Banks expect MSME credit spurt from ECLGS 5.0 amid war shadow on growth

The Centre’s Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, announced on Tuesday, is expected to support fresh bank lending to the micro, small and medium enterprises (MSMEs) sector while containing asset-quality risks, at a time when the war in West Asia has disrupted supply chains, threatening to derail growth as well as credit demand in the segment.

 

Indian banks relied heavily on MSMEs to drive credit growth in FY26, and were bracing for stress in the segment in FY27 due to the West Asia situation. The government expects the new scheme to facilitate additional credit flow of about Rs 2.55 trillion, including ₹5,000 crore for airlines.

 

 “As per rough estimates, since the scheme was announced only last night, additional borrowing could be in the range of ₹12,000-15,000 crore because of this support,” Indian Bank MD and CEO Binod Kumar said. “However, not all borrowers may opt for it. Even in the past, several strong borrowers did not avail themselves of the scheme. Those who can survive on their own may choose not to go for it, although the interest rate and other terms are attractive,” Kumar said.

 

Amitava Chatterjee, MD & CEO, J&K Bank, termed ECLGS 5.0 a proactive measure from the government that could more than double the lender’s credit growth in the segment over last year.  

 

“I would say it is a very good step and will benefit the entire banking industry. We are an MSME-focused bank, so for us, this will definitely provide strong support. In fact, my team has made a rough estimate that our [loan] growth [to MSMEs] could rise to 20-22 per cent specifically because of this credit guarantee,” Chatterjee told Business Standard.  

This is significantly higher than FY26, when the bank had recorded a subdued growth of 8-9 per cent in credit flows to MSMEs due to uncertainties in the business environment in the aftermath of Pahalgam terror attack.

 

According to SBI Research, the intervention will provide liquidity support, protect jobs, sustain supply chains and strengthen the resilience of the Indian economy. It estimates that nearly 110 million MSME accounts — around 45 per cent of the total MSME portfolio — could benefit from the scheme, with average additional credit flow per account estimated at Rs 2-2.3 lakh.

 

The aviation sector is also expected to benefit significantly. SBI Research said full disbursement of Rs 5,000 crore to airlines would amount to nearly 9.5 per cent of the Rs 526 billion outstanding credit to the sector as of March 2026.

 

Brokerage Equirus Securities said the scheme was likely to support credit growth while containing downside risks by limiting slippages and credit costs on a quarter-on-quarter basis. The sovereign-backed guarantee structure, it said, meaningfully de-risks incremental exposure, particularly in vulnerable segments.

 

Bank lending to MSMEs has risen sharply in recent years, aided by regulatory support measures. MSME credit grew by around 27 per cent year-on-year in FY26, taking the segment’s share in total bank credit to 18.5 per cent.

 

Major lenders, including State Bank of India, HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank, have between 15 and 20 per cent of their loan books exposed to MSMEs.

 

Micro enterprises accounted for nearly 83 per cent of beneficiaries by count, while banks accounted for around 86 per cent of total guaranteed disbursements. Sector-wise utilisation was led by trade at around 21 per cent and services at 19 per cent, followed by textiles at 8 per cent and food processing at 6 per cent, according to Equirus Securities.

 

According to Suresh Ganapathy of Macquarie Research, ECLGS has had a strong track record and supported both MSMEs and the broader financial system. The scheme acted as a key liquidity backstop during and after the Covid-19 pandemic, providing Rs 3.61 trillion in guarantees and Rs 2.82 trillion in disbursements by its conclusion on March 31, 2023. It is credited with saving around 1.46 million MSME units from closure and protecting an estimated 15 million jobs by preventing a cascade of defaults in the credit-constrained small business sector.

 

ECLGS was originally introduced to cushion the economic shock from the Covid-19 pandemic, alongside a regulatory standstill that froze days-past-due movement. The scheme had witnessed healthy traction, with around 23-24 per cent of eligible borrowers availing support, helping businesses maintain liquidity during the disruption.