Emergency Credit Line Guarantee Scheme (ECLGS) 3.0: Third Time Lucky?
The last week of March 2021 brought a pleasant surprise to the hospitality sector of India. Recognising the devastating impact of the pandemic on hotels, restaurants, and tourism, the government of India announced a special credit scheme that incrementally offers up to 40% of outstanding credit to eligible enterprises. Coming at the heel of the resurgence of Covid cases across India; this instrument would indeed offer a healing touch to the hospitality and travel trade sector.
Emergency Credit Line Guarantee Scheme (ECLGS) 3.0 is a sovereign guarantee to banks and financial institutions that allows them to extend additional capital to impacted sectors and businesses. Following are the key tenets of the ECLGS 3.0:
- Extension of incremental credit of up to 40% of the total loan outstanding across all lending institutions as of 29 Feb 2020.
- The tenor of loans granted under ECLGS 3.0 is 6 years including a moratorium period of 2 years.
- Available for business enterprises with outstanding credit not exceeding INR5 billion (or INR500cr) as of 29 Feb 2020.
- Valid as a top-up loan to existing customers of banks and financial institutions.
- Non-Performing Assets (NPA) as of 29 Feb 2020 or accounts with dues outstanding for greater than 60 days have been excluded from the coverage.
- The scheme works like a pre-approved loan for all eligible businesses who can choose to opt out. Banks and financial institutions are expected to approach the clients with the offer.
- The rate of interest is capped at 9.25% per annum for banks and 14.0% per annum for non-banking financial institutions.
- This credit has been assigned zero risk weightage by the Reserve Bank of India.
This additional capital is clearly a lifeline for many hotels which were struggling with a poor business environment on one hand and banker’s reluctance on the other. ECLGS 3.0 potentially brings fresh capital of around INR100 billion into the sector. A significant number of hotels had availed the 20% additional credit facility via ECLGS 2.0 in November last year and were hopeful of an improved market situation in the new financial year. The re-emergence of Covid cases has poured water on the sector’s hope for an early recovery as business and leisure travel are marred by heavy cancellations. The swiftness and consideration displayed by the government around ECLGS 3.0 is praiseworthy. This is a welcome change from the typical state of indifference and apathy towards the sector that the government is routinely blamed for.
The scheme allows banks to receive 75% of the guaranteed amount from the government within 30 days of disbursal. To that extent, there should be widespread adoption of the scheme by the lending party since this allows issuing banks to reduce instances of NPAs. Public sector banks have risen admirably to the occasion and are proactively offering the benefits to their clients. However, private sector lenders are somewhat hesitating and there seems to be a general reluctance to extend additional capital to the hospitality sector.
The Verdict: ECLGS 3.0 scores well in a scheme structure, timing, and implementation. Its swift and intuitive management by a specialized government agency (National Credit Guarantee Trustee Company Ltd) deserves to be applauded. A big area of improvement for the scheme could be pertaining to the tenor of the loan. A 6-years payment period for the sovereign loan in addition to the existing bank loan may be a bit of wishful thinking. This rather optimistic payback plan is making hotel owners nervous about availing of this scheme. Hotelivate opines that ECLGS 3.0 offers a 4-years moratorium and a 6-years payment plan for the beleaguered sector thereby giving a 10-years payment plan to eligible hotels and restaurants. The fall has been sudden but the climb will be gradual. ECLGS 3.0 is like the life-support system that will help many businesses survive tough times. A few amends here would go a long way in bringing the sector get back to its feet.