Government’s ECLGS push sends banks’ exposure to MSMEs soaring

Two bankers Moneycontrol spoke to agreed that ECLGS had had an important role to play in increasing credit flow to MSMEs.

Banks’ exposure to small entrepreneurs has jumped significantly over the last one year largely on account of the government’s aggressive credit push to Micro, small and medium enterprises (MSME) through a sovereign-guaranteed scheme.

According to bankers, the three avatars of the emergency credit line guarantee scheme (ECLGS) announced so far have led to a significant increase in the exposure of the banking system to MSMEs. According to sectoral data for April released by the Reserve Bank of India (RBI), outstanding bank loans to the medium segment rose 44 percent year-on-year (y-o-y), while loans to the micro and small enterprises segment grew four percent.

The emergency credit line guarantee scheme was launched by the government last year in the wake of the COVID-19 onslaught and as an immediate assistance to give a helping hand to the faltering economy. Banks, under this, can lend to existing borrowers by upto a certain limit of their outstanding loans as on February 29, 2020. Recently, the government modified the scope of the scheme.

The ECLGS push

At a time when the overall credit growth is lagging in a tepid economic environment, ECLGS has helped significantly, bankers and analysts said. ECLGS scheme, first announced in May 2020, entailed an outlay of Rs three lakh crore for offering sovereign guarantees of upto 20 percent against fresh loans to MSMEs. The scheme was later extended to larger companies in 26 specific sectors that had been hit badly by COVID-19. Recently, the Government said banks could lend an additional 10 per cent under this.

“MSME industries grew by 12.5 percent in April 2021(which offset the fall in large segments) as compared with a drop of 3.2 percent in April 2020,” CARE Ratings said in a note on June 2, adding, “This growth has continued to be supported by the ECLGS scheme (sanctions under ECLGS scheme have been Rs 2.54 lakh crore, which is around 85 percent of the targeted Rs three lakh crore, the scheme has been extended to September 2021).”

Two bankers Moneycontrol spoke to agreed that ECLGS had had an important role to play in increasing credit flow to MSMEs.

But, ECLGS is not the only factor.

The RBI dispensation to convert the interest component on MSME loans to working capital term loans could have also helped, bankers said.

In May 2020, the central bank had said that for working capital loans sanctioned in the form of cash credit/overdraft, lenders would be allowed to defer repayments up to August 31, 2020 on the interest component. They would also have the option of converting the accumulated interest for the deferment period up to August 31, 2020, into a funded interest term loan (FITL) which shall be repayable by March 31, 2021.

“Apart from ECLGS, the creation of FITLs has also played a role in raising the MSME exposure. The deadline for repayment was March 31, but some people think they have another three months to pay before it becomes an NPA,” said a senior banker on condition of anonymity.

A loan becomes a non-performing asset (NPA) if it remains unpaid for 90 days after its due date. Banks need to set aside more money to cover such loans.

In private conversations, bankers and analysts are already expressing concern on the quality of the FITL portfolio. An early sign can be found in Canara Bank’s investor presentation for Q4FY21, which shows that Rs 675.24 crore of FITLs remained outstanding, or unpaid, as on April 30, 2021.

At the same time, analysts said there was no reason to worry right now about the expansion of MSME credit. "It must be noted that the high growth in exposures in the medium segment comes on top of a relatively smaller base, while the base was higher in the micro and small segment," said Anil Gupta, VP and senior director - financial ratings, ICRA.

The RBI data showed that as on April 23, 2021, the quantum of bank exposure to the medium industries segment was Rs 1.43 lakh crore, up from Rs 99,457 crore a year ago, while that in the micro and small enterprises segment was Rs 3.72 lakh crore, up from Rs 3.58 lakh crore in April 2020.

As the Rs three lakh crore corpus of the ECLGS gets used up over time, MSMEs are also worried that they may return to the long-term trend of finding it difficult to access bank loans. “If we look at the trend in the last five years, bank lending to MSMEs has fallen by four-five percent,” said Chandrakant Salunkhe, founder and president, SME Chamber of India.

MSMEs continue to be under because of export orders being cancelled, rise in prices of raw materials and non-availability of raw materials. “Micro and small units still find it easier to access loans, but banks are very averse to lend to medium enterprises for growth,” Salunkhe added.

Salunkhe said that MSMEs had sought an expansion of the outlay under ECLGS to Rs five lakh crore.