The Cabinet’s approval of ECLGS 5.0 is a timely response to geopolitical stress, rising fuel costs, and supply-chain disruptions affecting MSMEs and aviation. With 100 per cent government-backed guarantees, capped rates, and near-automatic sanctions, the scheme continues the borrower-friendly approach of earlier ECLGS versions.
ECLGS 1.0, launched in May 2020 for MSMEs, was perhaps the most accessible working-capital facility India had ever offered. Loans of up to 20 per cent of outstanding credit were available without collateral, with interest capped at 9.25 per cent for banks, no processing fees, and a 100 per cent sovereign guarantee eliminating credit risk for lenders. Banks were actively reaching out to eligible borrowers. Government machinery was promoting drawdown. Yet, after four rounds of ECLGS, which ended in mid-2023, MSMEs availed of guarantees worth ₹2.45 lakh crore, out of the corpus of ₹5 lakh crore that was set aside. The total sum disbursed was ₹3.6 lakh crore. The reasons for this need to be explored.
MSMEs and traders do not operate on bank credit alone. Their working capital cycle is built on a continuous chain of trade credit — goods and services supplied on deferred payment terms to buyers ranging from large corporates and distributors to government departments. Bank working capital usually rests on the underlying trade credit system. The MSME’s ability to service any loan depends on the speed and reliability with which its buyers settle dues. Covid-19 disrupted this payment chain and the legacy continues.
