General

Emergency Credit Line Guarantee Scheme (ECLGS) For The MSME Sector

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This Blog is written by Priyank Sudhir Shah from Gujarat Law Society Law College. Edited by Harsh Sonbhadra.

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INTRODUCTION

The pandemic has caused a lot of disturbance throughout the world; the same has caused a lot of havoc throughout all the sectors of the business, the economy has suffered a lot due to this pandemic. This is an unprecedented event throughout the world, the world is struggling to tackle the same and been trying to save the economy and revive the same. The Emergency credit line guarantee scheme (ECLGS) has been formulated as a response to the unprecedented situation that has been caused due to COVID- 19, which has gravely impacted the MSME sector. The support under the scheme is provided not as an ordinary loan but as additional support to MSMEs so that they can restart their businesses which are in distress due to the Corona crisis. Under the Scheme, the Government of India has allocated Rs. 3 lakh crores in the form of a fully guaranteed emergency credit line to MSMEs. [1] The main objective of the Scheme is to provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and Non-Banking Financial Companies (NBFCs) to increase access to, and enable the availability of additional funding facility to MSME borrowers, because of the economic distress caused by the COVID-19 crisis, by providing them 100 percent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers. [2]

PURPOSE

The purpose of the scheme is to provide 100% guarantee coverage or the GECL, which shall be a pre-approved sanction limit of up to 20% of the loan outstanding as on 29th February 2020 to eligible borrowers, in the form of additional working capital term loan facility (in case of banks and Financial Institutions), an additional term loan facility (in case of NBFCs) from all Member Lending Institutions (MLIs) to eligible Business Enterprises / Micro, Small and Medium Enterprise (MSME) borrowers, including interested PMMY borrowers, because of COVID-19 crisis, as a special Scheme. [3] The scheme shall be managed and operated by National Credit Guarantee Trustee Company Ltd (NCGTC); the company is an entity of the Government of India. The scheme shall be operational till October 31, 2020, or till the amount of 3 lakh crores is sanctioned under the scheme, whichever is earlier.

ELIGIBILITY

According to the scheme, to guarantee cover under the scheme, the eligible institutions have to register with NCGTC as an MLI, as per the guidelines provided, following are the eligible MLI;

a) All scheduled commercial banks

b) Financial institutions as defined under section 45- I (c) (i) of the RBI Act.

c) All NBFCs which have been operational for 2 years as on 29^th Feb 2020.

Borrowers and Loans

A) All business enterprises including MSME whose outstanding loan as on 29th February 2020 is less than or equal to Rs. 25 crores and an annual turnover in Financial Year 2019-20 is less than or equal to Rs. 100 crores.

B) Loan given to business enterprises or MSMEs on or before 29th February 2020 under the Pradhan Mantri Mudra Yojana (PMMY) will also be considered as an eligible borrower under the Scheme. C) The benefits of the Scheme are extended to all kinds of entities irrespective of their formation. D) The Scheme aims to rescue those borrowers who are on the verge of committing the default due to dearth of funds. Thus, the Special Mention Account-0 and Special Mention Account-1 are also eligible to take loans under the Scheme. However, the business enterprises or MSME borrowers which have been categorized as Non- Performing Assets or Special Mention Account-2 as on 29th February 2020 shall not be eligible under the Scheme. E) The Scheme covers only existing customers on the books of the MLI. Thus, the loans which have already been issued by the MLIs will be covered under the Scheme and no new loans will be granted under the Scheme. F) All eligible borrowers must be GST registered except which do not require GST [4]

Application for loan

The eligible borrowers can make a loan application only with the lending institution which whom the loan is outstanding as on 29-2-2020 and the date of the application made. A new account has to be opened. If the borrower has existing limits with multiple lenders, then the additional funds under the scheme shall be disbursed by one lender or multiple lenders in terms of the agreement between the borrower and the MLI. If the borrower wants to avail loan from any lender and the amount is more than the proportional 20% of the outstanding credit which the borrower owes to a particular lender, then the borrower needs to get a No Objection Certificate (NOC) from all other lenders. However, the borrower will not require such NOC if the additional fund availed from a particular lender is limited to the proportional 20% of the outstanding credit that the borrower has with that lender. [5]

Rate of Interest

Interest Rate on GECL shall be capped as under [6]:

• For Banks and FIs, the lending rate linked to one of the external benchmark rates prescribed by RBI +1% subject to a maximum of 9.25% per annum.

• For NBFCs, the interest rate on GECL shall not exceed 14% per annum.

• Since the additional pre-approved facility is to be provided to existing customers, no additional processing fee shall be charged by MLIs to borrowers. [7]

• No penal interest due to any non-compliance of the already accepted covenants on the existing credit facilities may be charged on additional loans during the sanction time.

Security

The additional WCTL/ Term loan facility granted under GECL shall rank pari passu with the existing credit facility in terms of cash flows and security, with the charge on the assets financed under the scheme to be created within 3 months from the date of disbursal. No additional collateral shall be required.

Invocation of Guarantee

The Member Lending Institutions (MLIs) are required to inform the date on which the account was classified as NPA within 90 days of the account being classified as NPA. The Trustee Company shall pay 75 percent of the guaranteed amount within 30 days of preferring of the eligible claim by the lending institution, subject to the claim being otherwise found in order and complete in all respects. The balance 25 percent of the guaranteed amount will be paid on the conclusion of recovery proceedings or till the decree gets time-barred, whichever is earlier. [8]

CONCLUSION

The scheme is aimed at bringing out the sector from the distress caused due to the current pandemic; the structure of the scheme gives a ray of hope in bringing out the sector. The positive impact will be created on the economy and shall be a step in mitigating the stress caused due to this unprecedented pandemic. This scheme also a big step in reviving the sector and may even contribute to the PM’s recent Atmanirbhar Bharat initiative.