Banks want cover for one-time settlement option under ECLGS

Banks have urged the National Credit Guarantee Trustee Company Ltd (NCGTC) to cover the one-time settlement option for the resolution of stressed loans provided under the Emergency Credit Line Guarantee Scheme (ECLGS), said people with knowledge of the development.

At present, lenders need to initiate legal proceedings to avail of the full credit guarantee coverage provided by the NCGTC under the scheme. One-time settlement schemes are not considered legal recourse and are not covered by the guarantee.

As per the latest data, 11.3 million accounts with a consolidated ₹2.4 lakh crore underlying loan amount are guaranteed under the scheme, as on February 28, 2023.

A senior bank executive said the issue was discussed in a meeting last month. "We have requested that they consider it on a case-by-case basis, as in some cases the negotiated settlement amount is a much better proposition than taking recourse to legal recovery procedures, which further deteriorate the asset," said the executive, who did not wish to be identified.

Lenders said that if the NCGTC honours the guarantee in such one-time settlement cases, it will free up capital and help increase lending toward the sector. The ECLGS provides 100% guarantee through the NCGTC on loans up to ₹5 lakh crore to eligible micro, small and medium enterprises (MSMEs).

A government official said the scheme provides a carve-out for low-value loans up to ₹10 lakh. "In such cases, lenders can apply to claim 75% of the amount without initiating legal proceedings. This ceiling could be raised," he said on the condition of anonymity.

In such cases, however, the remaining 25% of the default amount is paid only after the conclusion of recovery proceedings.

Under the scheme regulations, recovery applications in lok adalats, or debt recovery tribunals, are considered legal action in cases where the due amount warrants such filings.

"In other cases (amount more than ₹10 lakh), the NCGTC only releases the amount where the final claim filed by lenders is approved by a tribunal and accordingly executed," said the bank executive cited earlier.

Loans of more than ₹10 lakh each accounted for over 78% of the total ECLGS-backed lending. About 85% of the guaranteed accounts had loans of up to ₹1 lakh each.