In light of the economic challenges brought about by the COVID-19 pandemic, the Indian government had announced several measures to provide relief to businesses and individuals affected by the crisis. One such measure was the Emergency Credit Line Guarantee Scheme (ECLGS), which aimed to provide financial support to businesses struggling to cope with the effects of the pandemic. However, the one-time settlement option available under the scheme has raised concerns among banks, who are now seeking protection for this option.
The ECLGS scheme was launched in May 2020 as a part of the Atmanirbhar Bharat Abhiyan economic package. Under the scheme, the government provided a 100% guarantee to banks and non-banking financial companies (NBFCs) for loans extended to eligible businesses. The scheme was targeted at businesses with a turnover of up to Rs. 250 crore and was aimed at providing them with much-needed liquidity to meet their operational requirements.
The one-time settlement option under the ECLGS scheme allows borrowers to settle their dues with the bank in a single payment. This option was provided to borrowers to help them avoid the cumbersome process of loan restructuring, which can be time-consuming and complicated. The one-time settlement option was also intended to incentivize borrowers to repay their loans promptly.
However, banks are now concerned that the one-time settlement option could lead to potential losses for them. Banks fear that borrowers who opt for the one-time settlement option may not have the financial capacity to pay back their dues in full, which could result in a significant loss for the bank. Moreover, the one-time settlement option could also lead to a moral hazard problem, where borrowers who have the capacity to repay their loans may choose to settle their dues in a single payment instead of repaying their loans in full.
To address these concerns, banks have sought protection from the government for the one-time settlement option under the ECLGS scheme. Banks have suggested that the government could provide a guarantee for a portion of the amount due in case of a default by the borrower. This would provide banks with some degree of protection against potential losses arising from the one-time settlement option.
The one-time settlement option under the ECLGS scheme has been a topic of discussion among industry experts as well. Some experts have suggested that the option should be made available only to borrowers who can demonstrate their financial capacity to repay their dues in full. This would help avoid situations where borrowers who do not have the capacity to repay their loans in full are allowed to settle their dues in a single payment.
Moreover, experts have also suggested that banks should exercise caution while extending loans under the ECLGS scheme. Banks should carefully assess the financial capacity of borrowers and ensure that only eligible businesses are provided with loans under the scheme. This would help avoid situations where borrowers are unable to repay their loans, leading to losses for banks.
The one-time settlement option under the ECLGS scheme has been a much-debated issue among stakeholders. While borrowers have welcomed the option, banks have expressed concerns about the potential losses that could arise from it. The government has also been closely monitoring the situation and is expected to take necessary steps to address the concerns raised by banks.
In conclusion, the ECLGS scheme has been a critical measure aimed at providing financial support to businesses affected by the pandemic. However, the one-time settlement option under the scheme has raised concerns among banks, who are seeking protection against potential losses arising from it. The government and industry experts must work together to address these concerns and ensure that the ECLGS scheme remains an effective tool in providing relief to businesses affected by the pandemic.
