It is raining loan guarantees, are loans pouring in?

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Government recent measures the increase in the size and volume of credit support after the second wave of the pandemic caused a mixed reaction.

On Monday, the government attracted more sectors to its loan guarantee portfolio and increased the total spending of its flagship Emergency Credit Line Guarantee Scheme (ECLGS) by From 1.5 trillion to 4.5 trillion Essentially, the government wants to ensure that businesses do not lack the funds they need to stay afloat after the adverse effects of the second wave. Guarantees benefit the weakest and smallest borrowers the most, and it should come as no surprise that small businesses need guarantees to offset the impact of the pandemic. Left on their own, small firms are unlikely to be able to borrow from lenders at competitive rates.

While the benefits of providing cheap and easy loans through guarantees are clear, the proof of the pudding is its food. Will enhanced guarantees lead to a free flow of loans from banks? There are encouraging signs, but there are also challenges.

Until now, under the ECLGS scheme, lenders have issued Loans in the amount of 2.69 trillion. USD, which is 90% of the previous goal. Bankers asked for an increase in the target, given that the demand for cheap loans could rise in the wake of the second wave. This shows that the demand for loans, albeit weak. “The impact will depend on how much money is borrowed along this route. Sectors such as tourism should benefit, provided they are allowed to open up in a meaningful way. A lower interest rate, which can be 2-3% lower than usual, will help reduce the cost of funds. It is necessary to find out whether such funds are being used for investments or to pay off old loans, “Care Ratings analysts wrote in a note.

In fiscal 21, loans to medium-sized enterprises grew 28% after nearly a decade of low single-digit growth interspersed with contractions. Obviously, the guarantees forced banks to lend more freely. However, loans to micro and small businesses are still low.

However, despite several loan guarantees and the Reserve Bank of India (RBI) ambition to create a covid loan portfolio, overall banking sector lending growth remains modest at around 6%. Companies are cutting back on borrowed funds, and the motivation to borrow and invest in projects is currently very low. Moreover, firms that take out loans do so only to pay off the more costly debts on their balance sheets. Lending is a medium-term incentive for firms that actually lack income, analysts point out. It is unlikely that these measures will immediately give an impetus to the development of small businesses. At best, easier lending will prevent firms from going bankrupt due to the pandemic.

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