Liquidity support: Credit guarantee scheme will help small businesses

Decisions taken by the government since last week suggest that necessary adjustment is being made to deal with the fallout of the crisis in West Asia. Prices of some categories of fuel were adjusted last week, which will help oil-marketing companies and the government contain the damage to their finances. However, higher prices of fuel and the limited availability of gas, for instance, are also affecting businesses, particularly small and medium enterprises. Given the disturbance in a critical trading route, businesses may also be facing demand issues. To help firms tide over the period of uncertainty, the Union government announced an Emergency Credit Line Guarantee Scheme (ECLGS 5.0) on Tuesday.

 

The scheme aims to provide 100 per cent credit-guarantee coverage for micro, small and medium enterprises (MSMEs) and a 90 per cent guarantee for non-MSMEs, along with a special facility for the airline sector. Under the scheme, eligible businesses will get additional credit up to 20 per cent of their peak working capital utilisation in the March quarter of 2025-26. The additional credit will be capped at ₹100 crore. In the aviation sector, companies will be able to borrow up to ₹1,500 crore, subject to certain conditions. The sector has been particularly affected by the increase in prices of aviation turbine fuel and other factors, leading to a reduction in operations in some cases. According to the government’s estimates, the scheme will enable an additional credit flow of about ₹2.55 trillion, including ₹5,000 crore for airlines. The credit guarantee, to be provided through the National Credit Guarantee Trustee Company, will help firms address immediate liquidity requirements.

 

Given the credit guarantee, banks will be less reluctant to lend, particularly to MSMEs. Small firms usually do not have financial buffers to navigate this kind of exogenous shock. In the absence of financial support, there would be a risk of closures, which must be avoided. Once firms go out of business, it is always difficult to revive them. Therefore, it will be important for the government, along with lenders and other relevant institutions, to carefully monitor how the scheme is implemented. It should also be prepared to make necessary intervention if the crisis persists.

 

As things stand, it is difficult to say with certainty when the crisis in West Asia will end, though there are renewed hopes that hostilities will be resolved soon. It has been reported that the United States and Iran are actively working towards an understanding, leading to a correction in prices of crude oil and a rise in stock markets on Wednesday. An early resolution to the conflict and the reopening of the Strait of Hormuz are critical. About one-fifth of the supply of global oil passes through the strait, and a near-complete stoppage of flows for over two months has significantly depleted reserves. Some analysts are of the view that reserves could fall below critical levels in the coming weeks, leading to a sharp increase in oil prices. Thus, it is important that the Strait of Hormuz is opened as soon as possible. Nevertheless, even if an agreement is reached to restore the flow of crude oil and gas in the coming days, the ECLGS will help firms because it will take a while before the price and availability of fuel, particularly of gas, adjust to desirable levels.