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Context

• Government officials have reported that non-performing assets (NPA) under the Emergency Credit Line Guarantee Scheme (ECLGS) are around 6 percent.
• This lower-than-anticipated NPA rate suggests that the cost of providing a full guarantee under the scheme will be significantly less than initially expected.

READ ALL ABOUT EMERGENCY CREDIT LINE GUARANTEE SCHEME (ECLGS) IN DETAIL:

https://www.iasgyan.in/daily-current-affairs/eclgs#:~:text=ECLGS%20Scheme%3A&text=The%20Government's%20aim%20through%20this,other%20operational%20costs%20as%20well.

READ ALL ABOUT NON-PERFORMING ASSETS IN DETAIL:

https://www.iasgyan.in/daily-current-affairs/non-performing-assets#:~:text=NPA%20or%20Non%20Performing%20Assets,Non%20Performing%20Assets%20or%20NPA.

Details of NPAs

• According to the Government, out of the total liquidity support of over ₹3.68-lakh crore, NPAs reported amount to approximately ₹22,000 crore or 6 percent of the loans guaranteed.
• The definition of NPA under ECLGS aligns with that defined by the Reserve Bank of India (RBI).
• As per RBI’s guidelines effective from March 31, 2004, an NPA is a loan or advance where interest and/or installment of principal remain overdue for more than 90 days in respect of a term loan.

Trends in Bad Debts

• The trends in bad debts under ECLGS appear consistent with overall system data.
• The latest Financial Stability Report by RBI indicates that scheduled commercial banks’ gross non-performing assets (GNPA) ratio fell to a multi-year low of 2.8 percent, and the net non-performing assets (NNPA) ratio dropped to 0.6 percent at the end of March 2024.
• For non-banking financial companies (NBFCs), the GNPA ratio stood at 4 percent at the end of March 2024.

ECLGS

• ECLGS was launched in May 2020 to provide liquidity support to businesses adversely affected by the Covid-19 lockdowns.
• The scheme covers loans sanctioned under the 'Guaranteed Emergency Credit Line' up to March 31, 2023, or until guarantees for ₹5-lakh crore are issued, whichever comes first.
• It provides 100 percent guarantee coverage to banks and NBFCs for credit extended to business enterprises/MSMEs based on their loan outstanding as of February 29, 2020.
• Initially focused on MSMEs, the scheme was later expanded to include borrowers from 26 stressed sectors identified by the Kamath Committee, as well as the healthcare and hospitality sectors.

Share of MSMEs

• Officials highlighted that out of the liquidity support of ₹3.68-lakh crore extended to 1.19 crore businesses, 95 percent of the guarantees are for MSMEs in terms of number, and about 65 percent in terms of the amount guaranteed.
• Notably, 88 percent of the borrowers supported are micro borrowers, 78 percent are MUDRA borrowers, and 68 percent are women borrowers. The scheme has benefited approximately 6.25 crore employees.

Impact and Future Outlook

• The scheme was mentioned in the World Development Report 2022 by the World Bank, which noted that the true cost of these guarantees to the government would become clearer over time.
• While India’s economic recovery from the pandemic has been robust, the immediate fiscal impact of credit guarantee schemes is low. However, credit guarantees carry the risk of becoming a liability if an economic downturn leads to increased loan defaults.
• A report by SBI released last year indicated that ECLGS has saved at least 14.6 lakh MSME accounts, improving MSME loan accounts worth ₹2.2-lakh crore since its inception.
• This means approximately 12 percent of outstanding MSME credit has been preserved from slipping into NPA due to ECLGS, thus safeguarding the livelihoods of 6.6 crore individuals.

IBC: https://www.iasgyan.in/daily-current-affairs/insolvency-and-bankruptcy-code-ibc-2016

https://www.iasgyan.in/daily-current-affairs/insolvency-and-bankruptcy-code-39

PPIRP: https://www.iasgyan.in/daily-current-affairs/pre-packaged-insolvency-resolution-process-ppirp

PRACTICE QUESTION Q. Analyze the impact of Non-Performing Assets (NPAs) on the profitability and lending capacity of Indian banks. How effective have the recent regulatory measures been in curbing the rise of NPAs, and what additional strategies could be implemented to further mitigate their impact on the financial sector?

SOURCE: THE HINDU