MSMEs Can Contribute in India's Economic Recovery Through Emergency Credit Loan Guarantee Scheme

In its commitment to support India’s credit industry in refueling growth and managing asset quality, leading information and insights company TransUnion CIBIL has released an analysis on the Emergency Credit Line Guarantee Scheme (ECLGS) under the Atmanirbhar Bharat relief package.

The INR 3 lakh crores of expected credit infusion to the MSME segment is set to be completed by end of October 2020. The size of this package is significant when compared with 2.8 lakh crores of MSME credit disbursal in the full calendar year of 2019. The Guaranteed Emergency Credit Line (GECL) facility is applicable to all MSME borrowers with industry-wide aggregate credit exposure up to INR 25 crores and industry-wide delinquency less than or equal to 60 days as of 29th Feb. 2020.

Eligible MSMEs can borrow up to 20% of their aggregate credit exposure. The loans have four-year tenor with the first 12 months of principal covered under moratorium to further assist MSMEs benefitting from the scheme. Additionally, the loans provided under the GECL have a 100% credit guarantee and this makes it a huge opportunity for lenders to plan their lending policies strategically.

Assessing MSME credit risk to lend under the ECLGS

As part of its analysis, TransUnion CIBIL looked at the CIBIL MSME Rank (CIBIL Rank) as of 29^th Feb. 2020 for the MSMEs eligible under the ECLGS scheme. The CIBIL Rank distribution of eligible MSMEs in the ECLGS reveals that 81% belong to what is considered the structurally strong section of CIBIL Rank - CMR-6 or less. CIBIL Rank is a credit risk solution that uses machine learning algorithms to predict the probability of an MSME becoming a non-performing asset (NPA) in the next 12 months. CIBIL Rank assigns a rank on a scale of one to 10 to the MSME based on historical repayment behavior on its credit lines. CMR-1 is assigned to the least risky MSME and CMR-10 to the most risky MSME. The higher the CMR, the greater the risk of NPA associated with the MSME.

Speaking on the analysis findings, Mr. Rajesh Kumar, Managing Director and CEO of TransUnion CIBIL, said: “The ECLGS package is well structured scheme which not only provides the much needed access to funds for deserving MSMEs but also ensures long term stability of the portfolio quality of lending institutions. Credit institutions have a large and important role to play during these unprecedented times to help boost economic opportunities for deserving MSMEs and refuel the economy. ECLGS has set the stage for an accelerated credit infusion into the MSME sector. However, credit institutions have to adapt to the increasing requirements of monitoring MSME credit.”

Elaborating on the ECLGS analysis he added, “In addition to 100% credit guarantee, the fact that over 80% eligible MSMEs have a ranking of CMR-6 or better makes ECLGS guidelines inherently cater for risk containment. However, in the rapidly changing market conditions, the dynamics of MSME businesses are evolving every day and therefore it’s important to not only rely on original structural strength of MSME but to also regularly monitor borrower’s behavior.”

Finding and funding the good MSMEs under the Atmanirbhar Bharat relief package

Finding and funding deserving businesses is critical to the recovery of the Indian economy and the ongoing financial health of the MSME sector. The study conducted in the recent MSME Pulse study makes the case that structurally strong MSMEs are better positioned to survive the current pandemic situation and emerge stable. These MSMEs are most deserving to receive financial assistance from credit institutions.

ECLGS has created an opportunity here for banks and financial institutions to identify and fund these entities and build a healthy portfolio. Such targeted interventions can help refuel the economy through these unprecedented times while ensuring that portfolio risk is under control. In order to proactively implement ECLGS for their MSME borrowers, the credit industry is partnering with TransUnion CIBIL to help implement the ECGLS guidelines and ensure astute lending and monitoring of portfolios under this scheme.

Speaking about the value of credit information insights in driving loans to MSMEs and business enterprises under this scheme, the MD & CEO of Union Bank, Mr. Rajkiran Rai, said: “Insights from TransUnion CIBIL have been supporting us in closely monitoring borrowers seeking and availing loans from multiple lenders and identify loan stacking behavior.”

As per the guidelines of the scheme, lending Institutions are expected to check with credit bureau on aggregate credit exposure of up to Rs. 25 crores and less than or equal to 60 days past due and also have simple and enabling criteria to assess the borrower eligibility. Explaining how Bank of Baroda has implemented credit information insights towards driving these loans, its Executive Director, Mr. Vikramaditya Singh Khichi said, “We have 4 lakh plus MSME customers who are eligible for loans under this scheme and we have already sanctioned credit to the tune of more than ₹ 7200 crores to around 2.25 lakh number of MSMEs and business enterprises as of 25th June, 2020. TransUnion CIBIL’s data and insights have played a pivotal role in helping us formulate policies, digitize CMR based lending, drive faster, easier and more judicious disbursement of loans.”

 Another crucial guideline requires lenders to closely monitor and recover dues as normal loans. Indian Bank, which has close to 4.5 lakh MSME customers who are eligible for loans under this scheme, has utilised credit information insights effectively and explaining this its MD & CEO, Ms. Padmaja Chunduru, said: “We have been judiciously using the services of Transunion CIBIL and extracting CIBIL Consumer Reports and CIBIL Commercial Reports. The total estimated disbursements by Indian Bank under this scheme are likely to be to the tune of ₹7,000-7,500 crore and so far the bank has sanctioned loans amounting to ₹ 4106 crore.”

Reasserting TransUnion CIBIL’s commitment to the credit industry and the regulator, Mr. Rajesh Kumar added: “Lending done well and monitored well has the potential to continue to drive economic opportunities for deserving MSMEs, refuel the economy while controlling the risks and ensure stability of credit portfolios in the long term.  We are committed to supporting lenders to not only comply with this mandate, but the increasing requirements on credit due diligence in these challenging times as well.”