It’s raining credit guarantees, will he pay out loans?


The government’s latest moves to expand the size and reach of its credit support in the wake of the second wave of the pandemic have met with mixed reactions.

On Monday, the government incorporated more sectors into its credit guarantee and increased total spending on the flagship Emergency Credit Line Guarantee Program (ECLGS) by 1.5 trillion 4.5 trillion. Essentially, the government wants to make sure that businesses do not run out of the funds they need to stay afloat in the aftermath of the damaging effects of Wave 2. Collateral benefits weaker and smaller borrowers the most, so it shouldn’t be surprising that small businesses need collateral to offset the impact of the pandemic and it is 100% sure. Left on their own, small businesses find it difficult to borrow at competitive rates from lenders.

While the benefits of giving cheap and easy credit with collateral are obvious, the proof of the pudding is in the eating. Will the strengthened guarantees result in a free flow of credit from the banks? There are encouraging signs but also problems.

So far, under the ECLGS program, lenders have granted 2.69 trillion in loans, or 90% of the previous target. Bankers have called for the target to be increased as demand for cheap credit may increase following the second wave. This shows that there is a demand for credit, albeit low. “The impact will depend on the amount of money borrowed through this route. Sectors like tourism should benefit provided they are allowed to open up in a meaningful way. The lower interest rate charged, which can be 2-3% lower than the regular rate, will help reduce the cost of funds. It has to be seen whether these funds are used to invest or to repay old loans, “wrote Care Ratings analysts in a note.

In FY21, loans to midsize businesses grew 28% after nearly a decade of weak single-digit growth interspersed with contractions. It is obvious that the guarantees have made it possible for the banks to grant loans more freely. However, loans to micro and small businesses remain modest.

That said, despite numerous credit guarantees and pressure from the Reserve Bank of India (RBI) to build a portfolio of covid loans, overall banking sector credit growth has remained anemic around 6%. Companies are deleveraging and the motivation to borrow and invest in projects is currently very low. In addition, companies that borrow only do so to pay off more costly debts than they have on their balance sheets. Analysts have pointed out that credit is a medium-term booster for companies that genuinely lack revenue. The measures are unlikely to immediately stimulate small business operations. At best, easier credit would prevent businesses from going bankrupt due to the pandemic.

To subscribe to Mint newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now !!

Leave A Reply

Your email address will not be published.