The good, the bad and the ugly in government ECLG metrics

MUMBAI: A persistent pandemic that has only worsened means that tax support for vulnerable small businesses granted last year must be continued. In this, the government’s decision to expand its Emergency Line of Credit Guarantee (ECLG) program both in time and scope is not a surprise, in fact it was necessary.

On Sunday, the government said the ECLG program will now cover the civil aviation and healthcare sector and will be available until the end of September. He also relaxed some rules regarding the main moratorium and the use of more credit. Small businesses affected by the second wave will indeed benefit from relief and airlines will breathe easy. At the same time, the banks announced the creation of a covid loan portfolio in which personal loans for medical purposes and loans for health infrastructure would be granted.

ECLGS and the covid loan portfolio are likely to achieve their goal of providing easy and cheap credit to individuals and small businesses when needed. The government’s permanent guarantee for credit risk has prompted lenders to extend credit without the usual reserves. Of the target of Rs 3 trillion, so far Rs 2.44 billion in loans have been made under the program. That leaves around Rs 55,000 crore to shell out, which can be done by December. Including struggling airlines and healthcare companies is a good thing, as the former will secure much needed cash to overcome another depressed demand situation. Given the need to rapidly scale up healthcare in the midst of a pandemic, loans to this sector will provide sufficient support.

“It is difficult to quantify the magnitude of the benefits of the measures announced at this stage, but the expansion of the scope of the ECLGS will lead to an additional profit of 20 to 25%,” wrote analysts at ICICI Securities Ltd. in a note.

But there are some unsavory results of this movement. Analysts point out that banks have not been enthusiastic enough to maintain their loans under this program. Loans to troubled micro, small and medium enterprises (MSMEs) carry high credit risk. The government guarantees the credit risk, but government payments are usually lagging behind and banks get the hang of it up front. This is observed even in the case of subsidy payments for agricultural loans. Ergo, we cannot blame the bankers for being slow in disbursements.

Another result is that it masks the stress of MSMEs on the books of the banks. In other words, it would just be a kick in the road. While the stack of loans under the scheme is government guaranteed, loans outside of it will require restructuring or turnaround efforts if stress increases. Analysts from Kotak Institutional Equities Ltd pointed out that the benefits of this program have been less than expected, although it delays recognition of tensions at the bank level. “Among the various measures proposed, the extension of repayment and the additional disbursement that can be made for existing borrowers who have taken ECLGS 1 is quite remarkable. Principal repayment has already started / will begin for a large number of borrowers and therefore this relief is expected to result in lower recognition of NPLs in the short term, ”a note from the broker said.

Finally, it cannot be denied that granting credit only increases the leverage effect on an already weakened balance sheet. MSMEs are struggling with the inability to repay loans as income has disappeared due to the pandemic. Indeed, the sector has been the main contributor to restructured bank loans. Analysts at Jefferies India Pvt Ltd warn that borrower indebtedness needs to be watched. Those at Kotak believe the real stress won’t be captured for another year in this segment.

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