Guaranteed Emergency Credit Line (GECL) for MSMEs-Lenders guaranteed by NCGTC

Guaranteed Emergency Credit Line (GECL) is the loan extended to eligible MSMEs/ Business Enterprises being 20 per cent of the loan outstanding as on February 29,2020. The Finance Minister had announced a collateral free, guaranteed credit scheme of  Rupees Three lakh crore to MSME sector under Atmanirbhar Bharat Yojna.  The objective of the GECL is to extend relief to the MSME sector by way of credit facilities up to Rs. 3 lakh crore at low cost to enable MSME sector to restart their operations post COVID-19 lock down.  Subsequent to the approval of the scheme by the union cabinet on May 22, 2020, the  National Credit Guarantee Trustee Company (NCGTC) has announced the details of the Guaranteed Emergency Credit Line.

What is the ECLGS (Emergency Credit Line Guarantee Scheme)?

ECLGC or the Emergency Credit Line Guarantee Scheme is the guarantee scheme launched by NCGTC to  extend  100% guarantee coverage to  lending institutions on the GECL of up to Rs. 3 lakh crore to be extended by them to eligible MSMEs. MSMEs for the purpose of this Scheme will include MSMEs/ Business Enterprises which are constituted as Proprietorships, Partnerships, Registered Companies, Trusts and Limited Liability Partnerships (LLPs), and also interested borrowers under PMMY. However, loans extended in the individual capacity are not covered under the scheme.

ECLGC will extend guarantee for all loans sanctioned under GECL during the period from May 23, 2020 to 31st October, 2020, or till the guarantee coverage of Rs. 3 lakh crore is exhausted, whichever is earlier.

What are the modalities of the Guaranteed Emergency Credit Line (GECL)?

The guarantee coverage would be provided by National Credit Guarantee Trustee Company (NCGTC) to Member Lending Institutions (MLIs). MLIs are required to execute an undertaking with NCGTC to get enrolled. Execution of the undertaking shall be with the approval of the Board of Directors of respective lending institutions.  Scheduled Commercial Banks (SCBs), Financial Institutions (FIs) and Non-Banking Financial Companies (NBFCs) can enrol as MLIs. NBFCs should have been in operation for at least two years as on February 29, 2020.

Member Lending Institutions can extend Guaranteed Emergency Credit Line (GECL) up to 20% of the borrower’s total outstanding credit up to Rs. 25 crore as on 29^th February,2020, as additional working capital limit. The maximum ceiling of Rs. 25 crore shall be arrived at by excluding off-balance sheet and non-fund based exposures. Thus, the maximum additional amount that can be extended under the Guaranteed Emergency Credit Line will be Rs. 5 crore to an eligible borrower.

NCGTC extends coverage of 100 per cent for the funding provided under GECL without charging any guarantee fee from lender or borrower. These features are in contrast to the functioning of CGTMSE guarantee scheme for MSMEs for guaranteeing credit facilities without collateral / third party guarantee.  CGTMSE extends guarantee coverage varying between 50% (retail traders) and 85% with a first year guarantee fee followed by annual fees.

Please read Why are banks hesitant to lend to MSE sector with CGTMSE coverage?

Can lending institutions deny credit facility under GECL to a MSME unit?

Lending institutions have freedom to extend loans less than 20% of outstanding as on February 29,2020. However, they are expected to sanction credit facilities liberally to eligible borrowers by using prudent banking judgement and using business discretion / due diligence in selecting commercially viable proposals. This means that lending institutions can deny proposals if they doubt the viability of units. Certain banks have already offered relief loans to their borrowers. Individual lending institutions may absorb such limits within GECL.

What are the eligibility norms for Guaranteed Emergency Credit Line (GECL)?

An MSME unit is eligible for the GECL if,

• The MSME has a total credit outstanding of Rs. 25 Crore or less as on 29th Feb 2020.
• Total turnover for 2019-20 was upto Rs. 100 Cr crore in FY 2019-20. In case accounts for FY 2019-20 are yet to be audited/finalized, the lenders may rely upon the borrower’s declaration of turnover.
• The MSME has a GST registration or were not required to obtain such GST registration (Udyog Aadhar or recognition as MSME is not required under this Scheme).
• The account status of the borrower accounts should be regular, SMA-0 or SMA-1 as on 29.2.2020. Accounts that were classified as NPA or SMA-2 as on 29.2.2020 will not be eligible under the Scheme.
• 20% of total outstanding amount would comprise of the outstanding amount across WC loans, term loans and WCTL loans. Non- fund based exposures and off balance sheet exposures will not be covered.
• Borrowers having limits with multiple lenders, but otherwise eligible based on the norms mentioned above are also eligible for GECL through one lender (after obtaining a no objection certificate (NOC) from other lenders) or each of the current lenders in proportion depending upon the agreement between the borrower and the lender. Lender shall ascertain the ceiling of total exposure ( Rs. 25 Cr) and account status with other lenders from CRILC/ Bureau reports.
• The GECL will be in the form of a pre-approved loan, with lending institutions offering the loan to the eligible borrowers which the borrowers may choose to accept and complete the documentation formalities. If the borrower is not interested, he may ‘opt-out’ without availing of the loan. For the borrower who accepts the offer,a separate loan account (distinct from the existing loan account(s)) shall be opened to extend the additional credit under GECL.

However, loans availed of in the individual capacity are not covered under the scheme. Further, the scheme covers loans that were outstanding as on February 29,2020 only.  Loans extended on or after March 1,2020 and  fresh loans to be granted hereafter  will not come under the coverage.

What is the interest rate and other charges applicable for Guaranteed Emergency Credit Line (GECL)?

The interest rate applicable for the loan facilities under GECL shall be

• For Banks and FIs, one of the RBI prescribed external benchmark linked rates +1% subject to a maximum of 9.25% per annum
• For NBFCs, the interest rate on GECL shall not exceed 14% per annum.

Further, lending institutions shall not charge

1. any processing fee
2. any pre-payment penalty for loans prepayment

Lending institutions shall not seek additional collateral for the GECL.   However, the credit under Guaranteed Emergency Credit Line will rank pari passu with the existing credit facilities in terms of cash flows (including repayments) and securities, meaning that NCGTC  will have right over the securities on pro-rata basis.  This charge is to be created within a period of 3 months from the date of disbursal.

The Scheme may also be operated in combination with applicable interest subvention schemes, as far as feasible.

What about the tenor, moratorium period and pre-payment penalty applicable for GECL?

The tenor of loans provided under GECL shall be four years from the date of disbursement with a moratorium period of one year for principal amount. The principal amount shall be repaid within 36 months after moratorium period.  However, no moratorium is permissible for interest payment.

Lending institutions and claims for GECL under ECLGS

If an account granted under GECL becomes NPA, the lender shall claim the guarantee amount within 90 days of account turning NPA. 75% of the guaranteed amount will be paid by NCGTC within 30 days of an eligible claim. The balance 25% will be paid on conclusion of recovery proceedings or till the decree gets time barred, whichever is earlier.