Turning on The Liquidity tap

Context: The Emergency Credit Line Guarantee Scheme (ECLGS) provides liquidity to companies, while still allowing the government to preserve its spending power.

Steps taken under ECLGS:

• Fund Allotment: Government has earmarked 10% (Rs.3 lakh crore) of the stimulus measures announced to date to support various industries through ECLGS.
  • Around two-thirds of the funds have been allocated to 61 lakh borrowers, an average of Rs.3 lakh per borrower.
• Support to MSMEs: Loans under ECLGS are fully guaranteed through the National Credit Guarantee Trustee Company and are collateral-free to borrowers.
• To help MSMEs in managing cash flow for new loan, interest rates are capped, one-year moratorium on principal payments, and no loan fees or prepayment penalty fees.

Benefits of the steps taken:

• Sustain the Financial Institutions: Financial institutions are able to utilise their current deposits to extend credit to their business customers during the times of slow lending.
• Added benefit of earning interest on the loan.
• Lifeline to MSMEs: These funds will prevent companies from going under distress conditions.
• Relief to Government: While there will be some defaults on loan, but it will still be less than the Rs.3 lakh crore of liquidity being provided today.

Way Ahead:

• Analyse reasons to the reluctance of eligible borrowers: who opted out of ECLGS loan consistently by instituting methods to measure the efficacy of ECLGS loan and collect data.
  • For E.g. Data on revenue, leverage and loan performance, employment growth, business locations, investment concentrations, external capital infusion and carbon footprint.
• Incentivise desired behaviours: such as reducing carbon footprint and integrate sustainable practices should introduce loan forgiveness programme or extending the maturity of the loan.