Lending: SME weakness may add stress to ECLGS book

Mumbai: Loans disbursed under the Emergency Line of Credit Guarantee Scheme (ECLGS) could lead to a new set of challenges for financial institutions as most of the medium and small businesses in the borderline sector that have received aid in loan form continue to struggle.

Also, interest in the expanded ECLGS scheme has been relatively subdued, although the government has expanded the size of the pool to ₹5 lakh crore from ₹3 lakh crore.

“As the first stage of secured lending draws to a close in the coming months, pressure mounts to assess the health of these loans, and we fear this may hold some negative surprises,” said an official at a bank in the country. public sector. “A large portion of these loan disbursements have gone to micro and small businesses, which are still showing signs of incipient stress.”

The Reserve Bank of India had recently said that banks and NBFCs needed to be vigilant and improve their risk management measures as the unwinding of easy policies could have ripple effects.

“We must, however, be mindful of the impact of the pandemic on the banking and NBFC sectors as the effects of regulatory reliefs and resolutions are fully felt,” central bank governor Shaktikanta Das said last month.

According to a State Bank of India report, the ECLGS program prevented 1.35 million MSME accounts from going bankrupt and prevented 14% of outstanding MSME loans from deteriorating.

Finance Minister Nirmala Sitharaman in her 2022 budget speech announced that the ECLGS scheme will be extended until March 2023. Also, the guarantee coverage of the scheme has been extended from ₹50,000 crore to 5 lakh crore ₹.

According to an India Ratings analysis, Stage 3 assets for NBFCs could fall from 5.6% in the December 2022 quarter to 6% by FY23, largely due to poor loan performance restructured and ECLGS. For housing finance companies, impaired assets could hit 3.3% at the end of this fiscal year due to a poor restructuring pool, and another 2% addition to bad debt could come from ECLGS portfolio slippages .

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