RBI Lowers Capital Requirement on ECLGS 5.0 Exposures

Source: Business Standard

Context

The Reserve Bank of India (RBI) has allowed lenders to assign a zero-risk weight to a significant portion of loans guaranteed under the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, reducing capital requirements and potentially supporting credit growth under the programme. Exposures under ECLGS 5.0 will attract zero per cent risk weight for up to 75 per cent of the guaranteed portion. Crisil Ratings has said ECLGS 5.0 could increase the debt levels of rated corporates by around 10 per cent, as firms tap the facility to meet higher working capital requirements arising from the ongoing West Asia conflict.

The RBI’s Move

• Allows lenders to assign zero per cent risk weight for up to 75 per cent of the guaranteed portion of ECLGS 5.0 loans.
• Reduces capital requirements for banks lending under the scheme.
• Aims to support credit growth under the programme.

What is ECLGS?

• Emergency Credit Line Guarantee Scheme (ECLGS).
• A central government scheme that provides a 100 per cent guarantee to lenders (banks and NBFCs) on emergency loans to businesses affected by crises.
• Administered by: National Credit Guarantee Trustee Company (NCGTC).
• Originally launched: May 2020 during the COVID-19 pandemic.

ECLGS Evolution

Version	Launched	Purpose	Coverage
ECLGS 1.0	May 2020	COVID-19 relief, MSMEs and businesses	Loans up to ₹3 lakh crore guarantee
ECLGS 2.0	November 2020	Expanded to 26 stressed sectors and healthcare	Increased coverage
ECLGS 3.0	March 2021	Covered hospitality, travel, tourism	Tenure increased to 6 years
ECLGS 4.0	April 2021	Healthcare sector for oxygen, vaccines	Specific to medical infra
ECLGS 5.0	2026	West Asia conflict relief for affected businesses	New iteration for current crisis

Why ECLGS 5.0 Now?

• West Asia conflict has disrupted:
  • Oil and gas imports through Strait of Hormuz.
  • Maritime trade routes.
  • Fertiliser imports.
  • Supply chains for chemicals, electronics, food items.
• Firms face higher working capital needs to manage these disruptions.
• ECLGS 5.0 provides government-guaranteed credit to affected businesses.

About NCGTC (National Credit Guarantee Trustee Company)

• Founded: 2014.
• Headquartered: Mumbai.
• A wholly-owned company of the Government of India.
• Function: Acts as a trustee to manage and operate various credit guarantee schemes under the Department of Financial Services (DFS).

What is a Risk Weight?

• A percentage applied to a bank’s asset to determine its risk-weighted assets (RWAs).
• Used in calculating capital adequacy under Basel III norms.
• Higher risk weight = more capital needed to hold against the asset.
• Examples:
  • Government bonds: Typically 0 per cent risk weight.
  • Residential mortgages: 35-75 per cent.
  • Corporate loans: 20-150 per cent depending on rating.
  • NBFC exposures: 20-150 per cent depending on rating.

What is Basel III?

• A global regulatory framework for bank capital, liquidity, and leverage.
• Issued by the Basel Committee on Banking Supervision (BCBS).
• Three pillars:
  • Pillar 1: Minimum capital requirements.
  • Pillar 2: Supervisory review process.
  • Pillar 3: Market discipline (disclosures).
• Key metrics:
  • CET1 (Common Equity Tier 1): Minimum 4.5 per cent.
  • Tier 1 Capital: Minimum 6 per cent.
  • Total Capital Ratio: Minimum 8 per cent (with buffers, 10.5 per cent).
  • Leverage Ratio: 3 per cent.
  • LCR (Liquidity Coverage Ratio): 100 per cent.
  • NSFR (Net Stable Funding Ratio): 100 per cent.

About Crisil Ratings

• Credit rating agency in India.
• Founded: 1987 (as Credit Rating Information Services of India Limited).
• Headquartered: Mumbai.
• Majority owned by: S&P Global.
• Functions:
  • Credit ratings for corporates, financial instruments, and sovereigns.
  • Risk assessment and research.
  • Other credit-related advisory services.
• One of India’s three major credit rating agencies along with ICRA and CARE Ratings.

Practice MCQs

Q1. With reference to the RBI’s recent decision on ECLGS 5.0 exposures, consider the following statements:

1. The RBI allows lenders to assign zero per cent risk weight for up to 75 per cent of the guaranteed portion of ECLGS 5.0 loans.
2. The move reduces capital requirements for banks lending under the scheme.
3. The change is intended to support credit growth under the programme.
4. The RBI requires 100 per cent risk weight on all ECLGS 5.0 exposures.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the RBI allows zero per cent risk weight for up to 75 per cent of guaranteed exposure, NOT 100 per cent risk weight.)

Q2. With reference to ECLGS, consider the following statements:

1. ECLGS was originally launched in May 2020 during the COVID-19 pandemic.
2. ECLGS provides 100 per cent guarantee to lenders on emergency loans to businesses.
3. ECLGS is administered by the National Credit Guarantee Trustee Company (NCGTC).
4. ECLGS 5.0 is specifically designed for the West Asia conflict context.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Q3. With reference to Basel III norms in India, consider the following statements:

1. CRAR for Indian banks is 9 per cent minimum + 2.5 per cent Capital Conservation Buffer = 11.5 per cent total.
2. Basel III is issued by the Basel Committee on Banking Supervision (BCBS).
3. Basel III has three pillars: Minimum capital, Supervisory review, and Market discipline.
4. India does not implement Basel III norms.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; India has implemented Basel III norms.)

Q4. With reference to NCGTC, consider the following statements:

1. NCGTC stands for the National Credit Guarantee Trustee Company.
2. NCGTC was founded in 2014.
3. NCGTC is a wholly-owned company of the Government of India.
4. NCGTC operates various credit guarantee schemes including ECLGS, CGSSD, CGS-MFI, and CGSEL.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Q5. With reference to credit rating agencies in India, consider the following statements:

1. Crisil is a credit rating agency founded in 1987.
2. Crisil is majority owned by S&P Global.
3. India has multiple credit rating agencies including Crisil, ICRA, CARE Ratings, and India Ratings.
4. Crisil is a government-owned body under the RBI.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; Crisil is a private credit rating agency majority owned by S&P Global, NOT a government body.)

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the RBI allows zero per cent risk weight for 75 per cent of guaranteed exposure.
2. (d), All four statements are correct.
3. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because India implements Basel III norms.
4. (d), All four statements are correct.
5. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because Crisil is a private agency owned by S&P Global.

Exam Relevance

RBI Grade B

Core area on banking regulation, capital adequacy