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The credit guarantee scheme facilitates loans to bottom of the pyramid borrowers through microfinance institutions

With the government push on digital and make in India, for enhanced economic stimulus, the new package puts an impetus on financial inclusion as well

The government has announced a COVID relief package with a substantial value of INR 6.3 Lakh Cr

Since the advent of the pandemic, the global economy has been witnessing tumultuous times and India is no different. While there has been a slight economic recovery in 2021, the quarter gone by, that was afflicted by the second COVID-19 wave was anything but stable. June however, has witnessed some relief as India began to unlock and vaccination drives started gathering pace.

While fears of the fresh delta variant garner attention, against this anxious backdrop, the government has announced a COVID relief package with a substantial value of INR 6.3 Lakh Cr. According to reports, this latest credit push for sectors hit by the pandemic along with other relief support will end up having an additional impact of 60 bps on the fiscal deficit, and can also go on to create an additional liquidity window of about Rs.70,000 crores to banks.

Important notices in the announcement that will impact NBFCs lending based start-ups include:

• Under the assumption that there would be equal distribution of INR  1.10 lakh crore, with 50% and 75% guarantee cover and await risk of 100%, banks may have on the hands of capital relief of around Rs. 7500 crore.
• The credit guarantee scheme facilitates loans to bottom of the pyramid borrowers through microfinance institutions. This move will not only benefit the NBFC-MFIs but their borrowers also, As,  in these tough times as the disbursements by MFIs have taken a hit because of cash flow issues, which eventually left borrowers in distress as they were unable to carry on their income-generating activities due to lack of funds. 

In the new package, the limit of ECLGS (Emergency Credit Line Guarantee Scheme) has been increased to INR 4.5 Lakh Crore, from the existing INR 3 Lakh Crore, which had been introduced in 2020 as a part of the AtmaNirbhar Bharat package. Why this limit increase is important is because the ECLGS has been quite beneficial for MSMEs and start-ups that have incurred losses due to the COVID-19 pandemic, and have been struggling to meet their working capital requirements. 

The credit guarantee scheme through MFIs includes:

• Facilitation of loans up to INR 25,00,00 people through micro-financing institutions 
• Provision to scheduled commercial banks for loans to new and existing NBFCs and MFIs for lending up to Rs.1.25 lakhs
• The interest rate on loans has been capped at MCLR plus 2%
• Focus is now on new lending and not the repayment of all loans
• Wider eligibility, even defaulters up to 89 days
• As for credit to the small borrowers through MFIs, a guarantee up to 75% of default amount for a maximum of three years will be provided by the government through the NCGTC, (National Credit Guarantee Trustee Company) and no guarantee fee will be charged by the state-run entity.
• The guarantee cover will be available for lending up to March 31, 2022, or until the guarantees for Rs 7,500-crore loans are used up, whichever is earlier.

Though, there are criteria for ECLGS that need to be met, before being able to avail the credit line, the revised rules and 1.5 lakh-crore of additional credit for small businesses helps lending-based start-ups in extending loans in a more risk-free manner. With the MSME sector being greatly hit by the pandemic, additional credit guarantee schemes via the microfinance institutions will end up proving to be viable in overhauling the broken cash flows due to the disruption.

Apart from this the new announcement of the inclusion of retail and wholesale trade under MSME’s would help them reap the benefits of priority sector lending under RBI guidelines, giving retail micro small and medium enterprises the support that is needed for reviving and thriving. Having a structural impact on the sector,  it will help in getting the sector formalised to get better financing options from both banks and NBFCs that were earlier denied to them.

With the government push on digital and make in India, for enhanced economic stimulus, the new package puts an impetus on financial inclusion as well, which has been the need of the hour. For people in low-income groups that have been employed in the informal sector, access to traditional credit, due to the inability of unit economics necessary has been an ongoing problem. As small merchants and consumers have been finding it difficult to garner loans in the economic slowdown, NBFCs and lending based start-ups that push for financial inclusivity hold the key to financial revival. 

The latest Covid relief package announced by the government is the right step in the direction forward, as it can infuse the economy with much-needed liquidity and provide relief to sectors worst affected by the pandemic.