Credit and Finance for MSMEs: Nearly half of the loans disbursed under the government’s Emergency Credit Line Guarantee Scheme (ECLGS) to MSMEs were used to clear the dues of vendors providing raw materials while one-third of loans were used to restart businesses, and the remaining amount was used for payment of salaries and to meet other expenses, said the Reserve Bank of India’s (RBI) annual report for the financial year 2021-22. ECLGS is the flagship post-Covid credit scheme for existing MSME borrowers launched in May 2020 as part of the Rs 20-lakh-crore special economic Atmanibhar Bharat package.
Following the ECLGS announcement, MSME loan demand increased sharply, particularly credit disbursements to small enterprises with loan sizes of less than Rs 10 lakh during the second quarter of FY21. According to the data shared in the report, 45 per cent of these loans were used to clear existing vendor dues followed by around 28 per cent to resume commercial operations, approximately 13 per cent towards employee salaries and the rest around 13 per cent towards other expenses.
However, to support new borrowers as well impacted due to the Covid pandemic, the central bank in February 2021 had announced a deduction of loans given to new borrowers in the MSME sector from the cash reserve ratio (CRR) maintained by banks. “This measure increased the availability of loanable funds to new MSME sector borrowers, as loans to new borrowers grew almost at the same pace as for existing borrowers,” the report noted.
This exemption was available for exposures up to Rs 25 lakh per borrower for credit extended up to the fortnight ending October 1, 2021, for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier, a statement by RBI in February had said.
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Moreover, ECLGS also helped in the recovery of stressed assets. Out of about 15 lakh ECLGS accounts, 88 per cent were standard assets, 10 per cent were special mention accounts (SMAs), and 2 per cent were non-performing assets (NPAs), the annual report said. Out of total NPAs, the transition from NPAs to standard assets was significantly higher in ECLGS accounts than non-ECLGS accounts of the same borrowers during 2021-22.
Based on the data shared by RBI in the annual report, 37 per cent ECLGS accounts transitioned from NPA to standard category in comparison to 14 per cent non-ECLGS NPA accounts that switched to standard category. Likewise, the share of NPAs evolving to SMA accounts was higher at 35 per cent for ECLGS accounts vis-a-vis 16 per cent for non-ECLGS accounts while in terms of accounts, which remained NPAs, 70 per cent belong to non-ECLGS category in comparison to 29 per cent ECLGS accounts.