Kolkata: The Centre is preparing a credit guarantee scheme to facilitate access of businesses to funds and the size of this assistance could be in the range of Rs 2-2.5 lakh crore, reports have stated. The objective of the scheme in the works is to allow companies which are weighed down by higher input and logistics costs, access funds relatively easily, with the scheme allaying fears of the lending institutions about lending in these times of increasing uncertainty.
Similarity with scheme during pandemic
Officials drew parallels with the credit guarantee scheme in the works with the one that was offered in May 2020 in view of the Covid 19 pandemic. It was known as Emergency Credit Line Guarantee Scheme and it offered 100% guaranteed collateral-free loans to those businesses which were considered eligible. The focus was on MSMEs.
Under that guarantee, a total of guarantees amounting to Rs 3.62 lakh crore were issued. That scheme had recorded 1.19 crore borrowers. Therefore, on average Rs 3 lakh were utilised as guarantee cover for each beneficiary. Annual interest rates under this scheme were capped at 9.25% for banks and 14% for NBFCs. SBI Research stated in 2022 that MSME loan accounts amounting to Rs 1.8 lakh crore did not turn into NPA (non-performing assets) due to the credit guarantee scheme.
“This is being worked out. The idea is to reassure the industry in view of the uncertainties imposed by the war,” a government official told The Economic Times. This official has also said that the government is acting in a pre-emptive manner and trying to put in place a cushion though there is no immediate stress in this domain.
What is credit guarantee scheme
A credit guarantee scheme is usually a government or institution-backed scheme. It is designed to provides guarantees for loans that are disbursed to businesses without the requirement of collateral. These are of particular help to SMEs and startups which need handholding in challenging environments. Credit guarantee schemes lowers the risk that lenders take on and it offers partial or full coverage against any default by the borrowers. These schemes usually cover term loans, working capital, venture debt and other credit facilities.