To help the small borrowers severely hit by the second wave of coronavirus pandemic, finance minister Nirmala Sitharaman has recently announced several economic relief measures. The government will provide credit guarantee scheme to scheduled commercial banks for loans to Non-Banking Financial Companies (NBFCs) and micro finance institutions (MFIs). This much-awaited credit facility will enable the lenders to offer loans of up to Rs 1.25 lakh to 25 lakh small borrowers, Sitharaman explained.
For small borrowers, the central government has capped the interest rates on loans from the banks at existing Marginal Cost of Funds based Lending Rate (MCLR) plus 2 per cent. The interest rate will be at least 2 per cent below maximum rate prescribed by Reserve Bank of India (RBI). The tenure for such loans will be fixed at up to 26 months.
The finance minister asked the institutions to focus on new lending instead of repayment of the old loans. All borrowers (including defaulters up to 89 days) eligible will be eligible for this scheme.”Loans to borrowers to be in line with extant RBI guidelines such as number of lenders, borrower to be member of Joint Liability Group (JLG), ceiling on household income & debt,” said finance minister.
The guarantee cover for funding provided by MLIs to MFIs or NBFC-MFIs will be till March 31, 2022 or till guarantees for an amount of Rs 7,500 crore are issued, whichever is earlier, she added. “Guarantee up to 75% of default amount for up to 3 years through National Credit Guarantee Trustee Company,” she further mentioned.
“The onslaught of the second wave and the impact of the lockdown was severe, particularly for the contact-oriented businesses like travel & tourism and small businesses. The travel & tourism sector is crucial to earning foreign currency in the case of international tourism. The announcement by the government is well-timed and in the right direction. MSMEs, MFIs, and small and unorganized sectors are the biggest employment creators. The measures will help boost growth, given the increased pace of vaccination across the country. The announcement for the health infra sectors will help strengthen the fight against the pandemic,” said Nish Bhatt, founder and chief executive, Millwood Kane International – an Investment consulting firm.
The government also increased the limit of Emergency Credit Line Guarantee Scheme (ECLGS) to Rs 4.5 lakh crore from the existing Rs 3 lakh crore. Launched as a part of Atma Nirbhar Bharat Package in 2020, the ECLGS scheme aims to provide 100 per cent guaranteed coverage to the banks, non-banking financial institutions (NBFCs) and other lending institutions in order to enable them to extend emergency credit to business entities that have suffered due to the Covid-19 pandemic.
“The measures announced are well targeted at the sectors most affected.The extension of additional amounts for guaranteed MSME loans is also welcome as the second wave has had further impact on the MSMEs that were recovering from the effects of the first wave. The micro-finance loans and capping of the rates for them at MCLR plus two percent will help in supporting demand generation,” said Ranen Banerjee, partner and Leader economic advisory Services, PwC India.