RBI Lowers Capital Burden On Banks For ECLGS 5.0 Loans

Banks extending loans under the government's Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 have received a regulatory concession from the Reserve Bank of India (RBI).

In a notification issued on Monday, the central bank said certain exposures backed by guarantees under ECLGS 5.0 would qualify for a zero-risk weight, reducing the capital requirement attached to such lending.

The revised framework has taken effect immediately.

What The RBI Said

According to the notification, banks can assign a risk weight of 0% to up to 75% of the guaranteed portion of an ECLGS 5.0 exposure.

The benefit will apply only in cases where the settlement amount under the guarantee is expected to be received within 30 days of invocation.

For the remaining portion of the exposure, existing risk-weight norms will continue to apply.

The amendment has been incorporated into the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025.

Triggered By Latest ECLGS Framework

The move follows a circular issued by the National Credit Guarantee Trustee Company (NCGTC) on 8 May relating to ECLGS 5.0.

The credit guarantee programme was first introduced during the pandemic period to help businesses access additional funding through government-backed guarantees. The scheme was widely used by banks and financial institutions to support borrowers, particularly MSMEs, during a period of economic disruption.

Successive versions of the programme have continued to operate with modifications to eligibility and coverage.

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Why The Change Matters

The latest amendment effectively reduces the capital charge on a large portion of eligible guaranteed loans.

Banks are required to maintain capital against their assets based on the level of risk attached to them. A lower risk weight generally means lower capital consumption.

The notification was issued under Section 35A of the Banking Regulation Act, 1949. It was one of the changes brought in the Ninth Amendment to the capital adequacy norms for commercial banks.

Sources:

CNBC TV18

Business Standard