Assuring credit is spread well, in time

GoI's assurance of an extra ₹2.55 lakh cr of credit to small enterprises and airlines, in the form of Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, will be well received in the immediate aftermath of the West Asian crisis. This is the fifth tranche since the 2020 Covid outbreak that has directed bank lending to a segment of the economy vulnerable to shocks. Credit guarantees work by neutralising the risk differential between large and small enterprises, and their efficacy is determined by coverage. Despite steady growth in bank lending to SMEs since 2020, institutional credit access is limited to the segment. Persistently high MSME loan default metrics contribute to lender risk aversion. Operational delays also restrict the ability of credit guarantees to derisk bank lending to small enterprises.

But these structural issues with scheme implementation don't detract from countercyclical impact of credit guarantees and GoI's prompt response in announcing emergency provisions to the baseline support it provides to MSMEs. Successful credit guarantee models operating in the US, Japan and the EU have higher guarantee and credit demand coverage and innovative risk-sharing incentives for banks. These need to be incorporated in operations of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for emergency measures to have better real-time impact.

Covid-era emergency credit line was successively enlarged to provide greater relief as distress mounted across the economy. This time around, disruption should be of a lower order, but sufficiently widespread as the energy shock travels through fertiliser and plastics industries. Airlines are at the frontline in most crises, and Indian carriers have recently flown into rough weather with flight safety and operational disruption. Bank balance sheets are healthy and nudging credit in the right direction won't pose inordinate challenges. Emergency credit guarantees involving extraordinary government support whittle down bank resistance to small borrowers.