To mitigate the liquidity constraints, the Government of India introduced the ECLGS scheme in May 2020. Under this, 100 percent guarantee is extended to the member lending institutions (MLIs) in respect of credit extended by them to the borrowers. Data indicates that as of 30 November 2022, the amount guaranteed under this scheme increased to Rs. 3.58 lakh crore, while the number of borrowers benefitted improved to 1.19 lakh. Consumer Durables/FMCG, Corporate Retail Outlets, Traders, Services account for more than a third of the amount guaranteed under ECLGS. MSMEs in India and their contribution to the country’s growth is well documented. They form a substantive chunk of the Indian economic system and play an important role in employment generation. Yet, this sector remains one of the most vulnerable in terms of cash flow management. Both supply and demand side reasons exist behind such vulnerability. The supply side difficulty is being unable to get adequate financial support even for profitable enterprises, while the demand side problem being the lack of creditworthiness of the enterprises. Healthy cash flow systems, both inward and outward, are lifeline to any business. Badly managed credit systems pose significant risks to the business. It is even more so for businesses that are relatively small and that do not achieve economies of scale. Recognizing this issue, successive governments have introduced suitable measures to overcome these difficulties in the flow of credit to MSMEs. Despite such measures, MSMEs still remain susceptible to any crisis and the COVID-19 pandemic has exposed the financial vulnerability of the MSMEs. In today’s story, we look at one such measure introduced by the Government of India to ease the liquidity constraints on MSMEs due to the COVID-19 pandemic. We also look at previous initiatives of the Government in this regard. MSMEs and flow of credit There are primarily two sources of credit availability to MSMEs- institutional and non-institutional. Institutional credit is led by the RBI and other agencies mandated by the RBI, while the non-institutional credit is majorly sourced from money-lenders and family and friends. The percentage of MSMEs using institutional credit remains low, because of the high-risk perception of banks in extending credit facilities to MSMEs, and this is more acute in the case of micro and small enterprises. To ease the flow of credit to MSEs, the Government of India had introduced the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE). A trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established with contribution in ratio of 1:4 by the Small Industries Development Bank of India (SIDBI) and the Government of India (GoI). The details of the eligibility of lending institutions, credit facilities, guarantee cover, and term of the guarantee can be accessed here. Consistent rise in the amount of guarantee approved under CGMSE. Under the Credit Guarantee fund scheme for MSEs, the amount of guarantee approved has shown consistent increase, with few exceptions. The number of member lending institutions has also increased, after a brief decline during 2017-19. The average size of the loan issued fell from Rs. 5.27 lakh in 2014-15 to Rs. 4.41 lakh during 2016-17. During 2017-18, it rose to Rs. 7.24 lakh, thereafter which it declined gradually to Rs. 4.42 lakh in 2020-21. In 2021-22, it increased again to Rs. 7.83 lakh. Since 2017, CGTMSE has experienced fundamental changes that have allowed it to broaden the scope of its programmes to include untapped markets including partial collateralized loans, retail trade, and untapped lenders like NBFCs, small finance banks, and scheduled cooperative banks. Emergency Credit Line Guarantee Scheme (ECLGS) COVID-19 pandemic and the subsequent containment measures had an adverse impact on the financials of the MSMEs. They were struggling with liquidity constraints to keep the enterprise running, and many of them were on the verge of bankruptcy and insolvency. To mitigate the liquidity constraints, the Government of India introduced the ECLGS scheme in May 2020. Under this, 100 percent guarantee is extended to the member lending institutions (MLIs) in respect of credit extended by them to the borrowers. The interest rate under the scheme is capped at 9.25 percent for Banks and Financial Institutions and 14 percent for Non-Banking Financial Institutions. The overall ceiling initially announced for ECLGS was Rs. 3 lakh crore which was subsequently enhanced to Rs. 4.5 lakh crore. Initially restricted to MSMEs, the scheme was subsequently expanded to cover other sectors. So far, four extensions have been made. The four extensions done are as below.