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A month of Rs 3 lakh crore MSME loan scheme: Sanctions are high but disbursals remain low; here's why

A closer look at the emergency credit line guarantee scheme (ECLGS) numbers show, even though banks have been aggressive in ramping up loan sanctions, the actual disbursements are yet to pick up in a meaningful way.

June 29, 2020 / 10:50 AM IST

It’s been a month since Union finance minister Nirmala Sitharaman launched the Rs 3 lakh crore emergency credit line guarantee scheme (ECLGS). This was arguably the biggest among the measures announced by the minister as part of COVID-19 economic package.

How has the scheme performed so far?

A closer look at the numbers show, even though banks have been aggressive in ramping up loan sanctions, the actual disbursements are yet to pick up in a meaningful way.

On Sunday, state-run Punjab National Bank (PNB) issued a press release saying that it has sanctioned Rs 6,757 crores of loans under ECLGS to 2.96 lakh eligible MSME borrowers. As on June 25, the bank has disbursed only a little over Rs 2,030 crore to 59,204 borrowers so far or an average loan of Rs 3.4 lakh per borrower.  As for the industry, the latest data available is till June 22 when banking sector sanctioned Rs 75,426 crore worth loans to 17 lakh borrowers while disbursing Rs 32,896 crores to 7.1 lakh borrowers. This is about 9 percent of the scheme size.

In other words, an average loan amount of Rs 4,62,659 is disbursed to 7 lakh borrowers.


Two clear trends emerge here:

One, banks have so far managed to disburse only less than half of the amount sanctioned to MSME borrowers. Second, even to those the actual amount disbursed per borrower is too low. A Rs 4.6 lakh average loan amount will hardly suffice to help MSMEs to get back on feet after a total collapse of business activities for nearly three months.

The idea behind the scheme, which was launched as part of the Rs 20 lakh crore economic package by the government in response to the COVID-19 crisis, was to help MSMEs to meet their immediate fund requirements such as paying salaries and rentals besides meeting other immediate operating expenditures. The government promised full guarantee cover to banks on such loans.

Banks could give up to 20 percent of the outstanding loan amount to MSMEs as on February 29, 2020. According to the details issued by the finance ministry, public sector banks disbursed Rs 22,197 crore loans so far while private sector banks disbursed Rs 10,697 crore. The sanction figures in these two segments are Rs 42739 crore and Rs 32687 crore, respectively.

Why disbursement are low?

Banks, mainly public sector banks, are under pressure to show that the scheme has received a good response. Hence in many cases, banks are giving automatic sanctions to all eligible borrowers, according to banking industry officials. In many cases these are sanctions are done even without the consent of the MSME borrower, said a senior banking industry official to Moneycontrol on condition of anonymity. “There is pressure on banks. So sanctions are given but availment is less,” said the banker. PSBs have asked their staff to contact all eligible borrowers to canvass loans under the scheme.

There is a difference between sanctioned loan amount and loan disbursed. Loan sanctions are given based on eligibility and disbursements are based on actual requirement of the borrower. In the initial stage, banks step up sanctioning process with or without the consent of the borrower. All MSMEs who have drawn up to Rs 25 crore loan outstanding and Rs 100 crore turnover are eligible to borrow money under this scheme.

Step 2 is critical. After sanctioning the loan amount, the bank awaits the borrowers’ response to issue the cheque. There are a few reasons why the actual disbursements are low so far.

  1. ) The crisis has impacted all MSMEs. But, the loan scheme is open for only those borrowers who already have a loan with banks, up to 20 percent of their loan limit. This means, a fresh borrower doesn’t stand a chance to benefit from the scheme.

  2. ) The existing borrower can avail only up to 20 percent of the outstanding loan amount. For an MSME which has already paid back most of the loans and has very little amount remaining as outstanding loan amount, the fresh additional amount that can be borrowed will be small. This perhaps explains the low average loan size of the disbursed amount so far.

  3. ) MSMEs’ ability to borrow more is constrained with the present business environment. The poor demand scenario has impacted the cash inflows and the ability of MSMEs to pay back even existing loans. MSMEs are not confident to borrow more, which explains lower disbursals.

  4. ) Banks are unable to reach out to many MSME clients on account of lockdown restrictions. Since the business activities have slowed significantly, MSMEs are also not proactive in reaching out to their bankers.

Political intervention

The involvement of political parties in the ECLGS raises another critical question. On June 19, Moneycontrol broke the story that Tamil Nadu BJP has launched a dedicated website to arrange loans for people under various government schemes. According to the website, the state unit of the ruling party has so far arranged Rs 42 lakhs worth loans and processed 57 applications. A total of 23524 applications have been received so far under the scheme. Political interventions in government loan schemes are not new though. There have been complaints about political meddling in Mudra scheme where politicians pressurise banks to issue loan to unworthy borrowers.

What lies ahead for ECLGS scheme?

Industry experts expect some pick up in the scheme as lockdown rules ease further and activities resume and demand scenario improves. However, the rule that limits 20 percent extra borrowing needs to go. Similarly, new borrowers need to be allowed to expand the scope of the scheme, bankers say. Sanjay Agarwal, Head, BFSI and NBFC at CARE Ratings said the disbursals are likely to pick up soon as more companies like to come forward to draw the money. Also, private sector banks’ participation will help to improve the overall performance, Agarwal said. “Banks will take time to process the sanctioned loans after finishing the modalities. I think the scheme will pick up soon,” said Agarwal.
Dinesh Unnikrishnan
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