The government’s ECLGS or the Emergency Credit Line Guarantee Scheme has seen sanction of loans up to Rs 1.93 lakh crore, while Rs 1.45 lakh crore has been disbursed. That’s just half the kitty available.

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Detecting some definitional issues, the government has been consistently expanding the contours of the scheme to cover more units. Initially, the scheme was applicable to units with outstanding loans up to Rs 25 crore, now it has been expanded to include units with outstanding up to Rs 50 crore. Personal loans taken by SME entrepreneurs have been included. Also, the MSME definition has been expanded to include units with a turnover of Rs 250 crore, up from Rs 100 crore earlier.

Indianomics | One of the biggest schemes announced to cushion the COVID blow was aimed at #MSME sector. Out of the provided funds, only 1.93 lk cr has been sanction & only 1.45 lk cr disbursed. What went wrong? @latha_venkatesh discusses the health of the sector with experts(1/2) pic.twitter.com/aaKukAMHo7

— CNBC-TV18 (@CNBCTV18News) October 30, 2020

Despite these expansions, why has the entire Rs 3 lakh crore not been disbursed?

We asked four relevant people: Satya Venkata Rao, DMD at SIDBI (or the Small Industries Development Bank of India), the nodal agency, which designed this scheme, as also Ram Jass Yadav, a chief general manager at Bank of Baroda who is in charge of MSME lending, Chandrakant Salunkhe, founder chairman of the SME chamber of commerce and Sanjay Agarwal, director, CARE Ratings.

Indianomics | One of the biggest schemes announced to cushion the COVID blow was aimed at #MSME sector. Out of the provided funds, only 1.93 lk cr has been sanction & only 1.45 lk cr disbursed. What went wrong? @latha_venkatesh discusses the health of the sector with experts(2/2) pic.twitter.com/QksH7pYIPR

— CNBC-TV18 (@CNBCTV18News) October 30, 2020

Rao of SIDBI said MSMEs have taken loans when it made commercial sense to them. During the 3 months of lockdown, few saw any business. Thereafter they have availed of the loans when orders flowed in. This makes sense since the loan is guaranteed to the bank, not the borrower and he is likely to increase his leverage only if he is sure of the business.

Salunkhe representing the SME chamber of commerce didn't quite buy this point. He argued that there are 7 crore SME units in the country but only 45 lakhs have a bank loan. He argued banks aren’t going the distance to lend and fulfil government given targets. Bank of Baroda's Yadav disagreed. He pointed out that his bank held webinars to popularise the scheme and disbursed 87 percent of monies sanctioned. He mentioned 50 lakh units as benefitting from the government scheme but the source of that number is unclear.

Sanjay Agarwal of CARE pointed out that the Rs 3 lakh crore may have been an aggressive target from the start. He said that banks, as of March, had an exposure of Rs 11 lakh cr to MSMEs. NBFCs probably accounted for another Rs 2 lakh crore. The government probably estimated total MSME outstanding loans at Rs 15 lakh crore and offered to guarantee 20 percent incremental loans or Rs 3 lakh crore. Now only if all the units, took the entire 20 percent incremental loan available to them will the Rs 3 lakh crore target be reached, he pointed out.

It is arguable that all those with bank credit lines, may not have seen enough business to take on more debt. Maybe some had internal accruals, and some went out of business. He argued that Rs 3 lakh crore was always an outer limit and the fact nearly Rs 2 lakh crore has been sanctioned indicates the good performance of the scheme.

Agarwal further argued that last year while overall loan growth was over 10 percent, SME loans saw growth of about 7 percent. But this year, overall credit growth is at 5.5 perecent, and SME loan growth is also as much. He added that MSME loan growth keeping pace with system loan growth is an indication of the scheme’s success.

One sticking point is an oft-expressed fear that some banks, especially private banks and even NBFCs are asking their MSME clients to avail of the scheme, deducting their overdue interest and passing on only the balance amount to their customers.

The issue came up obliquely during the investor call post-Kotak Bank's earnings. An analyst asked the management why the bank's loans to SMEs hasn’t risen despite the bank availing of the scheme to lend to MSMEs. The management replied that some borrowers had indeed used the scheme to retire older, more expensive loans.

This has led to a suspicion that bankers are still risk-averse or are indeed using the scheme to improve the quality of their loan book. Venkata Rao disagreed with the risk aversion argument. Why would banks sanction Rs 2 lakh crore of additional credit if they were risk-averse, he asked. Also, the scheme has picked up steam since September and may still see more loans disbursed as the economy picks up.

But Salunkhe’s point remains the discrepancy between the number of registered MSMEs at over 6 crore and those with bank accounts and a CIBIL score at only 45 lakh. It is clear that despite nationalisation and Jan Dhan, the formal system hasn’t reached the last mile.

It's possible MFIs are bridging some of this gap. But here’s where the inadequate bandwidth of India’s growth, its formal sector and its administration shows up.