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ECLGS repayment extension to benefit regional banks
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SME Times News Bureau | 31 May, 2021
The Government's decision to extend the period of repayment of loans
disbursed under Emergency Credit Line Guarantee Scheme (ECLGS) 1.0 by
another 12 months will come as a blessing for banks, particularly
regional banks like City Union Bank, Karur Vysya Bank and small private
banks like DCB Bank, as it will help them in lower non performing loan
(NPL) recognition on several of these stressed accounts in the near
term.
Regional banks have been key beneficiaries of the ECLGS as
they have disbursed 3-5% of the loans under this scheme. The impact is
lower for public banks (1-1.5% of loans). The exposure for the frontline
private banks is not high at around 2% of loans.
As loans given
under the scheme, largely MSME borrowers, to meet their working capital
needs in times of the pandemic hit economy, carries lot of
uncertainties, the extension of the period of repayment of these loans
would prevent banks from declaring a portion of this credit as non
performing loan and make extra provisioning thereby blocking capital.
According
to a report on banks by Kotak Institutional Equities, repayment of
principal under ECLGS announced by the finance ministry in May, 2020 has
already started or will begin for a lot of borrowers and hence, this
relief (one year extension of repayment) should result in lower NPL
recognition in the near term.
The brokerage said that the
Centre's decision is significant as several public banks who have
disclosed their SMA (Special Mention Accounts) data as of March 2021 or
have disclosed slippages under the SME segment for FY2021 show that the
stress is quite high. This would have meant that several loans under
RCLGS would have turned NPL. But now there is a buffer of one more year
and banks can use this time to strengthen their ECLGS accounts.
The
Reserve Bank of India (RBI) introduced the classification of Special
Mention Accounts (SMA) in 2003 to identify the weakness in the loan
accounts at an early stage. This classification serves as a risk
management technique so that banks become alert from the beginning to
warning signals exhibited by the loan accounts and to take appropriate
suitable action to prevent the loans from becoming an NPA at a future
date.
The KIE report said that banks have been quite restrictive
in using restructuring or ECLGS schemes. "It is quite hard to understand
if this behaviour represents borrowers or lenders lack of confidence to
recover from this slowdown or confidence to come back strongly once the
economy returns to normalcy," the report said.
The quantum of
loans disbursed under ECLGS has remained unchanged at Rs 3 lakh crore
despite expansion in its scope. The scheme started with ECLGS 1 and was
then revised to include the large corporates and then further expanded
to specific stressed sectors. The pace of utilization of this scheme has
been quite low as well.
Our initial thesis was that the
borrowers and lenders would look to utilize the scheme in a relatively
short time post the window was opened. We understand, from the press
meet, that the scheme still has another 25% (Rs 45,000 crore) unutilized
as of date, the brokerage said.
The brokerage also said that
private banks in the past have indicated that the disbursements were
also towards borrowers who utilized the scheme to lower the cost of debt
and not necessarily to improve cash flows.
Last week the Centre
announced several measures to combat the latest slowdown on account of
the second Covid wave. These included 100% guarantee cover to loans up
to Rs 2 crore for setting up on-site oxygen generation plants with
interest rate capped at 7.5%, borrowers who had availed loans under
ECLGS 1.0 will get an extension of an additional year (first two years
of only interest and three years for repayment of principal and
interest), 10% additional disbursement to borrowers covered under ECLGS
1.0, eligibility criteria (ceiling of Rs 500 crore of loan outstanding
under ECLGS 3.0) has been relaxed but each borrower would be limited to
40% of loans outstanding or Rs 200 crore, whichever is lower, the scheme
has been extended to 2QFY22 or till guarantees for an amount of Rs 3
lakh crore are issued. Disbursement under the scheme permitted up to
3QFY22.
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