the borrower’s needs and eligibility. 
  • The aggregate limit originally announced for ECLGS was Rs 3 lakh, later increasing to Rs 4-5 lakh. ECLGS is under the DFS (Department of Financial Services), the operating area of ​​the Department of Finance. 
  • To ensure easy repayment, the government has capped interest rates under the ECLGS scheme at 9.25% for banks and financial institutions and 14% for non-bank financial institutions. The plan also provides a one-year deadline for principal component payments.

Why in the news?

In Budget 2022, the Emergency Credit Line Guarantee Scheme (ECLGS) was extended to cover the next fiscal year, with an expanded guarantee cover of Rs 5 lakh crore.

What is a Special Mention Account (SMA)?

  • RBI has classified debt for customer groups into three categories according to SMA or Special Mention Account to manage bad debts.
  • SMA0 is a type of loan where principal and interest remain unpaid for 30 days after the payment due date.
  • SMA1 is a category where the lag for more than 30 days is at 60

The Government has modified the Emergency Credit Line Guarantee Scheme(ECLGS). Currently, Borrowers are eligible for restructuring as per RBI guidelines of May 05, 2021, and had availed of loans under ECLGS 1.0. The overall period of 4 years comprises repayment of interest during the first 12 months with principal repayment and interest in 36 months. Moreover, they can now avail of tenure of five years for their ECLGS loan repayment of interest only for the first 24 months, with repayment of principal and interest in 36 months after that.

 Manoj Patodia, Chairman, TEXPROCIL (The Cotton Textiles Export Promotion Council), commented, “the increase in loan repayment period to 5 years has come as a huge relief for the MSMEs who are struggling to get the business back from disruptions caused by the Second wave of COVID19 pandemic.”

 Additional assistance of up to 10%  under ECLGS of the outstanding as of February 29, 2020. Furthermore, the borrowers covered under ECLGS 1.0 have also been extended.

Mr. Manoj commented, “This is a very positive measure as it will increase the much-needed cash flow for the MSMEs.”

 The current ceiling of Rs. 500 Cr. of outstanding loan for eligibility under ECLGS 3.0 has also been removed, subject to maximum additional ECLGS assistance to each borrower is limited to 40% or Rs. 200 crore, whichever is lower. Further, the validity of ECLGS is extended to 30.09.2021 or till guarantees for an amount of Rs. 3 lakh crore is issued. Disbursement under the scheme is permitted up to 31.12.2021. According to the President of TEXPROCIL, removing the eligibility limit under ECLGS 3.0 and expanding ECLGS will allow more entities to benefit from the program’s advantages.

What can be the benefits?

  • Banks can provide loans to existing borrowers additionally without asking for extra collateral.
  • MSMEs impacted by intermittent lockdowns in states get funding to stay afloat. 
  • Sanctions and disbursements under the facility are relatively faster due to a full guarantee by the government against credit losses. 
  • Companies in hospitality, travel, tourism, and leisure and sporting sectors are expected to benefit from the relaxation in the scheme.  Hotels, restaurants, canteens, restaurants, wedding halls, tour operators, amusement parks, and theaters can benefit from the installation.

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