December 7, 2022

Published from Mumbai, Delhi & Bhopal

ECLGS repayment extension to benefit regional banks, lower their NPL recognition

New Delhi, ┬áThe 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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