Credit guarantee scheme saves 13.5 lakh MSMEs in India amid Covid-19 spread

Rough approximations suggest that the revised CGTMSE scheme if properly designed could support incremental SME lending up to 2% of GDP that could turbo charge at least additional 12 lakh SME units supporting at least 1.2 crore additional employment for the lending largesse as capital gets freed up from banking system

Mumbai: The Emergency Credit Line Guarantee Scheme (ECLGS) of the government saved 13.5 lakh MSME units and 1.5 crore jobs, but it also saw 14 per cent of outstanding MSME loans turning into NPA, says an internal economic research report by SBI.

In May 2020, government launched the ECLGS scheme for MSME sector to provide relief to the sector amidst the Covid-19 pandemic. 'We estimate almost 13.5 lakh MSMEs accounts were saved due to ECLG scheme (including restructured): Almost 93.7 per cent of such accounts are in Micro and Small category', the report says.

In absolute terms, MSME loan accounts worth Rs 1.8 lakh crore were saved from slipping into NPA during the period. This is equivalent to 14 per cent of the outstanding MSME credit being saved from becoming NPA. As per our analysis, the study says, if these units had turned nonperforming, then 1.5 crore workers would have become unemployed. In effect, the ECLG scheme saved the livelihood for 6.0 crore families (assuming four family members per worker including herself).

Trading Sector (including small kirana shops) has benefited the most followed by Food Processing, Textiles and Commercial Real Estate. Amongst the States, Gujarat has been the biggest beneficiary, followed by Maharashtra, Tamil Nadu and Uttar Pradesh.

The current guaranteed loan product CGTMSE needs to be restructured for a credit boost to MSME sector, the report says. Interestingly, CGTMSE portfolio have a 55 per cent-plus recovery rate, low portfolio delinquency, low capital requirement but still an unpopular product. Conversely, the non CGTMSE portfolio/collateralised has a 25 per cent recovery rate, high portfolio delinquency implying much higher loan loss provisions with high capital requirement but still a popular portfolio.

This could be done by enhancing the scope and role of current CGTMSE portfolio by setting up an institution that will exclusively administer the CGTMSE along the lines of US Small Business Administration. Given that more than 90 per cent of the units are in Micro sector, CGTMSE coverage may be made mandatory for all enterprises up to Rs 2 crore.

Despite being in existence for two decades, coverage of CGTMSE for eligible loans remains abysmally low at sub-10 per cent mostly due to the complexities inherent in the product structure. This may be due to various issues like higher premium outflows for guarantee obtention and continuance by borrowers, preference by customers to take recourse to asset backed loans (to mitigate the high cost of guarantee), knowledge gap among operating functionaries of FIs and limited awareness among entrepreneurs who often battle all pervasive information asymmetry while remaining late embracers of enabling technologies.

"This could be done by enhancing the scope and role of current CGTMSE portfolio by setting up an institution that will exclusively administer the CGTMSE along the lines of US Small Business Administration," says Dr Soumya Kanti Ghose, chief economic advisor, SBI group.

Simultaneously, structural reforms in CGTMSE scheme, with digital platforms eliminating the manual interventions completely and providing an end-to-end dynamic solution, like onboarding claim lodgement and recovery journeys on a real time basis to adhere to best practices, he said. As per the report, CGTMSE needs to develop a suitable model for covering purely cash flow-based lending as it is likely to act as a substitute for collateral-based lending up to Rs 2 crore. With increased thrust on cash flow-based lending, the credit limits will be assessed with respect to cash flows and not Balance Sheets any more.

Rough approximations suggest that the revised CGTMSE scheme if properly designed could support incremental SME lending up to 2 per cent of GDP that could turbo charge at least additional 12 lakh SME units supporting at least 1.2 crore additional employment for the lending largesse as capital gets freed up from banking system.