Emergency Line of Credit Guarantee Program: Government Expands Size to Rs 4.5 Lakh Crore, Says Nirmala Sitharaman

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The central government has extended its emergency credit program for small businesses to Rs 4.5 lakh crore, increasing its size by half.

Making an announcement on Monday, as part of an economic support plan, Finance Minister Nirmala Sitharaman said the facility will continue to support small and medium-sized businesses.

The Emergency Line of Credit Guarantee Program for Medium and Small Businesses was launched in May 2020 as part of the government’s “Atmanirbhar” – or self-sufficiency – program to alleviate economic distress from the Covid pandemic. 19 and subsequent blockages.

As part of this program, the government had initially planned to offer guarantees at Rs 3 lakh crore in the form of loans to small businesses in difficulty. Borrowers were allowed to borrow 20% in addition to their credit facilities under the program.

So far, Rs 2.73 lakh crore of loans had been sanctioned and Rs 2.10 lakh crore disbursed, leaving little room to provide support to businesses affected by the second wave of Covid infections.

Over the past twelve months, the program has expanded to cover a multitude of sectors. More recently, the list of eligible sectors has been expanded to include hospitals, nursing homes, clinics and oxygen production plants. The civil aviation sector was also allowed to benefit from loans under the program and the conditions for the hospitality, travel and tourism, leisure and sport sectors were relaxed.

The expanded program could allow borrowers to benefit from more than 20% of unpaid contributions, the finance ministry said, adding that this would be reviewed across different sectors.

In addition, the government announced:

  • Rs 1.1 lakh-crore loan guarantee for areas affected by Covid.

  • Of this amount, Rs 50,000 crore is allocated to the health sector, with an interest rate capped at 7.95%.

  • The remaining 60,000 crore is reserved for other sectors, with an interest rate cap of 8.25%

For “ambitious” cities, 75% warranty coverage will be provided for new and existing installations.

The maximum loan amount per establishment is set at Rs 100 crore. The warranty will be applicable for three years.

For the Rs 60,000 crore of collateral support available in other sectors, decisions about individual loan limits, among other aspects, will be decided at a later stage, according to the government submission.

The announced measures should help struggling companies at least stay afloat until the economy recovers, said NR Bhanumurthy of the BR Ambedkar School of Economics. “In that sense, I would say well thought-out steps have been taken today.”

In order to support borrowers from microfinance institutions, the government announced that it would introduce a new loan guarantee system.

  • Rs 7,500 crore as collateral to be provided to banks for loans to microfinance institutions.

  • This is intended to support loans up to Rs 1.25 lakh per household.

  • All borrowers, including those overdue by up to 89 days, will be eligible.

  • The borrowing rate will be capped at the banks’ marginal cost borrowing rate plus 2%.

The regime is applicable until March 31, 2022.

According to P Satish, executive director of the industrial organization Sa-Dhan, the measures announced could encourage the flow of bank credit to small MFIs.

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