Information about Emergency Credit Line Scheme (ECLGS) as Automatic Loans by Government of India

Today as we approach towards the end of the 3rd month of a partial Lockdown in India due to COVID19, we are yet to see any sign of relief or improvement from this deadly virus specially in cities like Delhi, Mumbai or Chennai. It is said that India is yet to see its “Peak” before the curve starts “Flattening”.

These 3 months have really taught us alot, from being independent to leading a simple basic life. However, we are yet to learn how to sustain our businesses during these times and even after COVID19.

Most of the businesses have already taken a hit and there doesn’t seem to be any respite from the deadly virus as of now. While some have tried to resume economic activities, most of them have failed due to rising number of cases; India has seen a surge with almost 350,000 cases as of today. I reckon that the economic activity would only resume towards the later half of 2020.

On 13th May 2020 Honourable Finance Minister of India announced a massive stimulus package to reduce the stress on the cash strapped and financially impacted Micro, Small and Medium Enterprises (MSME) of India.

A big announcement for Economic Stimulus Package was made to provide MSME’s with ₹ 300,000 Crores ($ 42 bn) through an Automatic Loan Facility, which would allow MSME’s (upto ₹250 crores of turnover) would be entitled for loans under this scheme. After countless speculations post this announcement and its impact on the general public, today I would like to throw some of my insights on this scheme and its accessibility to the Startup sector.

First, I would like to put it on record that “IT IS AN ABSOLUTELY LEGIT SCHEME”. That’s correct, the government is doing its part to support as many businesses as it can through this scheme.

The Government of India has launched Automatic Loan Facility under a dedicated scheme called “Emergency Credit Line Guarantee Scheme” (ECLGS) under the National Credit Guarantee Trustee Company Limited (NCGTC). In order to provide this credit line to its customer each lending institution, be it a Bank or an NBFC, has to first become a Member Lending Institution (MLI) with NCGTC.

Once the membership is approved, each lending institution can grant upto INR 25 crores or upto 20% of your outstanding debt as on 29th February 2020.

How does it work? Your lending institution will get in touch with you in case you have an outstanding debt in the form of any loan (secured or unsecured) and will offer you additional 20%.

Is it that simple? Yes it is. There is a nominal paper work required primarily to open a separate bank account in which this amount will be credited by the lending institution.

What is the Rate of Interest? Government of India has setup a nominal interest rate on this loan. The exact interest is “Lending Rate determined by RBI to each bank + 1%” with a Maximum Cap of 9.25% – for banks. In case of NBFC, this interest rate is capped at 14% per annum.

What is your eligibility? In case you have a running debt in form of a Working Capital Limit, CC, Term Loan or any other loan, your bank would sanction you an additional limit.

What if you do not have an existing loan / debt? Well as per the scheme it is simpler for lending institutions to provide additional credit to exiting customers with outstanding debt / loan excluding NPA’s or MSME’s classified as SMA2. However other customers are also eligible, you simply need to contact your Relationship Manager / Bank Branch.

Repayment Terms: Under this scheme there is a moratorium provided for the first one year, i.e 12 months on the principal amount. However interest needs to be paid during the moratorium period. The tenure of loan is 48 months and repayment will start from the 13th month in the form of 36 EMI’s. So you have 1 year to put this capital to use and start repayment post that.

Are there any charges? MLI’s are not allowed to charge anything extra for providing this facility. In most cases an annual fee, or processing charge is already taken from the customer. GoI has specifically mentioned that no additional charges or margin money can be taken against this new credit scheme.

Validity of the Scheme? Eligible MSME’s can avail this scheme till 31st October 2020 or upto ₹ 300,000 Crores whichever is earlier.

Should one avail this scheme? Well Government has taken a big step of providing access to Capital in form of a debt which is secured by the Government. We often crib that Government isn’t doing enough to support businesses. Things have changed in the last 3 years since introduction of GST. The new tax system provides easy assessment of credibility which has led to easier processing of Working Capital and Term Loans for Businesses.

In my experience of working in India, I would surely recommend this scheme to all entrepreneurs and business owners who have had a good turnover in FY 2019-20. If you had a customer base till end of Feb 2020, you would surely be able to repay this loan. The loan is secured by the Government, wherein 75% of defaulted amount (if any) would be paid by the Government to the lending institution within 30 days of filing the claim and remaining 25% would be paid after getting the final status of the MSME.

If you see yourself running a business in India, this might be your chance to access capital and scale up your business.

In case you wish to read more about ECLGS, you can visit www.eclgs.com and read the documents mentioned towards the bottom of the page.