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-Siddharth Goel (firstname.lastname@example.org)
The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’). The Master Directions consolidates various circulars and guidelines issued by RBI with respect to PSL.
The changes made in the Master Directions primarily deal with targets and sub-targets for classification of loans as priority sector loans. Further there are some addition of new sectors in Eligible categories, along with increase in lending limit of some of the existing eligible categories for priority sector lending.
Our detailed write-up on the topic can be viewed here.
Changes in priority sector norms do not have a direct impact on the NBFCs, but they have an indirect impact. Banks are allowed to acquire loans under Direct Assignment arrangements or invest in pass through certificates backed by loans which qualify the definition of PSL, in order to meet the prescribed targets. Mostly, the banks acquire these receivables from NBFCs who does the origination of the loans. Additionally, banks also engage in co-lending arrangements with NBFCs to originate PSLs. Therefore, it is worthwhile to examine the impact of these changes on NBFCs.
RBI through its vide notification RBI/2018-19/49 dated September 21, 2018 issued guidelines on Co-origination of loans by Commercial Banks and NBFC-ND-SI (“Co-origination Guidelines”). These guidelines excluded Regional Rural Banks (RRBs) and Small Finance Banks (SFBs). Essentially, the banks could claim priority sector status in respect of its share of credit while engaging in the co-origination arrangement with NBFC under the Co-origination Guidelines. Provided, the priority sector assets on the bank’s books should at all times be without recourse to the NBFC.
It is pertinent to note that the PSL Master Directions under its para 25 covers Co-origination of loans by Banks and NBFC-ND-SI. The Master Direction specifically excludes, RRBs SFBs and Urban Co-Operative Banks (UCBs) and Local Area Banks (LABs) under the above para. Moreover, the Master Directions under the said para, specifically stipulates that detailed guidelines in this regard are to be governed as provided under Co-origination Guidelines dated September 21, 2018. Hence there are no changes intended to be introduced vis-a-vis Master Direction, to the co-origination of loans by banks and NBFCs.
In the earlier regime, after the review of Priority sector lending by banks to NBFC for On-Lending notification dated August 13, 2019, RBI through its notification dated March 23, 2020, extend the priority sector classification for bank loans to NBFCs for on-lending for the FY 2020-21. Further, existing loans disbursed under the on-lending model continued to be classified under Priority Sector till the date of repayment/maturity. The extension notification also stipulated an overall capping limit for calculating bank’s total priority sector lending as produced herein below;
“3. Bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending will be allowed up to an overall limit of five percent of individual bank’s total priority sector lending. Further, banks shall compute the eligible portfolio under on-lending mechanism by averaging across four quarters, to determine adherence to the prescribed cap.”
Para 22 of the Master Directions governs Bank loans to registered NBFCs (other than MFIs). It is highlighted that there is no change in sub-category for On-lending by NBFC, and limits also remain unchanged. The above para in the Master Direction, clearly stipulates that on-lending will be eligible for classification as priority sector under respective categories which is subject to the following conditions:
(i) Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture will be allowed up to ₹ 10 lakh per borrower.
(ii) Micro & Small enterprises: On-lending by NBFC will be allowed up to ₹ 20 lakh per borrower.
The above dispensation is valid up to March 31, 2021 and will be reviewed thereafter. However, loans disbursed under the on-lending model will continue to be classified under Priority Sector till the date of repayment/maturity. Caping of overall limit of Bank Credit to 5 percent has been prescribed under para 24 of the Master Directions.
Investments by banks in securitised assets or assignment/outright purchase of a pool of assets, representing loans by banks and financial institutions to various categories of priority sector, except ‘others’ category, are eligible for classification under respective categories of priority sector depending on the underlying assets. However, earlier the requirement was that the interest rate charged to the ultimate borrower in securitised assets and in case of transfer of assets through direct assignment, shall be capped at Base Rate of the investing bank plus 8 percent per annum.
Therefore, investments by banks, in securitised assets and purchase of assets originated by NBFCs in eligible sectors had to comply with above capping in order to qualify as eligible for PSL. To encourage MSME lending in smaller areas where cost of intermediation is high for the smaller NBFCs, the UK Sinha committee in its report has proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter. The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches.
Accordingly, such capping limit has been relaxed and as per the as per the revised requirement the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately. It is expected that the RBI shall be separately communicating the limits to the banks.
The aforesaid relaxation in the interest rate capping would widen the eligibility of loans originated by the NBFCs for securitisation and direct assignment to banks, for meeting the PSL requirement.
To address the regional disparities in flow of credit at the district level, currently districts have been ranked on the basis of per capita credit flow. Higher weight (125%) is assigned to the incremental priority sector credit in districts with low per capita credit flow. Similarly, lower weight (90%) has been assigned to incremental PSL in districts with comparatively higher credit flow. The higher PSL credit (125 %) districts are specified in ANNEX-I A and districts with comparatively low PSL credit (90%) are specified in ANNEX-IB of the Master direction. Districts not mentioned in either of the Annex will be having weightage of 100%. PSL incremental credit shall be applicable from F.Y. 2021-2022 onwards.
Thus, for the purpose of above incentives, banks will get incremental PSL credit, if they invest as following:
The new Master Direction does not seem to impact legal relationship between banks and NBFCs in respect to co-origination of loans and co-lending materially, since all the regulations are similar to the earlier PSL regime. However, the incentives introduced by way of incremental PSL credit to Banks will channel the credit to districts with low credit penetration. Therefore, banks will be benefitted by dealing with NBFCs having portfolio of loans (eligible for PSL) and presence in districts with lower credit penetration.
Further, change in capping, of investments by Banks in securitised assets and direct assignment/ outright purchase of loans, originated by NBFCs is intended to cover loans originated with higher spreads. Further lending to new sub sectors introduced through Master Direction, would also qualify towards PSL target investments by Banks.
The indicative list of new sub-sectors and sub-sectors with enhanced credit limit is reproduced herein below for ready reference.
|Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities.||· Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.
· Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer
· Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.
· Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee7.
· Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.
· Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.
· A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations8.
|Other Finance to MSMEs||In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)
|· Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.
· Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.
· Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.
|Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.
|Renewable Energy||Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.
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-Financial Services Division (email@example.com)
The RBI via a notification on 1st January 2019 had allowed NBFCs and banks to restructure their advances to MSMEs, classified as ‘standard’, without any asset classification downgrade and the same was extended further on 11th February 2020.
Through the notification dated August 6, 2020, the RBI has again extended the timeline for restructuring till March 31, 2021.
Further, the notification dated August 6, 2020 provides that the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation i.e. from August 6, 2020 to March 31, 2021, may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan.
For accounts restructured under these guidelines, the lenders are required to maintain an additional provision of 5% over and above the provision already held by them with respect to standard assets. Though, the extension notification does not specifically provide such provisioning requirements for NBFCs, however, reading in consonance with the January 2019 notification, it can be said that the requirement is for both banks and NBFCs.
The extension of relaxation would chiefly benefit the MSME borrowers who are having sound businesses as well as repayment capabilities however, are unable to meet their obligations post 1st March 2020, due to widespread disruption caused by the pandemic. The move would ensure that MSMEs that are having a viable business standing are not hit by negative classification just because of short term volatilities.
The existing RBI guidelines require that for the loan granted by banks against the security of gold jewelry i.e. gold loans a Loan-to-Value (LTV) Ratio of maximum upto 75% has to be maintained. Through notification dated August 6, 2020, LTV requirement has been relaxed temporarily. Accordingly, banks may now lend up to 90% of the amount of gold jewellery pledged until March 31, 2021.
Banks may, while sanctioning new loans, grant relatively more amount of loan. Further, using the advantage of extended LTV, banks may also consider providing top-up loans to the existing borrowers, on existing security of gold jewellery.
After March 31, 2021, the LTV requirement shall be restored back to 75%. While the notification mentions that fresh loans granted after such date shall have an LTV of 75%, it is silent about the treatment of existing loans. Clarification in this regard is expected from the RBI.
In the absence of any clarification, the loans given before March 31, 2021 shall also be bound by the LTV of 75% after such date. Accordingly, the banks should either structure the loan in such a manner that the LTV comes down to 75% after receiving repayments up to March 31, 2021 or the banks may have to call back a certain portion of loan so as to meet the LTV requirement after such date.
It may also be noted that despite the high amount of market penetration of NBFCs in gold loan sector, no such relaxation has been provided to NBFCs.
The RBI has revised the existing guidelines on priority sector lending (PSL) by banks. While the detailed PSL guidelines are yet to be released, following are a few major changes that will be introduced:
Timothy Lopes | Senior Executive
Vinod Kothari Consultants
In light of the disruption caused by the pandemic, the Government of India announced a Rs. 20 lakh crores economic stimulus package. The first of the several reforms were announced on 13th May, 2020 which announced the Emergency Credit Line, the partial credit guarantee scheme 2.0 (PCG 2.0), TLTRO 2.0 and much more.
The PCG 2.0 scheme permitted banks to purchase CPs and bonds issued by NBFCs/MFIs/HFCs. These purchases were then guaranteed by the Government of India up to 20% of the first loss. For more details of the scheme see our write up here.
The announcement also proposed launching a Rs. 30,000 crores “Special Liquidity Scheme” for NBFCs/HFCs including MFIs. The Cabinet approved this scheme on 20th May, 2020.
On 1st July, 2020, RBI has released the details of the Special Liquidity Scheme. The scheme is intended to avoid potential systemic risk to the financial sector. The scheme seems to be a short term relief for NBFCs acting as a bail-out package for near term maturity debt instruments. The scheme is intended to supplement the existing measures already introduced by the Government.
The scheme will provide liquidity to eligible NBFCs defined in the notification which is similar to the eligibility criteria specified under the PCG 2.0 scheme. The Government will implement the scheme through SBICAP which is a subsidiary of SBI. SBICAP has set up a SPV called SLS Trust to manage the operations. More details about the trust can be found on the website of SBICAP.
Under the scheme, the SPV will purchase the short-term papers from eligible NBFCs/HFCs. RBI will provide liquidity to the Trust depending on actual purchases by the Trust. The utilisation of proceeds from the scheme will be only towards the sole purpose of extinguishing existing liabilities.
Instruments eligible for the scheme are relatively short term. The scheme specifies that CPs and NCDs with a residual maturity of not more than three months (90 days) and rated as investment grade will be eligible instruments. These dates, however, may be extended by Government of India. The SPV would invest in securities either from the primary market or secondary market subject to the conditions mentioned in the Scheme.
The actual investment decisions will be taken by the Investment Committee of the SPV.
The scheme is available only up to 30th September, 2020 as the SPV will cease to make purchases thereafter and would recover all the dues by 31st December, 2021 or any other date subsequently modified.
The SPV set up under the scheme comprises of an investment committee. The investment committee will decide the amount to be invested in a particular NBFC/HFC. The FAQs available on the website of SBICAPs specifies that the Trust shall invest not more than Rs. 2000 crores on any one NBFC/HFC subject to them meeting conditions specified in the scheme. The Trust may have allocation up to 30% to NBFCs/HFCs with asset size of Rs. 1000 crores or less.
Rate of Return (RoR) and other specifics under the scheme will likely be based on mutual negotiation between the NBFCs and the trust. According to the FAQs, the yield on securities invested by SPV shall be decided by the Investment Committee subject to the provisions of the scheme.
The Trust may also require an appropriate level of collateral from the NBFCs/ HFCs as specified under the FAQs.
The scheme is a welcome move likely to provide sufficient liquidity to the NBFC sector for the near term and act as a bail-out package for their short term liabilities.
The press release dated 20th May, 2020, approving the Special Liquidity Scheme states that “Unlike the Partial Credit Guarantee Scheme which involves multiple bilateral deals between various public sector banks and NBFCs, requires NBFCs to liquidate their current asset portfolio and involves flow of funds from public sector banks, the proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio. The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued. The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector.”
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-Financial Services Division (firstname.lastname@example.org)
-Updated as on June 08, 2021
The Finance Minister has, in the month of May, 2020, announced a slew of measures as a part of the economic stimulus package for self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (ECLGS, ‘Scheme’), which intends to enable the flow of funds to MSMEs. This is the so-called Rs 300000 crore scheme. The scheme was further amended on 4th August 2020 for widening the scope of the said scheme.
Under this Scheme the GoI, through a trust, will guarantee loans provided by banks and Financial Institutions (FIs) to Individuals MSMEs and MUDRA borrowers. 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 crisis.
Based on the information provided by the Finance Minister about this Scheme, the press release issued in this regard and the operating guidelines scheme documents issued subsequently, we have prepared the below set of FAQs. There is also a set of FAQs prepared by NCGTC – we have relied upon these as well.
In brief, the Guaranteed Emergency Line of Credit [GECL] is a scheme whereby a lender [referred to as Member Lending Institution or MLI in the Scheme] gives a top-up loan of 20% of the outstanding facility as on 29th February, 2020. This top up facility is entirely guaranteed by NCGTC. NCGTC is a special purpose vehicle formed in 2014 for the purpose of acting as a common trustee company to manage and operate various credit guarantee trust funds.
[Vinod Kothari had earlier recommended a “wrap loan” for restarting economic activity – http://vinodkothari.com/2020/04/loan-products-for-tough-times/. The GECL is very close to the idea of the wrap loan.]
Essentially, the GECL will allow lenders to provide additional funding to business entities and individual businessman. The additional funding will run as a separate parallel facility, along with the main facility. The GECL loan will have its own term, moratorium, EMIs, and may be rate of interest as well. Of course, the GECL will share the security interest with the original facility, and will rank second charge, with the main facility, both in terms of cashflows as in terms of security interest.
The major questions pertaining to the GECL are going to be about the eligible borrowers to whom GECL may be extended, and the allocation of cashflows and collateral with the main facility. Operationally, issues may also centre round the turnaround time, after disbursement, for getting the guarantee cover, and whether the guarantee cover shall be in batch-processed, or processed loan-by-loan. Similarly, there may be lots of questions about how to encash claims on NCGTC.
On account of nationwide disruption due to COVID-19 pandemic second wave, the Government has further enlarged the scope of the Emergency Credit Line Guarantee Scheme (ECLGS) via updated ECLGS operation guidelines dated June 07, 2021(‘ECLGS 4.0’). Additionally, FAQs pertaining to scheme operational guidelines were also updated via notification dated June 07, 2021.
The following chart depicts the various parts of ECLGS as per updated operational guidelines on June 07, 2021.
Eligible Lenders and eligible borrowers
The GECL shall be an additional working capital term loan (in case of banks and FIs), and additional term loan (in case of NBFCs) provided by the MLIs to Eligible Borrowers. The GECL facility may run upto 20% of the loan outstanding on 29th February, 2020.
The meaning of “working capital term loan” is that the amount borrowed may be used for general business purposes by the borrower.
1A. What are the key differences between ECLGS 1.0, ECLGS 2.0, ECLGS, 3.0 and ECLGS 4.0?
Refer to the comparative table at the end of the FAQs.
For the purpose of the Scheme MLIs/eligible lenders include:
III. Non-Banking Financial Companies (NBFCs), registered with the RBI and which have been in operation for a period of 2 years as on 29th February, 2020.
The language of the scheme indicates that the NBFC must be in operation for 2 years (and not financial years) as on 29th February, 2020. Thus, the period of 2 years shall be counted from the starting of operations after getting registration as an NBFC.
Usually, the RBI while granting registration requires the NBFC to start operations within a period of six months of getting registration. It also requires the NBFC to intimate to RBI that it has commenced operations. Logically, the 2 years’ time for starting of operations should be read from the date of commencement of operations
The asset size of the NBFC would not matter. The NBFC must only hold a valid certificate of registration issued by RBI in order to be eligible under the scheme (and in operation for 2 years). Thus, whether SI or not, any NBFC will qualify.
Yes, the eligibility criteria specifically requires the NBFC to be registered.
In our view, that should certainly be possible. However, in our view, in that case, the rate of interest charged to the borrower should be the blended rate considering the interest rate caps for the bank [9.25%] and the NBFC [14%].
The Eligible Borrowers shall be entities/individuals fulfilling each of the following features :
8A. Can the beneficiary under one scheme avail benefits under other schemes?
The guaranteed extended credit line (GECL) is borrower-specific and sector-specific relief. The additional credit line under ECLGS 1.0 and ECLGS 2.0 are mutually exclusive. Whereas, in cases where an additional credit line has been extended under ECLGS 1.0 and the borrower is also covered ECLGS 3.0, such accounts are eligible for additional funding up to 40% of the outstanding amount as on Feb 29. 2020. The additional funding up to 2 crores under ELGS 4.0 is allowed to all the eligible borrowers under ECLGS 4.0, irrespective of whether the funding has been availed under ECLGS 1.0, ECLGS 2.0, ECLGS 3.0.
Mudra borrowers are micro-finance units who have availed of loans from Banks/NBFCs/MFIs under the Pradhan Mantri Mudra Yojna (PMMY) scheme.
No. There is no particular organisational form for the Eligible Borrower. It may be a company, firm, LLP, proprietorship, etc.
Note that the Scheme initially used the expression: “all Business Enterprises / MSME institution borrower accounts”. From the use of the words “business enterprises” or “institution borrower account”, it was contended that individuals are excluded. In Para 7 of the Operational Guidelines on the website of NCGTC, it mentioned that “Loans provided in individual capacity are not covered under the Scheme”. However, the very same para also permitted a business run as a proprietorship as an eligible case of business enterprise.
Hence, there was a confusion between a business owned/run by an individual, and a loan taken in individual capacity. The latter will presumably mean a loan for personal purposes, such as a home loan, loan against consumer durables, car loan or personal loan. As opposed to 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”.
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.
To ensure clarity, the revised operational guidelines include business loans taken by individuals for their own businesses in the ambit of scheme, Further, individual would be required to fulfil eligibility criteria for the borrower.
The term “ business enterprise” has been used repetitively in the Scheme, and is undefined. In our view, its meaning should be the plain business meaning– enterprises which are engaged in any business activity. The word “business activity” should be taken broadly, so as to give an extensive and purposive interpretation to fulfil the intent of the Scheme. Clearly, the Scheme is intended to encourage small businesses which are the backbone of the economy and which may help create “self reliant” India.
Having said this, it should be clear that the idea of the Scheme is not to give loans for consumer durables, personal use vehicles, consumer loans, personal loans, etc. While taking the benefit of the Scheme, the MLI should bear in mind that the intent of the lending is to spur economic activity. There must be a direct nexus between the granting of the facility and economic/business activity to be carried by the Eligible Borrower.
The eligibility criteria for borrowers does not specifically require the MSMEs to be registered under the MSMED Act. Thus, an unregistered MSME may also be an Eligible Borrower under the scheme.
There is no particular form. However, we suggest something as simple as this: To whomsoever it may concern Sub: Declaration of Turnover I/ We………………………………….. (Name of Authorized Signatory), being ……………………..(Designation) of …………………………………………………. (Legal Name as per PAN) do hereby state that while the financial statements for the FY 2019-20 have not still been prepared or finalised, based on our records, the turnover of the abovementioned entity/unit during the FY 2019-2 will be within the value of Rs 250 crores.
Signed …………. Date:…………………
Note: The turnover applicability under ECLGS 1.0 has been removed.
The manner of counting DPD is – we need to see the oldest of the instalments/ principal/interest due on the reckoning date. Here, the reckoning date is 29th Feb. On that date, the oldest overdue instalment is that of 10th Jan. This is less than 59 DPD. Hence, the borrower is eligible.
On the reckoning date, the oldest instalment is that of 1st Jan. 2020. Since the reckoning date is 29th Feb., we will be counting only one two dates – 1st Jan and 29th Feb. The time lag between the two adds to exactly 59 days. The borrower becomes ineligible if the DPD status is more than 59 days. Hence, the borrower is eligible.
It does not seem relevant that the GECL should be of the same nature/type or purpose as the primary facility. We have earlier mentioned that the purpose of the GECL is to support the business/economic activity of the borrower.
However, there may be issues where the existing facility itself would not have been eligible for the Scheme. For instance, if the existing facility was a car loan to a business entity (say, an MSME), can the GECL be eligible if the same is granted for working capital purposes? Intuitively, this does not seem to be covered by the Scheme. Once again, the intent of the Scheme is to provide “further” or additional funding to a business. Usually, the so-called further or additional funding for a business may come from a lender who had facilitated business activity by the primary facility.
Hence, in our view, the primary as well as the GECL facility should be for business purposes.
There does not seem to be a correlation between the residual term of the primary facility and the tenure of the GECL facility. The GECL seems to be having a term of 4 years, irrespective of the original or residual term of the primary facility.
Of course, the above should be read with our comments above about the primary facility as well as the GECL to be for business purposes.
Here, the purpose of the loan, and the nature of collateral supporting the loan, are different, but what matters is the end-use or purpose of the loan. The collateral is a self-occupied house. But that does not change the purpose of the loan, which is admittedly working capital for the retail trade activity.
Hence, in our view, the facility will be eligible for GECL (ECLGS1.0), subject to other conditions being satisfied.
It seems that even loans extended to co-obligors or co-applicants also qualify.
We may envisage the following situations:
The GECL under ECLGS 1.0, ELCGS, 2.0, ECLGS 3.0, and ECLGS 4.0 shall be sanctioned latest by Spetember 30, 2021 or till an amount of Rs. 3 lakh crore is sanctioned under GECL, whichever is earlier.
19A. Is there a sunset clause for the guarantees to be extended under the ECLGS schemes?
For fund-based (ECLGS 1.0, ECLGS 2.0, ECLGS 3.0, and ECLGS 4.0) and non-fund-based (ECLGS 2.0 and ECLGS 4.0) as may be applicable, facilities under all the Schemes to be sanctioned latest by September 30, 2021.
While the disbursement or utilisation (as the case may be) of such sanctioned additional credit facility shall be done latest by December 31, 2021.
Understandably, there may be mechanisms of either dissemination of the information by NCGTC, or some sort of a pre-approval of a limit by NCGTC.
The Scheme specifically mentions that the limit of Rs. 50 crores shall be ascertained considering the borrower accounts of the business enterprises/MSMEs with combined outstanding loans across all MLIs. For the purpose of determining whether the combined exposure of all MLIs is Rs 50 crores or not, the willing MLI may seek information about other loans obtained by the borrower.
Logically, all business loans, that is, loans/working capital facilities or other funded facilities availed for business purposes should be aggregated. For instance:
The Scheme uses the term MSME, but nowhere has the Scheme made reference to the definition of MSME under the MSMED Act, 2006. Therefore, it does not seem necessary for the Eligible Borrower to have registration under the MSMED Act. Further, even if the entity in question is not meeting the criteria of MSME under the Act, it may still be satisfying the criteria of “business enterprise” with reference to turnover and borrowing facilities. Hence, the reference to the MSMED Act seems unimportant.
However, for the purpose of ease of reference, we are giving below the meaning of MSME as per the definition of MSMEs provided in the MSMED Act, 2006 (‘Act’):
|Enterprise||Manufacturing sector [Investment in plant and machinery (Rs.)]||Service sector [Investment in equipment (Rs.)]|
|Small||Not exceeding 25 lakhs||Not exceeding 10 lakhs|
|Micro||Exceeding 25 lakhs but does not exceed 5 crores||Exceeding 10 lakhs but does not exceed 2 crores|
|Medium||Exceeding 5 crores but not exceeding 10 crores||Exceeding 2 crores but does not exceed 5 crores|
The above definition has been amended by issue of a notification dated June 1, 2020. As per the amendment such revised definition shall be applicable with effect from July 01, 2020. Accordingly, w.e.f. such date, following shall be the definition of MSMEs:
|Enterprise||Investment in plant and machinery or equipment (in Rs.)||Turnover (in Rs.)|
|Micro||Upto 1 crore||Upto 5 crores|
|Small||Upto 10 crores||Upto 50 crores|
|Medium||Upto 50 crores||Upto 250 crores|
The Scheme states that a borrower is eligible if the borrower has –
(i) total credit outstanding of Rs. 50 Crore or less as on 29th Feb 2020;
turnover for 2019-20 was upto Rs. 250 Cr; (Turnover limit omitted by way of updated operational guidelines)
(iii) The borrower has a GST registration where mandatory.
Udyog Aadhar Number (UAN) or recognition as MSME is not required under this Scheme.
Hence, even retail traders fulfilling the eligibility criteria above would be eligible under the scheme.
Looking at the clear language of the Scheme, it seems that existence of an outstanding facility is a prerequisite to avail credit facility under the Scheme. The intent of the Scheme is to provide additional credit facility to existing borrowers.
25 A. What if the borrower satisfies the conditions with respect to DPDs on the respective cut-off dates under various ECLGS schemes, but subsequently is downgraded to NPA – will the borrower still be eligible for additional finance under the schemes?
The borrower account otherwise eligible under the scheme should not be an NPA as on the date of sanction / disbursement.
Since the amount of GECL is related to the POS as on 29th Feb., 2020, there is no question of such a borrower qualifying.
It is counter-intuitive to think that the MLI cannot put end-use restrictions. Ensuring that the funds lent by the MLI are used for the purpose for which the facility has been extended is an essential prudential safeguard for a lender. It should be clear that the additional facility has been granted for restarting business, following the disruption caused by the COVID crisis. There is no question of the lender permitting the borrower to use the facility for extraneous or irrelevant purposes.
Terms of the GECL Facility
The major terms are as follows:
Yes. This scheme may operate in conjunction with any interest rate subvention scheme as well.
It seems that the Scheme has a non-negotiable tenure of 4 years. Of course, the Scheme document does say the parties may agree to a prepayment option, without any prepayment penalty. However, in view of the purpose of the Scheme, that is, to restart business activity in the post-COVID scenario, it does not seem as if the purpose of the Scheme will be accomplished by a shorter loan tenure.
Minus the Scheme, nothing stopped a lender from giving a top-up lending facility on a loan. Therefore, the wrapped portion of the GECL facility is 20% of the loan, but if the lender so wishes to give further loan, there is nothing that should restrain the lender from doing so.
Para 11 of the Scheme document says: “…facility granted under GECL shall rank pari passu with the existing credit facilities in terms of cash flows and security”. The concept of pari passu sharing of the security, that is, the collateral, may create substantial difficulties in actual operation, since the terms of repayment of the primary facility and the GECL facility are quite divergent. To understand the basic meaning of pari passu sharing, assume there is a loan of Rs 100 as on 29th Feb., 2020, and the MLI grants an additional loan of Rs 20 on 1st June, 2020. Assume that the value of the collateral backing the primary loan is Rs 125. As and when the GECL is granted, the value of this collateral will serve the benefit of the primary loan as well as the GECL facility. In that sense, there is a dilution in the value of the security for the primary loan. This, again, is illogical since the primary does not have a sovereign wrap, while the GECL facility has. What makes the situation even worse is that due to amortizing nature of the primary loan, and the accreting nature of the GECL facility during the moratorium period, the POS of the primary facility will keep going down, while the POS of the GECL facility will keep going up. It may also be common that the primary facility will run down completely in a few months (say 2 years), while the GECL facility is not even half run-down. In such a situation, the benefit of the collateral will serve the GECL loan, in proportion to the amount outstanding of the respective facilities. Obviously, when the primary facility is fully paid down, the collateral serves the benefit of the GECL facility only.
The ECLGS scheme initially provided for parri-passu charge over collateral, but by way of subsequent amendment, the anomaly discussed above was removed by the Government. Therefore, in the example above, there will be no dilution in the value of the security for the primary loan. Since the proceeds from the collateral will be used, firstly to recover dues of the primary loan facility, and secondly the remaining amount from realisation of collateral (if any) will be used to satisfy loan under GECL Facility.
The sharing of cashflows on pari passu basis should mean, if there are unappropriated payments made by the borrower, the payment made by the borrower should be split between the primary facility and the GECL facility on proportionate basis, proportional to the respective amounts falling/fallen due. For instance, in our example taken in Q 15 above, assume the borrower makes a payment in the month of July 2020. The entire payment will be taken to the credit of the primary loan since the GECL loan is still in moratorium. Say, in the month of July 2021, an aggregate payment is made by the borrower, but not sufficient to discharge the full obligation under the primary facility and the GECL facility. In this case, the payment made by the borrower will be appropriated, in proportion to the respective due amounts (that is, due for the month or past overdues) for the primary facility and the GECL facility.
Refer to updated FAQ 32.
Indeed there is. The difficulty arises because there are two facilities with the borrower, one is naked, and the other one wrapped. The pari passu sharing of cashflows will raise numerous challenges of appropriation. Since the claim is against the sovereign, there may be a CAG audit of the claims settled by the NCGTC.
If the existing loan has a charge securing the loan, and if the same security interest is now serving the benefit of the GECL facility as well, it will be necessary to modify the charge, such that charge now covers the GECL facility as well. As per Companies Act, the time for registration of a modification is thirty days, and there is an additional time of ninety days.
Not at all. The grant of the GECL facility is a grant of an additional facility, with the same collateral. Therefore, until the GECL loan is fully repaid, there is no question of the borrower getting a release of the collateral.
In our view, the collateral is shared by both the facilities on pari passu basis. Hence, there is no need for a cross default clause.
The fact that the GECL facility is 100% guaranteed by the sovereign may encourage MLIs to consider the GECL facility as risk free, and go aggressively pushing lending to their existing borrowers.
For the borrower as well, the borrower eventually has to pay back the loan. In case of NBFCs, the loan is not coming cheap – it is coming at a cost of 14%. While for the lender, the risk may be covered by the sovereign guarantee, the risk of credit history impairment for the borrower is still the same.
Hence, we suggest both the parties to take a considered call. For the lender, the consideration should still be the value of the collateral, considering the amount of the top up facility. In essence, the top up facility does not mechanically have to be 20% -the amount may be carefully worked out.
While the disbursal should appropriately be made by the MLI upfront, if the borrower uses the money to settle existing obligations with the MLI, that should be perfectly alright.
Further, In case the borrower wishes to take from any lender an amount more than the proportional 20% of the outstanding credit that the borrower has with that particular lender, a No Objection Certificate (NOC) would be required from the lender whose share of ECLGS loan is proposed to be extended by a specific lender. Further, it would be necessary for the specific lender to agree to provide ECLGS facility on behalf of such of the lenders.
In our understanding, the meaning is, except for those borrowers who opt out of the facility, the lender shall consider the remaining borrowers as opting for the facility. However, there cannot be a case of automatic lending, as a loan, after all, is a mutual obligation of the borrower towards the lender. Hence, there has to be explicit agreement on the part of the borrower with the lender.
Of course, a wise borrower may also want to negotiate a rate of interest with the lender.
At least the following:
Income recognition, NPA recognition, risk weighting and ECL computation
Of course, yes. In case of lenders following IndAS 109, the income will be recognised at the effective interest rate. In case of others too, there will be accrual of income.
The GECL loan will have a moratorium of 12 months – hence, nothing is payable for the first 12 months. The primary facility may actually be having upto 59 DPD overdues at the very start of the scheme itself. Hence, it is quite possible that the primary facility slips into an NPA status.
As a rule, if a facility granted to a borrower has become an NPA, then all facilities granted to the same borrower will also be characterised as NPAs.
Therefore, despite the 100% sovereign guarantee, the facility may still be treated as an NPA, unless there is any separate dispensation from the RBI.
As regards the GECL facility, any provision is for meeting the anticipated losses/shortfalls on a delinquent loan. As the GECL is fully guaranteed, in our view, there will be no case for creating a provision.
In view of the 100% sovereign guarantee, this becomes a case of risk mitigation. In our view, this is not a case for providing for any ECL.
Here again, our view is that the facility is fully sovereign-guaranteed. Hence, there is no question of a prudential build up of a general loss provision as well. The RBI should come out with specific carve out for GECL loans.
The RBI issued a notification on June 22, 2020 stating that since the facilities provided under the Scheme are backed by guarantee from GoI, the same shall be assigned 0% risk weight, in the books of MLIs.
Guarantor and the guarantee
The Guaranteed Emergency Credit Line (GECL) or the guarantee under the Scheme shall be extended by National Credit Guarantee Trustee Company Limited (NCGTC, ‘Trust’).
NCGTC is a trust set up by the Department of Financial Services, Ministry of Finance to act as a common trustee company to manage and operate various credit guarantee trust funds. It is a company incorporated under the Companies Act, 1956.
The role of NCGTC is to serve as a single umbrella organization which handles multiple guarantee programmes of the GoI covering different cross-sections and segments of the economy like students, micro entrepreneurs, women entrepreneurs, SMEs, skill and vocational training needs, etc.
Presently, NCGTC manages 5 credit guarantee schemes that deal with educational loans, skill development, factoring, micro units etc.
The guarantee shall cover 100% of the eligible credit facility.
Yes, the Scheme shall cover both the interest as well as the principal amount of the loan.
The NCGTC shall charge no guarantee fee from the Member Lending Institutions (MLIs) in respect of guarantee extended against the loans extended under the Scheme.
Usually, eligible lenders under such schemes are required to enter into an agreement with the trust extending the guarantee, to become their members. In this scheme, the eligible lenders are required to provide an undertaking to the NCGTC, in the prescribed format, in order to become MLIs.
The MLI shall, within 90 days from a borrower account under the scheme turning NPA, inform the date on which such account turned NPA. On such intimation, NCGTC shall pay 75% of the guaranteed amount to the MLI i.e. 75% of the default amount.
The rest 25% shall be paid on conclusion of recovery proceedings or when the decree gets time barred, whichever is earlier.
Securitisation, direct assignment and co-lending
On the face of it, there is nothing that stops a lender from giving a further facility, in addition to the one that has been securitised. However, in the present case, there will be modification of the existing charge document, whereby the charge will be extended to the top up GECL loan as well. This amounts to a dilution of the security available for the primary loan. In our view, this will require specific consent of the PTC investors, through the trustee.
Note that FAQ 35 by NCGTC seems to be talking about off-balance sheet facility. Many securitisation transactions are actually on the balance sheet. Further, even if the original facility has gone off the balance sheet, the additional funding being given by the originator-servicer will be on-the-balance sheet.
Any interpretation of the guarantee scheme has to serve the purpose for which the scheme was envisaged – which is, clearly, to provide additional liquidity to borrowers affected by the disruption. There can be no suggestion that borrowers whose loans have been securitised will not need additional liquidity. Hence, the Scheme intends to wrap all additional lendings done by the lender, within the limits of 20%.
Same reasoning as above. Here again, FAQ 40 by NCGTC is talking about the entity on whose books the loan currently is. NCGTC’s view about the loan being on the books of a lender is seemingly overshadowed by accounting concepts which have drastically changed over time. For example, a loan which has been a matter of a DA transaction is actually partly on the books of the original lender, and partly on the books of the assignee. One cannot expect the assignee to be giving the additional line of credit, as the assignee is, practically speaking, a mere passive investor. The assignee does not have the franchise/relation with the borrower, which the originator has. To contend that the assignee bank should extend the additional facility is actually to deny the facility to the borrower completely, for no fault of the borrower and for no gain for the system. Since it is the original lender who maintains the relation with the borrower, it is original lender only who may extend the facility.
There is nothing in the Scheme for assignment of the benefit of guarantee. Typically, unless the guarantee agreement says to the contrary, the benefit of a security or guarantee is assignable along with the underlying loan. However, the guarantee agreement between NCGTC and the lender will be critical in determining this.
60. Can a borrower who availed facility under ECLGS 1.0, restructure the same, and to what extent?
Borrowers who have availed assistance under ECLGS 1.0 and are eligible for restructuring as per RBI guidelines of May 05, 2021, are permitted to avail of the same. However, the restructuring can involve granting of moratorium on payments, and granting of additional assistance upto 10% of the POS as on 29.02.2020 or 40% of the POS as on 29.02.2020 if borrower satisfies the conditions under ECLGS 3.0. In case, a moratorium is granted, the restructured repayment tenure can be extended upto 5 years, i.e, period upto 24 months during which only interest shall be payable and the principal instalments shall be payable thereafter in 36 monthly instalments.
61. Can the borrowers whose existing ECLGS facilities have been restructured become eligible for additional facilities under any of the ECLGS schemes?
In case the borrower has availed funding under ECLGS 1.0, the loan can be restructured and borrower can avail either of the following
1. ECLGS 3.0- 40% (incremental only), provided the borrower is an eligible borrower under ECLGS 3.0
2. 10% additional facility
The borrower accounts covered under the RBI’s resolution framework would be eligible for additional assistance of 10% or additional assistance under ECLGS 3.0, but not both
62. Can the borrowers who have availed additional finance from the lender as a part of the RBI’s restructuring framework also avail additional finance under the ECLGS framework?
The borrower will have the following options
The only difference between the additional funding under the RBI framework and the ECLGS Scheme would be that the former is not guaranteed whereas the latter is 100% guaranteed.
63. Can the borrowers who have availed the restructuring facility for other loans avail the ECLGS facility post restructuring?
In case the borrower has not availed additional facilities under any of the ECLGS schemes previously, and gets its existing facilities restructured, it will have the option of availing additional facilities under any of the ECLGS schemes, subject to the fulfillment of the conditions provided thereunder.
64. To what extent can moratorium be granted (on the loans extended under the ECLGS scheme?
|Scheme||Total repayment period including moratorium||Moratorium period on principal repayment|
|ECLGS 1.0||4 years *||1 year|
|ECLGS 2.0||5 years||1 year|
|ECLGS 3.0||6 years||2 year|
|ECLGS 4.0||5 years||6 months|
The aforementioned indicates the maximum period of moratorium, the lenders shall have the discretion to provide shorter moratorium periods as well. Further, it is important to note that during the moratorium period, the interest will have to be serviced by the borrower – therefore, unlike the moratorium period under the COVID 19 relief package provided by the RBI which provided for complete moratorium on EMI payments, this will not be a complete moratorium, and at least the interest will have to be serviced during this period.
* Provided there is no restructuring under Restructuring Framework 2.0.
65. What is the tenure and moratorium period allowed for non-fund based facilities?
Under ECLGS 2.0 and 4.0, no tenor has been prescribed for non-fund based facility, but the guarantee cover on the non-fund based facility shall expire on completion of 5 years from the date of first disbursement/first utilization under fund based or non-fund based facility.
66. A borrower has availed 20% additional credit line under ECLGS 1.0. What incremental funding can be availed by such borrower if it qualifies as an eligible borrower under ECLGS 3.0?
The borrower who has availed 20% GECL under ECLGS 1.0, and the same borrower is also eligible under ECLGS 3.0, in such a case the borrower shall only be eligible for incremental funding amount. Incremental funding amount can be calculated as follows:
Let POS as on Feb 29 be Rs. 200
1. Eligible funding under ECLGS 3.0 (40% of POS as on Feb 29, 2020) = Rs. 80
2. Funding availed under ECLGS 1.0 (20% of POS as on Feb 29, 2020) = Rs. 40
3. Eligible incremental funding: 1-2 = Rs. 40
67. Will there be a provisioning requirement for additional 10% funding extended to loans under ECLGS 1.0, as part of RBI 05 May 2021 Restructuring Framework 2.0?
The initial top up GECL facility was zero rated (notification on June 22, 2020), therefore additional finance extended by the lender as part of restructuring of GECL under RBI Restructuring Framework 2.0 shall also be risk free. Hence there is no provisioning requirement for such additional 10% finance extended to GECL loan under Restructuring Framework 2.0.
Comparative table of ECLGS schemes :
|ECLGS 1.0||ECLGS 2.0||ECLGS 3.0||ECLGS 4.0|
|Nature of support||Opt Out (Pre approved)- Extended Credit Guarantee Line upto 20% of Outstanding loan as on 29.02.2020||Opt In Extended Credit Guarantee Line (fund based or non-fund based) upto 20% of Outstanding loan as on 29.02.2020||Opt In Extended Credit Guarantee line (fund based) upto 40% of Outstanding loan as on 29.02.2020||Opt In Extended Credit line for assistance upto 2 crores.|
|Fund based support or non-fund based support||
|Extent of additional finance permitted||
|Eligible borrowers||Business Enterprises / MSMEs/individuals who have availed loan for business purposes
||26 key sectors identified by Kamath committee report and healthcare sector
||Hospitality, Travel & Tourism, Leisure & Sporting sectors, scheduled and non-scheduled airlines, chartered
flight operators, air ambulances and airports
homes/clinics/medical colleges / units engaged in manufacturing of liquid oxygen,
oxygen cylinders etc
|Interest rate on facilities (Max cap)||
|Tenor of facilities||
|Moratorium on repayment of facilities||
|Principal repayment tenor in case moratorium has to be granted||
|Whether eligible for restructuring||
No security for Rs.25 lakh (outstanding as on
No security for Rs.25 lakh (outstanding as on
No security for Rs.25 lakh (outstanding as on
No security for Rs.25 lakh (outstanding as on February 29, 2020 plus loan sanctioned under GECL
 The scheme earlier required the MSMEs to obtain UAN (i.e. get registered) in order to avail benefit under the same. However the same was recently done away with through a notification issued on February 5, 2020. Link to the notification- https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11803&Mode=0
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