Here's why MSMEs preferred ECLGS over subordinate debt scheme

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A subordinate debt scheme under which bank loans would be provided to promoters of small businesses affected by the pandemic has received lukewarm response, while loan guarantees offered under a larger Covid-19 relief package has been a hit.

The Rs 20,000 crore Credit Guarantee Scheme for Subordinate Debt was launched in June last year for the restructuring of pandemic-hit micro, small and medium enterprises as part of the government’s Aatmanirbhar Bharat package.

Over a year since, only 708 guarantees amounting to Rs 75 crore have been issued. The scheme had targeted support for 200,000 Covid-hit MSMEs that were stressed and non-performing accounts as of April 30, 2020, and were eligible for restructuring as per the Reserve Bank of India guidelines.

Experts said the debt scheme had few takers because it required collateral and wasn’t customer-friendly.

Under the Emergency Credit Line Guarantee Scheme for MSMEs that was announced as part of a Rs 20 lakh crore Covid-19 relief package, loans of Rs 2.73 lakh crore have been sanctioned out of the enhanced Rs 4.5 lakh crore limit so far. An amount of Rs 2.14 lakh crore has been disbursed by banks.

The ECLGS aims to provide 100 percent guarantee to banks, nonbanking financial institutions and other lending institutions to enable them to extend emergency credit to business entities that have suffered due to the pandemic and are struggling to meet their working capital requirements.

“Both CGSSD and ECLGS are schemes formulated to ameliorate the stress, which was experienced by the MSME sector in the post-Covid period. The latter scheme was more business friendly and therefore, it picked up very fast by disbursing financial support to entrepreneurs who needed it badly,” said Joseph Thomas, head of research at Emkay Wealth Management.

Commenting on CGSSD’s failure to take off, Thomas noted that it was mainly because the scheme required the promoter of the business to bring in 10 percent of the subordinated debt amount as collateral.

“This requirement was self-defeating as the promoter and the business, both of which were significantly weakened by an inclement and disruptive business environment, were in no way able to meet this condition. Therefore, the scheme failed in providing the requisite support to the business,” he said.

According to Thomas, the requirement of restructuring is quite a long-drawn-out process and hence many did not opt for it.

“In stark contrast to this, the ECLGS was more pragmatic in its approach and provided liquidity support to MSMEs for a two- to three-year time period, without any strings like restructuring, etc. Restructuring was optional under this scheme. This scheme was runaway hit as it was business-friendly,” Thomas added.

"The amounts disbursed reveal the extent of acceptance of the schemes by the MSME segment," he said.

Speaking on the condition of anonymity, a senior official from an MSME Industry body said, “Most of the MSMEs preferred ECLGS over CGSSD as it was a more customer-friendly scheme and ready to serve, unlike CGSSD where it would have taken relatively longer for the MSMEs to avail of the benefit. Moreover, under ECLGS, undergoing restructuring was just an option.”