6 days ago

ECLGS 5.0 to be positive for companies, says Crisil

The Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 is expected to benefit most corporates rather than raise concerns, even though the corporate borrowings may go up by approximately 10%, says CRISIL Ratings.

The rating agency suggests that this additional debt is primarily aimed at addressing a temporary liquidity shortfall caused by the West Asia conflict and the subsequent rise in working capital demands, rather than funding unprofitable operations. The scheme’s design—featuring a five-year duration and a one-year moratorium on principal repayments—affords companies ample time to stabilize their cash flows before they need to start repaying.

The surge in crude prices, heightened freight and insurance expenses, extended shipping routes, and the necessity to hold larger inventories have all contributed to increased cash requirements for businesses. With the US-Iran deal about to take effect, these pressures are anticipated to diminish as supply chains return to normal.

Interestingly, Indian corporates seem to be in better financial shape thanks to significantly stronger balance sheets, as compared to the Covid period. Years of deleveraging, enhanced profitability, and improved interest coverage ratios have reinforced many corporates hence any potential spike in leverage is not expected to substantially weaken the credit profiles of most investment-grade borrowers.

Policymakers will have to watch closely for any escalation in the corporate leverage. Over the past decade, Indian firms have been focused on reducing their debt levels following the twin balance sheet crisis of the mid-2010s.

Even though this initiative is a short-term emergency liquidity solution with a short-term effect, the introduction of ECLGS 5.0 has temporarily shifted trend to seek further borrowing. However, if the scenario returns to normalcy sooner, the anticipated 10% increase in debt is generally seen as manageable, considering the improved financial standing of Indian corporations today.