MoF & MSME Minister !!! Keeping out Co-operative Banks from ECGLS unhelpful & harmful to multitude of MSME's

The Union Cabinet had on 20th May 2020, approved additional funding of up to Rs 3 lakh crore to MSME’s at a concessional rate through the Emergency Credit Line Guarantee Scheme ECLGS. National Credit Guarantee Trustee Company Ltd. NCGTC vide its letter Ref. No. 2842 / NCGTC / ECLGS dated 23rd May 2020, issued detailed Operational Guidelines relating to the scheme.

As against the Rs 3 lakh crore ECLGS, as per media reports, as on 15th July 2020 total amount sanctioned to MSME’s stood at Rs 1,23,345.16 crore & Rs 68,311.55 crore out of that has been disbursed.

The scheme when launched was to benefit 45 lakh units, as on 15th July 2020 total number of MSME accounts sanctioned were 37,26,238 & 17,98,336 out of them were disbursed with credit.

(Rs, in Crore)            

Lenders                                Sanctioned                         Disbursed

PSB                                        69,135.19                               41,819.19

Private Banks                        54,209.97                               26,492.36

Total                                  1,23,345.16                               68,311.55

Economic Times editorial opinion dated 15th July 2020, in response to the government wanting to provide micro, small and medium enterprises (MSMEs) additionally Rs 1 lakh crore to help them meet their wage bill, says that the proposed scheme, if launched, should not be saddled with cumbersome conditions that whittle eligibility down as happened in the case of the Emergency Credit Line Guarantee Scheme (ECLGS).

The editorial lists two conditions that constrain MSMEs’ ability to draw on this facility:

1. MSMEs with an annual turnover of only up to Rs 100 crore in FY 2019-20 are eligible for the loan despite the subsequent change in definition of MSME’s covering turnover up to Rs.250 crores. 
2. Credit under the scheme is up to 20% of the borrower’s total outstanding credit capped at Rs 25 crore, excluding off-balance sheet and non-fund-based exposures, as on February 29, 2020 (that is additional credit is up to Rs 5 crore).

Further, the editorial points out that MSMEs who have repaid their loans on the stipulated date and have no outstanding credit are ineligible to avail this scheme.

However, the most important issue missed out is how the operational guidelines forced out & deprived many eligible MSME’s banking exclusively with Scheduled Cooperative Banks from availing this scheme.

As per the definition of Member Lending Institution, as defined in point 4 of the operational guidelines of the scheme, includes

• Banks: All Scheduled Commercial Banks.
• Financial Institutions: As defined in sub-clause (i) of clause (c) of Section 45-I of Reserve Bank of India Act.
• NBFC: "Non-Banking Financial Company” means a non-banking financial company as defined in clause (f) of section 45-I of the RBI Act, 1934 and which has its principal business as defined by RBI and has been granted a certificate of registration under sub-section (1) of section 3 of the Act. All NBFCs which have been in operation for 2 years as on 29th February, 2020 would be eligible under the Scheme.

As per RBI Scheduled Banks mean:

All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are Scheduled Banks. These banks comprise Scheduled Commercial Banks and Scheduled Co-operative Banks.

The Member Lending Institution defined above only includes Scheduled Commercial Banks which as per RBI, are categorised into five different groups according to their ownership and / or nature of operation. These bank groups are (i) State Bank of India and its Associates, (ii) Nationalised Banks, (iii) Private Sector Banks, (iv) Foreign Banks, and (v) Regional Rural Banks. In the bank group-wise classification, IDBI Bank Ltd. has been included in Nationalised Banks.

While Scheduled Co-operative Banks which consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks have been surprisingly excluded.

This exclusion of Co-operative Banks is totally stark when compared to qualifying requirements for Non-Banking Financial Companies (NBFCs).

NBFC’s have only two requirements i.e.

(i)           being registered with the RBI and

(ii)          having been in operation for a period of 2 years as on 29th February, 2020.

Here even the asset size of the NBFC does not matter. Thus, an NBFC need not be Systemically Important (SI) i.e. having asset size of Rs. 100 crores or more to qualify as an MLI.

The NBFC must only hold a valid certificate of registration issued by RBI in order to be eligible under the scheme besides having been in operation for 2 years.

The Ministry of Finance MoF, Department of Financial Services DoFS and NCGTC on account of this exclusion, have caused immeasurable harm to Co-operative Banks as a class of lenders & more particularly to Scheduled Co-operative Banks. Along with Public Sector Bank’s, Co-operative Banks have for a very longtime nurtured and financially supported MSME’s.

As per news report in The Indian Express, the President of NAFCUB (National Federation of Urban Co-operative Banks and Credit Societies), in a letter to the Finance Minister seeking that co-operative banks be included under guarantee cover, said that outstanding loans to MSMEs by the urban cooperative banking sector is of the order of Rs 82,000 crore.

Exclusion of Co-operative Banks as MLI has unfairly deprived numerous eligible MSME’s from availing the benefit of ECGLS only on account of the Constitution of their lender as they find that having exclusive banking relation with Co-operative Banks has landed them in this unforeseen situation of being discriminated & unfairly deprived from the benefits of this scheme.

I had pointed out this exclusion through my tweet dated 27th May 2020 and re-posted it on 2nd June 2020.

As on 10th July 2020 the breakup of Scheduled Commercial Banks as MLI’s registered with NCGTC are as under:

1)   Public Sector Banks – All 12 nos classified by RBI

2)   Private Sector Banks - All 22 nos classified by RBI

3)   Foreign Banks – 4 nos out of 44 nos classified by RBI

1.   STANDARD CHARTERED BANK

2.   DBS BANK INDIA LIMITED

3.   HSBC LIMITED

4.   DEUTSCHE BANK AG

Other MLI’s include 5 nos Small Finance Banks, one Financial Institution being SIDBI, 26 nos Regional Rural Banks, 79 nos NBFC’s.

As it can be seen from the above, for having a substantial jump in the sanction and disbursement amount under ECGLS it is imperative for MoF to include Co-operative Banks as MLI’s. If not all Co-operative Banks like in the case of NBFC’s, then they should at least include the Scheduled Co-operative Banks.

If the Co-operative Banks were excluded just because of lack of adequate oversight, as RBI had been regulating and supervising banking functions while the primary oversight was with the registrar of societies. With the promulgation of Banking Regulation (Amendment) Ordinance, 2020 on June 26, 2020 to bring "Co-Operative Banks" under the ambit of the RBI by amending the Banking Regulation Act, 1949, now there should not be anything holding back MoF, DoFS & NCGTC to include Co-operative Banks & qualify them to register as MLI with NCGTC. 

I hope and look forward to the MoF and DoFS immediately correcting this possibly unintended exclusion to enable thousands of MSME's banking with Co-operative Banks to also avail of the benefit of ECGLS.