ECLGS 5.0 to help banks prevent spike in bad loans, say experts

The government's Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 for micro, small and medium enterprises (MSME) is expected to help banks prevent a spike in bad loans, according to experts, as it comes at a time when many businesses may be under financial stress.

ECLGS 5.0 makes it easier for MSMEs to access guaranteed credit. Although the scheme's operational guidelines were released only a few days ago, lenders are already reaching out to eligible borrowers to encourage early uptake before their finances worsen.

"Compared to what we were 20 days back, we look much more comfortable with the support from the government," said Shekhar Bhandari, head of SME at Kotak Mahindra Bank.

"The ECLGS 5.0 scheme will insulate SMEs, mid-corporates and corporates from the challenges arising from the West Asia crisis. Businesses are good, businesses are producing well, demand has been there - it is only the working capital cycle and input costs that have gone up, and these get mitigated very well with ECLGS 5.0."

ECLGS 5.0 seeks to catalyse ₹2.55 lakh crore in additional credit, functioning as a counter-cyclical tool to ease liquidity stress, support employment and sustain production.

Under the scheme, MSMEs receive 100% credit guarantee coverage on additional credit facilities extended to address short-term liquidity mismatches arising from the West Asia crisis.

MSMEs are eligible for a top-up of up to 20% of their peak fund-based working capital outstanding during Q4 of FY26, subject to a maximum of ₹100 crore per borrower. The loan carries a five-year tenor from the date of first disbursement, including a one-year moratorium on principal repayment.

"The idea is to provide more support to certain pockets of MSMEs that will be stressed-the scheme definitely helps to champion that cause," said Presha Paragash, whole time director and CEO of Credit Saison India.