Experts cheer expansion of ECLGS, but flag NPA risk from removal of loan ceiling

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The government’s move to expand the scope of the Emergency Credit Line Guarantee Scheme (ECLGS) to cover civil aviation and oxygen-generation plants will help the pandemic-hit sectors but the removal of the ceiling of Rs 500 crore outstanding loans for some sectors can increase bad loans, experts said.

On May 30, the government expanded ECLGS and removed the ceiling of Rs 500 crore for sectors like travel and tourism, leisure and sporting, hospitality and civil aviation, making bigger entities eligible for the scheme. The maximum additional loans the sectors can take under the scheme is limited to 40 percent of the outstanding loan or Rs 200 crore, whichever is lower.

"Extension of the ECGLS to sectors like civil aviation, which is amongst the most adversely affected sectors due to COVID-19, is a step in the right direction. Easing up of ceiling limits of Rs. 500 Crore for the entities engaged in travel industry, like hospitality, travel and tourism, leisure and sporting and civil aviation, is the most welcome step." said Deepak Thakur, Partner, L&L Partners.

"However, inclusion of civil aviation and removal of ceiling limits has its own challenges, especially for the entities which were already cash-starved and were either already declared as NPAs or were on the verge thereof," Thakur said.

Extending the scheme to cash-starved large entities increases the risk of bigger NPAs, and  banks need to be cautious that ECGLS for bigger entities should not take away any of the benefits of the smaller ones, he said.

Ameya Joshi, independent aviation analyst and founder of aviation website Network Thoughts, welcomed the government’s move. "After over a year, finally there is some respite being provided for aviation sector. The earlier announcements were for allied industries like MRO (Maintenance, Repair and Overhaul)  which did not help airline operations on a day-to-day basis."

However, the limit of 40 percent of outstanding loan or Rs 200 crore was inadequate, as the largest carrier IndiGo reported a loss of Rs. 620 crore in Q3, while Spicejet, the second largest, reported Rs. 66 crore, and losses were higher in Q2.

“Overall this 200 crore will be over within months and at best can act as liquidity bridge till funding is tied up. Structurally, airlines cannot survive on this amount," Joshi said.

Ajay Shaw, Partner, DSK Legal, said the loan cap of Rs. 200 crore per company under the new scheme is intended to ensure that the benefit is broad based so that a larger number of stressed entities can be accommodated under the new scheme.

"The removal of loan outstanding ceiling on stressed sectors is to accommodate companies in these sectors to tide over their liquidity crisis given that there has been a huge disruption to their businesses on account of COVID-19." said Ajay Shaw, Partner, DSK Legal.

The ECLGS  was initially announced in the COVID-19 relief package Atmanirbhar Bharat Abhiyan. The scheme aimed to provide Rs 3 lakh crore worth of collateral-free, government-guaranteed loans to micro, small and medium enterprises (MSMEs) across India to mitigate the distress caused by the coronavirus-induced lockdown.

Later, it was extended to Hospitality, Travel and Tourism, Leisure, and Sporting sectors and 26 stressed sectors identified by the Kamath Committee.