In a major move expected to offer relief to the MSME sector burdened by the impact of the US-Israel war, the government on Tuesday announced an Emergency Credit Line Guarantee Scheme (ECLGS) with an outlay of Rs 18,100 crore.
The scheme aims to provide credit guarantee coverage of 100% for MSMEs and 90% for non-MSMEs as well as the airline sector, to Member Lending Institutions (MLIs) by National Credit Guarantee Trustee Company Limited (NCGTC) for the amount in default under the additional credit facility extended to eligible borrowers to tide over any short-term liquidity mismatches in view of the West Asia Crisis, as per a PIB release. It is also expected to help provide an additional credit flow of Rs 2.55 lakh crore, including Rs 5,000 crore for airlines.
However, the loan tenor for MSMEs and non-MSMEs will be 5 years from the date of first disbursement, including a 1-year moratorium. So will ECLGS 5 offer much-needed support to small businesses, or does it mask more than it clarifies? Industry experts saw the latest announcements as positive for the industry but hinted at caution regarding certain terms and conditions. Vikas Singh Chauhan, Director at the Home Textile Exporters’ Welfare Association (HEWA), highlights that the moratorium period is actually very harmful, especially for MSMEs. Citing experiences, Chauhan states that those who took it suffered badly. “What happened is that both the interest and the principal kept getting added together, and then interest was charged on that combined amount. It kept piling up, and the total became so large that people got into serious trouble. They did take the moratorium, but it ended up hurting them more than helping. So this is not a good solution,” he says.
He adds that the government should consider waiving interest for at least a year if it genuinely wants to support small businesses. Explaining his point further, he says the situation would have been different if the interest had been waived. “Overall, the market is facing severe disruption—from freight to payment terms to raw material supply. My concern is that this moratorium period may prove damaging for many small businesses, particularly those in Laghu Udyog or cottage industries across hinterland Tier 2 and Tier 3 regions,” Chauhan says.
Devil in the details
Others in the industry hail it as a welcome move since the working capital of all MSMEs has increased continuously over the last 5 years. Jayanth Mutha, CEO, Himlite Products is cautiously optimistic given previous experiences. “The devil is in the details. If the government really intends to help, then the interest on the moratorium should be waived off. Right now, nothing has been mentioned on that front, so it is open to interpretation,” he states, reflecting on how difficult the time was during Covid. “During Covid, one ultimately had to pay interest for that period as well; it was just pushed off for later,” he says.