While the move is expected to strengthen credit flow and economic stability, experts note that such guarantees may pose long-term fiscal risks if defaults rise.

The Union Cabinet is expected to soon take a call on the credit guarantee scheme to support various sectors affected by the West Asia war.

The scheme, a version of the Emergency Credit Line Guarantee Scheme (ECLGS), is expected to cover loan worth ₹2.5 lakh crore and would be valid for four years, a senior government official told here. Further, it is likely to provide a 90 per cent credit guarantee for loans from the National Credit Guarantee Trustee Company (NCGTC). The fund will cover the loss in the event of the borrower’s default.

Support across sectors

“Effort is to extend support across sectors, including aviation, MSMEs and even other businesses that are currently facing liquidity pressures, the official said, specifically highlighting the aviation sector, which is facing disruptions in routes, costs and operations. He also highlighted the success of the ECLGS scheme.

It has been effective in supporting businesses during stress periods, but the current situation requires a significant scale-up. We are looking at enhancing both the scope and the overall limit of the scheme so that a larger set of sectors and enterprises can access guaranteed credit more easily,” he said.

Background of ECLGS scheme

ECLGS was launched in May 2020 as a special initiative to provide liquidity support to businesses adversely impacted by the COVID-19 pandemic lockdown. The scheme covers all loans sanctioned under ‘Guaranteed Emergency Credit Line’ up to March 31, 2023, or until guarantees for an amount of ₹ 5 lakh crore are issued, whichever is earlier. Borrowers did not need to provide any additional security or collateral to avail of these loans. Interest rates were capped at 9.25 per cent for banks and 14 per cent for NBFCs. Also, the scheme offered a one-year moratorium on principal repayment, though interest was payable during this period.

Expansion to multiple sectors

It provided 100 per cent guarantee coverage to banks & NBFCs on credit extended to business enterprises/MSMEs, based on their loan outstanding as on February 29, 2020, to meet their additional term loan/additional working capital requirements. Initially, it was mainly for MSMEs, but later it was expanded to include borrowers from 26 stressed sectors identified by the Kamath Committee, as well as the healthcare and hospitality sectors.

Out of the liquidity support of ₹3.68 lakh crore to 1.19 crore businesses, the share of MSMEs was 95 per cent in terms of the number of guarantees and about 65 per cent in terms of the amount of guarantees issued. In terms of the number of borrowers supported, 88 per cent are micro borrowers, 78 per cent are MUDRA borrowers and 68 per cent are women borrowers. According to officials, out of the total liquidity support of over ₹ 3.68 lakh crore, NPAs reported are around Rs 22,000 crore, or 6 per cent, on loans guaranteed.

Global perspective and risks

The scheme was mentioned in the World Bank’s World Development Report 2022. It was said that the true cost of these guarantees to the government will only become clear in the long term. Although India’s economic recovery from the first waves of the pandemic has been remarkably robust, and the immediate fiscal impact of credit guarantee schemes is low, credit guarantees always carry the risk of becoming a liability for the government if an economic downturn causes loan defaults to rise.

Published on April 7, 2026