In the wake of economic challenges, especially post-COVID-19, Micro, Small, and Medium Enterprises (MSMEs) in India have faced unprecedented disruptions. From declining sales to delayed payments and supply chain bottlenecks, the stress on cash flows has made it difficult for many small businesses to repay loans on time. Recognizing this, the Government of India, in collaboration with financial institutions, has rolled out several relief schemes—two of the most significant being the Emergency Credit Line Guarantee Scheme (ECLGS) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

This article explores how loan restructuring under ECLGS and CGTMSE is providing critical support to the MSME sector and helping them recover, rebuild, and grow.

Understanding ECLGS: A Response to the Crisis

The Emergency Credit Line Guarantee Scheme (ECLGS) was launched in May 2020 as a part of the Atmanirbhar Bharat package to provide liquidity to MSMEs impacted by the pandemic. Under this scheme, credit is provided with 100% government guarantee to ensure businesses can meet their operational liabilities and restart smoothly.

Key Features of ECLGS:

• 100% Guarantee Cover: Provided by the National Credit Guarantee Trustee Company (NCGTC) to Member Lending Institutions (MLIs).

• Eligibility: MSMEs, business enterprises, and individuals (borrowers) with existing loans as of a specific cutoff date.

• Loan Amount: Up to 20%–30% of the borrower's total outstanding credit.

• No Collateral Required: Since it's backed by a government guarantee.

• Interest Capping: Attractive interest rates to keep borrowing affordable.

• Flexible Repayment: Moratorium period followed by a 4-year repayment window.

Evolution of ECLGS:

Initially launched as ECLGS 1.0, the scheme evolved into ECLGS 2.0, 3.0, and 4.0, each targeting different sectors and increasing coverage. For example:

• ECLGS 2.0 focused on 26 stressed sectors like construction and hospitality.

• ECLGS 3.0 was designed to support the travel, tourism, and aviation industries.

• ECLGS 4.0 allowed hospitals to set up oxygen plants and increased credit limits further.

This flexibility allowed the scheme to remain relevant and continue addressing sector-specific needs.

Loan Restructuring Under ECLGS

Loan restructuring involves modifying the terms of existing loans to reduce the burden on borrowers without classifying the account as a Non-Performing Asset (NPA). Under the RBI’s loan restructuring guidelines, banks and NBFCs are allowed to:

• Extend repayment periods

• Reduce EMIs

• Provide moratoriums

• Convert interest into a funded interest term loan

Benefits to MSMEs:

• Improved Cash Flow: Extended tenure and moratoriums provide breathing space.

• Avoid NPA Classification: Borrowers retain their credit standing.

• Easier Access to Credit: Healthy repayment track records make it easier to access new credit under ECLGS.

Under ECLGS, the additional credit does not disturb the borrower’s existing loans but offers extra working capital to support their business.

Role of CGTMSE in MSME Lending

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up in 2000 by the Government of India and SIDBI to offer collateral-free credit to MSMEs.

Key Highlights of CGTMSE:

• Credit Guarantee Cover: Up to ₹2 crore per borrowing unit.

• Coverage Ratio:

  • 85% for micro-enterprises

  • 75%–80% for women entrepreneurs, SC/ST borrowers, and businesses in North Eastern states

• Applicable Loans: Term loans and working capital facilities

• Participating Lenders: Banks, NBFCs, RRBs, and other financial institutions

How CGTMSE Supports Restructuring:

If an MSME unit undergoes restructuring, the existing guarantees under CGTMSE can continue, provided the restructuring is done as per RBI norms. This ensures that lenders remain confident in extending or restructuring loans without fearing losses in case of default.

Impact on MSMEs

The combined force of ECLGS and CGTMSE has helped lakhs of MSMEs across India. As of early 2025:

• Over ₹4.5 lakh crore has been sanctioned under ECLGS across various sectors.

• More than 1.2 crore MSMEs have benefited from credit under the ECLGS scheme.

• CGTMSE continues to guarantee loans worth ₹2 lakh crore+, significantly reducing the need for collateral.

• Loan restructuring enabled many businesses to avoid default and maintain their creditworthiness.

These initiatives have ensured that credit keeps flowing to the backbone of India’s economy, especially during periods of financial distress.

Challenges Faced

Despite the benefits, there are challenges:

1. Awareness Gaps: Many small business owners are still unaware of such schemes or find the documentation process complex.

2. Lender Reluctance: In some cases, banks hesitate to restructure loans, fearing future NPAs.

3. Delayed Disbursals: Bureaucratic hurdles can delay loan disbursal, reducing the effectiveness of emergency support.

4. Limited Digital Access: Rural or semi-urban MSMEs may struggle with digital applications.

Way Forward

To strengthen loan restructuring and MSME relief further, the following steps are crucial:

• Awareness Campaigns: Government and industry bodies must launch outreach programs in regional languages.

• Ease of Process: Simplifying loan and restructuring applications through digital platforms and single-window systems.

• Digital Financial Literacy: Helping small business owners understand credit terms and manage finances better.

• Public-Private Partnerships: More tie-ups with fintech companies can help in last-mile credit delivery using alternative credit scoring.

Additionally, the government must keep reviewing and expanding schemes like ECLGS and CGTMSE based on real-time industry needs and macroeconomic factors.

Conclusion

Loan restructuring, when backed by robust schemes like ECLGS and CGTMSE, serves as a financial cushion for millions of MSMEs facing external shocks. These frameworks not only offer immediate relief but also set the foundation for long-term financial health and growth. As India pushes towards becoming a $5 trillion economy, empowering MSMEs with flexible credit and supportive restructuring mechanisms will remain vital.

Whether you're a small trader, manufacturer, or service provider, understanding these schemes can make the difference between business survival and closure.