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EXPLAINED | The credit guarantee schemes announced by FM to ease Covid-induced financial pain

Finance Minister Nirmala Sitharman on 28 June listed out initiatives costing a total of Rs. 6.29 lakh crore. The overwhelming majority of this however, will be spread across the series of credit guarantee schemes spread across sectors. We take a look at the details.

June 28, 2021 / 07:55 PM IST
Finance Minister Nirmala Sitharaman (File image: Reuters)

Finance Minister Nirmala Sitharaman (File image: Reuters)

After the domestic industry increasingly raised demand for another major economic package for the Covid-19 got louder over the past few months, the government has come out with a series of announcements.

Effectively tied together another round of fiscal stimulus into the economy, the announcements come after macro indicators showed demand to have slipped dangerously low in the economy.

The credit guarantee schemes are intended to address this by providing liquidity to key segments of the populations, including small businesses, struggling poor and the worst hit sectors.

Loan Guarantee Scheme for COVID Affected Sectors

The government has brought out further support for sectors, especially batting the economic downturn brought on by the pandemic. The Rs 1.1 lakh crore Loan Guarantee Scheme announced by the government has two distinct parts with separate benefits for various sectors.


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Health Sector : Rs 50,000 crore

Especially aimed upgrading medical infrastructure across underserved areas, the government has announced it will guarantee both new projects and expansions of health or medical infrastructure in cities other than the top 8 metropolitan cities.

The guarantee will be made through the National Credit Guarantee Trustee Company Limited. The guarantee coverage will be 50 percent for expansion projects and 75 percent for new projects. In the most underdeveloped districts of the country, classified as 'Aspirational Districts' by the NITI Aayog, the guarantee cover will be 75 percent for both new projects and expansion.

The maximum loan amount will be Rs 100 crore for a single loan and the guarantee duration will be up to 3 years. The government has announced that interest rates will be capped at 7.95 percent.

"The FMs announcements providing support to the healthcare sector is therefore timely. Shortage of infrastructure in tier 2 and 3 was a gap that was starkly visible during the last year. Specific focus on paediatric care will hopefully cater to some long term improvements in this segment," Charu Sehgal, Partner at Deloitte India said.

However, she warned that to ensure the funds are in fact utilised, a clear time bound investment plan should be laid out.

Finance Minister NIrmala Sitharman has also announced allocations of upto Rs. 60,000 crore for similar loan guarantees in other sectors. The normal interest without guarantee cover is 10-11 percent.

While detailed sectoral announcements are set to be announced later based on evolving needs, the government has announced financial support to more than 11,000 registered tourist guides and other stakeholders in travel and tourism as part of this.

Both working capital and personal loans will be extended to tourist guides and those in the tourism sector to discharge liabilities and restart businesses. This may see upto 10,700 separate tourist guides recognized by the Tourism Ministry and more than 900 'tourism stakeholders' covered.

The loans will be 100 percent guaranteed upto Rs 10 lakh per tourism agency or Rs, 1 lakh for every registered tourist guide at the state and regional level.

"The loan guarantee scheme has come as a timely aid for the economy. This will go a long way in providing a short-term stimulus to the affected sectors," Arvind Sharma, Partner, Shardul Amarchand Mangaldas & Co said.

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Emergency Credit Line Guarantee Scheme widened to Rs. 4.5 lakh crore

Sitharman has also announced that financial support through the Emergency Credit Line Guarantee Scheme (ECLGS) will now have a total outlay of Rs 4.5 lakh crore, up from the earlier Rs 3 lakh crore.

Launched as part of the Rs 20 lakh crore COVID-19 relief package called the Aatmanirbhar Bharat Abhiyaan in May 2020. It remains the government's flagship scheme to help businesses hit by the pandemic.

On 28 June, the Finance Minister announced that till now, through all the versions of the scheme, namely ECLGS 1.0,2.0, and 3.0, a combined disbursal of Rs 2.69 lakh crore has taken place. This has flown to 1.1 crore units by 12 public sector banks, 25 private sector banks, and 31 non-banking financial corporations.

Sitharaman said the scheme will continue to cover contact-intensive sectors which have suffered the most after the pandemic. Till now, Rs 4000 crore has been channelized to these sectors through ECLGS. The government has now announced the limit of admissible guarantee and loan amount will be increased above existing level of 20 percent of outstanding on every single loan.

Terming the move as laudable, Chandrajit Banerjee, Director General, CII said it is expected to address the severe cash flow distress precipitated by the business disruptions caused by the lockdowns in the wake of second wave of the pandemic.

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Loans for 25 lakh smallest of small borrowers

The government has announced a Credit Guarantee Scheme to facilitate loans to 25 lakh people through micro finance institutions (MFIs).

The guarantee will be provided to Scheduled Commercial Banks for loans to new or existing NBFCs or MFIs for lending upto Rs 1.25 lakh to each borrower. The government has announced that focus will be on new lending and not repayment of old loans.

The interest rate on loans from banks will be capped at marginal cost of funds based lending rate (MCLR) plus 2%. MCLR is the lowest interest rate that a bank or lender can offer.

The guarantee will be upto 75 percent of default amount for upto 3 years, paid through National Credit Guarantee Trustee Company (NCGTC). Crucially, no guarantee fee will be charged by NCGTC.

The maximum tenure of the loan will be 3 years, while 80 percent of assistance will be used by MFIs for incremental lending, at an interest at least 2% below maximum rate prescribed by the RBI.

"Loans to borrowers to be in line with extant RBI guidelines such as number of lenders, borrower to be member of JLG, ceiling on household income & debt. All borrowers (including defaulters upto 89 days) will be eligible," the Finance Ministry has said.

The scheme will run till March 31 or till guarantees for an amount of Rs.7,500 crore are issued,, whichever is earlier.

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