2 min read.Updated: 29 Jun 2021, 09:52 AM ISTAparna Iyer
Analysts have pointed out that credit is a medium-term booster to firms that are actually starved of revenues. The measures are unlikely to boost small business operations immediately
The government’s latest measures to expand the size and scope of its credit support in the wake of the pandemic’s second wave have elicited mixed reactions.
On Monday, the government brought in more sectors into its credit guarantee fold and increased the flagship emergency credit line guarantee scheme’s (ECLGS) total outlay by ₹1.5 trillion to ₹4.5 trillion. In essence, the government wants to ensure that businesses do not starve of funds they need to stay afloat in the wake of the adverse effects of the second wave. Guarantees benefit the weakest and smallest borrowers the most and therefore it should not be surprising that small businesses need guarantees to offset the pandemic’s impact. Left on their own, small firms are hardly able to borrow at competitive rates from lenders.
While the benefits of giving cheap and easy credit through guarantees are obvious, the proof of the pudding is in the eating. Will the bolstered guarantees result in a free flow of credit from banks? There are encouraging signs but some troubles too.
So far under the ECLGS scheme, lenders have given out ₹2.69 trillion worth of loans, which is 90% of the earlier target. Bankers have been asking for the target to be increased given that the demand for cheap credit may rise in the wake of the second wave. This shows that there is demand for credit albeit weak. “The impact will depend on how much money is borrowed through this route. Sectors like tourism should benefit provided they are allowed to open in a meaningful manner. The lower interest rate charged which can be 2-3% less than the normal rate will help to lower the cost of funds. It needs to be seen if such funds are taken for investment or for repaying old loans," wrote analysts at Care Ratings in a note.
In FY21, loans to medium enterprises grew at 28% after nearly a decade of low single-digit growth interspersed with contractions. This is evident that guarantees have made banks give out credit more freely. However, loans to micro and small businesses continue to remain tepid.
That said, despite the several credit guarantees and the push from the Reserve Bank of India (RBI) to create a covid loan book, the overall banking sector’s credit growth has remained anaemic around 6%. Businesses are deleveraging and the motivation to borrow and invest in projects is very low currently. Moreover, firms borrowing are doing so only to pay back costlier debt they have on their balance sheets. Analysts have pointed out that credit is a medium-term booster to firms that are actually starved of revenues. The measures are unlikely to boost small business operations immediately. At best, easier credit would prevent firms going bankrupt due to the pandemic.