ECLGS scope expanded to cover business loan by individuals

-Financial Services Division (finserv@vinodkothari.com)

 The Finance Minister had announced several measures to provide stimulus to economy for providing a momentum after impact caused by Covid-19 and also to take further the mission of self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (‘Scheme’), which intends to enable the flow of funds to MSMEs by providing additional loans to MSME’s covered by 100% government guarantee.

Under this Scheme, the Government of India, through a National Credit Guarantee Trust (NCGTC), will provide 100% guarantee on loans provided by banks and Financial Institutions (FIs) to MSMEs and MUDRA borrowers under the said scheme. The Scheme aims to extend additional funding of Rs. 3 lakh crores to eligible borrowers in order to help them through the liquidity crunch faced by them due to the Covid-19 crisis.

In order to ensure the full utilisation of the 100% government guarantee loans in times of such financial downturns, the scheme has been updated on July 4, 2020[1] to widen the scope and significant changes in the limits has been notified. It is evident form the amendments under revised operational guidelines that it is aimed at providing deeper benefit to the society, by expanding the borrower base to include individuals who have availed loan for business purposes under the scheme.

This article discusses the changes and its impacts in detail.

Key changes under the new ECLGS

Eligible Borrower

The erstwhile operational guidelines only allowed Business Enterprises/MSME to borrow under the scheme which were having already existing loan facility with the member lending institution (MLI). The major change under the revised guideline is the extension of the scheme to the individuals who have existing loan facility with MLI. Such application of credit facility by an individual under the scheme shall be supported by Management Certificate to the effect that they have availed such loan facility for their own business purposes.

We had earlier also held the view that a loan taken by a business, even though owned by an individual and not having a distinctive name than the individual himself, cannot be regarded as a “loan provided in individual capacity”. And hence, must be covered under the ambit of the scheme.

For instance, many SRTOs, local area retail shops etc are run in the name of the proprietor. There is no reason to disregard or disqualify such businesses. It is purpose and usage of the loan for business purposes that matters.

The scheme now specifically includes individuals who have availed loans for business purpose, this would help business who are not incorporated or the owner had availed facility in its own name. This would also benefit professionals like Doctors, CA/CS/CMA, who have availed loans for scaling up their service businesses.

Increase in total outstanding loan limit for eligible borrowers

Under the previous operational guideline the total outstanding loan limit of an eligible borrower from all the MLI was caped at INR 25 crores which has now been increased up to INR 50 crores as on February 29, 2020. As the ceiling for maximum amount of loan is increased the maximum amount of guaranteed loan that can be issued under the guideline have increased from INR 5 crores to INR 10 crores.

Increase in turnover limit for eligible borrowers

The turnover limit of eligible borrowers has been increased from INR 100 Crores to INR 250 crores. This means eligible borrowers which were earlier having annual turnover inclusive of all taxes/GST more than INR 100 crores are now eligible under the new operational guidelines. Provided there annual turnover is less than INR 250 crores for financial year 2019-20.

Smaller companies were already covered under the scheme and so the aforesaid amendment would include larger companies as well.

Option to MLI providing ECLGS facility on behalf of other lenders

The erstwhile operational guideline provided for a borrower who wishes to take from any lender more than 20% of outstanding credit that the borrower had with specific lender, a NOC would be required from all the other lenders.

Revised operational guidelines has served as a clarification that NOC to be required in such cases only from the lender whose share of ECLGS loan is proposed to be extended by a specific lender. However, it would be necessary for the specific lender to agree to provide ECLGS facility on behalf of such of the lenders.

Conclusion

As per the news report, more than half of the amount of guarantee approved under the scheme remains unrealised till date. Hence, the increase in ambit of scheme would be beneficial to reach out to the businesses in the name of individuals as well. Further, it would help the larger businesses to avail funding, in these times when all businesses are facing liquidity issues.

 

[1] https://www.eclgs.com/documents/Operational_Guidelines_ECLGS_Updated_as_on_August_04_2020.pdf

 

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