In a major move expected to offer relief to the MSME sector burdened by the impact of the US-Israel war, the government on Tuesday announced an Emergency Credit Line Guarantee Scheme (ECLGS) with an outlay of Rs 18,100 crore.
The scheme aims to provide credit guarantee coverage of 100% for MSMEs and 90% for non-MSMEs as well as the airline sector, to Member Lending Institutions (MLIs) by National Credit Guarantee Trustee Company Limited (NCGTC) for the amount in default under the additional credit facility extended to eligible borrowers to tide over any short-term liquidity mismatches in view of the West Asia Crisis, as per a PIB release. It is also expected to help provide an additional credit flow of Rs 2.55 lakh crore, including Rs 5,000 crore for airlines.
Terms & conditions apply
However, the loan tenor for MSMEs and non-MSMEs will be 5 years from the date of first disbursement, including a 1-year moratorium. So will ECLGS 5 offer much-needed support to small businesses, or does it mask more than it clarifies? Industry experts saw the latest announcements as positive for the industry but hinted at caution regarding certain terms and conditions. Vikas Singh Chauhan, Director at the Home Textile Exporters’ Welfare Association (HEWA), highlights that the moratorium period is actually very harmful, especially for MSMEs. Citing experiences, Chauhan states that those who took it suffered badly. “What happened is that both the interest and the principal kept getting added together, and then interest was charged on that combined amount. It kept piling up, and the total became so large that people got into serious trouble. They did take the moratorium, but it ended up hurting them more than helping. So this is not a good solution,” he says.
He adds that the government should consider waiving interest for at least a year if it genuinely wants to support small businesses. Explaining his point further, he says the situation would have been different if the interest had been waived. “Overall, the market is facing severe disruption—from freight to payment terms to raw material supply. My concern is that this moratorium period may prove damaging for many small businesses, particularly those in Laghu Udyog or cottage industries across hinterland Tier 2 and Tier 3 regions,” Chauhan says.
Devil in the details
Others in the industry hail it as a welcome move since the working capital of all MSMEs has increased continuously over the last 5 years. Jayanth Mutha, CEO, Himlite Products is cautiously optimistic given previous experiences. “The devil is in the details. If the government really intends to help, then the interest on the moratorium should be waived off. Right now, nothing has been mentioned on that front, so it is open to interpretation,” he states, reflecting on how difficult the time was during Covid. “During Covid, one ultimately had to pay interest for that period as well; it was just pushed off for later,” he says.
Over the last few months, since the war started, there has been a 50% increase on all plastics and other oil-based components for them. It is a similar story for all MSMEs facing escalating cost pressures amid the war crisis.
Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME) says that this measure provides much-needed liquidity support and reinforces the Government’s commitment to safeguarding the MSME sector during external shocks.
However, he adds, the effectiveness of this intervention will depend on its design and delivery. “Banks could focus on the sectors most affected and especially micro and smaller enterprise segments. Further, the need for funds is now, so the speed with which funds flow to the needy will determine its effectiveness,” he says, asserting that the duration and tenor of the moratorium are appropriate and address the interests of many small businesses.
Timely assistance
Adding to his point, HEWA’s Chauhan states that freight costs, which earlier averaged around $300 per container, have now surged beyond $4,000 in many cases. “In addition to rising freight costs, many exporters are also facing challenges in obtaining timely credit support. Various bankers and financial institutions have become cautious and, in several cases, have reduced or stopped funding companies that are purely export-oriented businesses. This has affected the liquidity cycle of exporters, particularly in the textile and home textile sectors where the payment and production cycle generally ranges between 60 to 120 days,” he says. In this context, he is hopeful that the ECLGS-5 scheme will help ease the financial burden on exporters by improving access to credit and working capital support. “Timely financial assistance is critical for sustaining production, fulfilling export orders, and maintaining India’s competitiveness in international markets,” he contends.
According to Pallavi Shrivastava, Co-Founder, Progcap, ECLGS 5.0 comes at a time when many MSMEs are facing tighter cash flow cycles and heightened uncertainty in daily operations. "In such conditions, timely access to working capital becomes critical, and the 100% guarantee structure enables that by giving lenders greater confidence to disburse faster."
Industry experts also emphasise the need to study the fine print carefully to understand the way forward. Puran Dawar, Chairman, Development Council for Footwear & Leather Industry, Regional Chairman (North)–Council for Leather Exports, says that while the policy is strong, execution will be critical. “Credit must reach businesses quickly, especially at the last mile. If implemented efficiently, this scheme can go beyond short-term relief and significantly boost India’s growth, exports, and global competitiveness,” he says.
Asked if he is satisfied with the fine print of the scheme, Dawar says, "A moratorium cannot be permanent. The government has given relief for one year, and I think one year should be sufficient. If the West Asia crisis continues for a longer period, the government can extend it. Overall, it shows that the government is taking timely and appropriate decisions."
Munindra Verma, CEO, M1 NXT, says industry players across trade finance, MSME banking, and fintech believe the enhanced guarantee support and expanded credit coverage could improve lender confidence, accelerate working capital access, and strengthen the resilience of small businesses navigating supply-side and trade challenges. "This will also deepen adoption of digital financial tools and enable more inclusive credit deployment across underserved MSME segments."
