In India, it often takes a crisis to spur an effective policy fix to a long-standing problem. The Emergency Credit Line Guarantee Scheme (ECLGS), introduced by the Centre as a stop-gap arrangement to keep credit flowing to Micro, Small and Medium Enterprises (MSMEs) during Covid, has proved to be one such instance.

A report in this newspapershows that the ECLG scheme extended liquidity support of over ₹3.68-lakh crore to 1.19 crore businesses in just a three-year tenure between May 2020 and March 2023. SBI’s economic research has estimated that this saved 1.5 crore MSME jobs. Contrary to original fears that Non-Performing Assets (NPAs) from ECLGS would blow up and saddle the exchequer with a large bill on guarantees, the scheme has ended with Non-Performing Assets (NPAs) of about ₹22,000 crore or 6 per cent of the loans. A 6 per cent NPA figure may seem big today when banks are sitting on system-wide NPAs of less than 3 per cent. But it should be seen in the context of the severe dislocation suffered by MSMEs during the pandemic. A 6 per cent delinquency rate for MSMEs is not all that high, when you consider that banks were left with a stressed loan stock-pile of over 14 per cent from medium and large corporate loans in September 2013 after the capex boom. The ECLGS experience could offer lessons to address the ₹25-lakh crore credit gap in MSME funding (UK Sinha committee estimates).

It may be worth reviewing why the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTME), which has been running guarantee-based schemes for MSMEs for over two decades now, has not met with the same success as ECLGS. The former levies an annual guarantee fee of between 0.37 per cent and 1.35 per cent from lenders against MSME loans, while the ELCGS did not levy any fee. While offering a 100 per cent sovereign backstop to lenders without any fee may entail moral hazard, the CGTME can perhaps lower its guarantee fees. ECLGS had capped MSME lending rates at 9.25 per cent for bank loans and 14 per cent for NBFC loans, while the CGTME allows free pricing. While capping loan rates may not sync with free-market principles, the success of ECLGS goes to show that MSME loans need to be reasonably priced to foster loan offtake. The bulk of loans under ECLGS has been availed by retail trade and services firms, suggesting that this segment has a large unmet credit need. Lenders, particularly banks, should move away from collateral-based lending models based on hypothecation of plant and machinery or inventory. With widespread digital adoption, lending based on easily verifiable cash flows of micro-enterprises has become quite viable.

The ECLGS experience suggests that contrary to perception, the credit behaviour of MSMEs can be superior to that of large corporates. Their ability to service loans may be impaired during crises, but their willingness to do so is quite high once it is business-as-usual.

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