Banks free to do due diligence on guaranteed MSME loans

Banks and shadow lenders have been given the flexibility to do their own due diligence and restrict advances below the stipulated limit on sound business principles.

While the government has pledged full guarantee for up to 20% additional, collateral-free working capital loans under the Rs 3-lakh-crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs, banks and shadow lenders have been given the flexibility to do their own due diligence and restrict advances below the stipulated limit on sound business principles.

This leaves the scope for some lenders to exploit the situation, unless the implementation of the scheme is monitored well by the government, according to a senior MSME industry executive.

No new MSME borrower will be eligible for the guaranteed loan under this scheme, which is part of the Rs 21-lakh-crore package recently announced by the government to tide over the Covid-19 impact.

A set of frequently asked questions (FAQ) released by state-run National Credit Guarantee Trustee Company, which will provide guarantee, says: “Under ECLGS, banks/ NBFCs are to offer loans up to 20%. Actual loan extended can, therefore, be less than 20%.” While the bank/ NBFC is expected to be liberal in sanctioning such loans, it is also expected to evaluate credit proposals by using prudent banking judgement and use business discretion/due diligence in selecting commercially-viable proposals and conduct the account(s) of the borrowers with normal banking prudence,” said the FAQ.

The government has earmarked a corpus of Rs 41,600 crore over the current and the next three financial years to implement this scheme.

Borrowers with up to Rs 25-crore outstanding as of February 29 and Rs 100-crore annual turnover will be eligible. Such loans will have four-year tenure with a moratorium of 12 months on repayment of the principal amount. The interest rate will be capped at 9.25% a year for banks and financial institutions and 14% for non-financial banking companies. The scheme can be tapped until October 31, or until the Rs 3-lakh-crore limit is exhausted, whichever is earlier. As many as 45 lakh units can resume business activity and safeguard jobs, the government recently announced.

The scheme also aims at supporting stressed MSME borrowers who are not in default. So, borrowers with standard accounts (with timely repayment), SMA-0 (with overdue of up to 30 days) and SMA-1 (with overdues of up to 60 days) can also take advantage of this scheme.

Interested borrowers under the Mudra scheme, which supports budding entrepreneurs from vulnerable sections of the society, will also be covered under the guaranteed emergency credit line.

The reliefs come at a critical juncture for MSMEs. In a recent report (before the announcement of the Rs 21-lakh-crore package), Kotak Institutional Equities said only 7% of SMEs surveyed thought they would be able to survive for more than three months if their business remained closed. While about 97% of the firms surveyed have paid their employees salary for March, as many as 34% of the SMEs say they won’t be able to pay April and May salaries (in the absence of government intervention).