Facing delay in receiving government guarantee for loans under ECLGS: South Indian Bank MD

Finance Minister Nirmala Sitharaman (File image)

The Emergency Credit Line Guarantee Scheme (ECLGS) has enabled last-mile loans to micro, small and medium enterprises (MSMEs) across the country. However, banks are facing operational delay in receiving the guaranteed credit amount from the government in case of defaults, Murali Ramakrishnan, managing director and chief executive officer at South Indian Bank, told Moneycontrol on May 24.

“The ECLGS has been propagated quite well to avert the Covid-19 crisis. In terms of compensation, however, wherever the cases have gone bad the compensation process seems very difficult. Out of 100 cases we submit they only read some five cases and keep 95 cases as work in progress and it takes an enormously long time and that is something which can be expedited,” the MD said.

Banks had extended credit under ECLGS with the understanding that if a loan falls into the non-performing asset (NPA) category, then all a bank had to do was inform the government and they would be compensated, Ramakrishnan says.

“That is the impression with which I think many banks have gone ahead and lent money. When it comes to getting this money back from the government for any cases that slipped into NPA, it is not easy, the process is made so difficult,” he said.

The ECLGS

The government launched the scheme in 2020 with the aim to provide 100 percent guaranteed coverage to banks, non-banking financial institutions (NBFCs) and other lending institutions to enable them to extend emergency credit facilities to MSMEs and other businesses during the pandemic.

The initial corpus of the scheme was Rs 3 lakh crore. However, the scheme has since been extended multiple times. On March 30, the government extended ECLGS for one more year till March 31, 2023, and expanded the guarantee coverage under the scheme by Rs 50,000 crore to Rs 5 lakh crore.

As part of the new operational guidelines for ECLGS 3.0, new borrowers from the hospitality, travel, tourism, and civil aviation sectors who had taken loans after March 31, 2021, and up to January 31, 2022, can also avail of emergency credit facilities.

The National Credit Guarantee Trustee Co, the entity that operates the ECLGS, has also increased the limit for borrowing under the third iteration of the scheme. The government has set January 31, 2022, as the reference date for companies to avail credit as part of the extended scheme.

Companies in the hospitality, travel and tourism industry can now borrow up to 50 percent of their highest fund-based credit outstanding, compared with 40 percent of their credit outstanding as part of ECLGS 1.0 and ECLGS 2.0, the government said in the statement.

However, the cap on maximum borrowing by a single MSME from the hospitality, travel and tourism industry still stands at Rs 200 crore.

As on March 25, 2022, loans sanctioned under ECLGS had crossed Rs 3.19 lakh crore, and about 95 percent of the guarantees issued are for loans sanctioned to MSMEs.

“…I am concerned that the compensation we are receiving for resolved cases is a very small portion of what we are supposed to be getting,” Ramakrishna said, referring to the delay in ECLGS payments.

“Yes, under ECLGS loans there are defaults, but the number is low. Challenges exist in certain cases as they are asking for more details,” said another official with a state-run bank.

Restructured loans

Loans extended under ECLGS come under the restructured advances portfolio of banks.

Since there are moratoriums in place for repayment of loans under ECLGS, the defaults are only gradually starting to appear on banks’ balance sheets as per their Q4FY22 figures, analysts say.

The country’s largest lender State Bank of India has a total ECLGS loan portfolio of Rs 32,000 crore of which it has seen less than Rs 640 crore turn NPA, as per the bank’s management.

Canara Bank managing director and chief executive officer L.V. Prabhakar, in a post-earning call, said the bank is observing up to 4.5 percent slippages in its restructured book of advances.

“Restructuring book is Rs 14,000 crore as far as under the resolution framework 2 is concerned and about Rs 5,000 crore under resolution framework 1. Put together it is about Rs 19,000 crore to Rs 20,000 crore. We are observing about 4-4.5 percent as slippages and in this restructured book now in resolution framework 1, the repayment is up to 95 percent and in resolution framework 2 the repayment is about 85 percent,” he said.

For South Indian Bank, Ramakrishnan said the Covid-19 restructured book stands close to Rs 2,000 crore and Rs 62 crore of the loans have slipped into the NPA category.

During FY23, Ramakrishnan expects one-fourth of the bank’s total restructured book of Rs 2,400 crore to turn NPA. This would still be better than the bank’s last two years’ slippages, the MD said.

With these kinds of slippages, a dramatic shift in the bank’s NPA position is unlikely this fiscal, he said. He added that by the end of the current fiscal, South Indian Bank will lower its gross and net NPA below 5 percent and 2 percent from the 5.9 percent and 2.8 percent, respectively, seen on March 31, 2022.