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The extension in the scope of Emergency Credit Line Guarantee Scheme (ECLGS) will support the liquidity of around one third of mid and emerging corporates (MECs), India Ratings and Research (Ind-Ra) said.

Centre had launched the ECLGS in May 2020 to protect the MSME sector from the massive economic upheaval caused by the pandemic.

Recently, the Centre expanded the scope of the scheme.

"The additional funds made available for their working capital requirements along with extending the moratorium period in their previously availed ECLGS loans would lower repayment obligations in FY22," the ratings agency said in a note.

"Furthermore, it will provide opportunity to MECs to swap their previous availed high interest-bearing term loans with lower cost ECLGS loans."

At present, ECLGS's rate of interest is capped at 9.25 per cent for banks and 14 per cent for the non-banks due to which a cost reduction of up to 200bp can be easily achieved.

However, the working capital of MECs remaining stuck either in form of inventory or with debtors due to the extension in localised lockdown.

This will remain a key concern as it might deplete the newly sanctioned funds in short term, the agency said.

"The liquidity cushion will improve in the key sectors such as consumer discretionary goods & services (CDGS), fast moving consumer goods (FMCG), industrials and basic materials sectors."

"While a sizeable portion these MECs might continue to fully utilise their bank limits along with availing additional funds due to weaker collections, the additional funding will provide the much-needed liquidity support to continue their operations."

According to the agency, the second Covid wave has led to disruptions majorly for the CDGS, FMCG and industrial sectors along with some impact in the basic materials sector.

"There has been significant dependence on the bank limits by MECs rated in these sectors in the last three months compared to preceding three months which reflects presence of liquidity stress."

"In last three months, the percentage of entities using their bank limits over 95 per cent in CDGS was 33 per cent, in FMCG sector was 36 per cent, in industrials was 33 per cent and in basic materials was 27 per cent."

However, the entities belonging to healthcare and other remaining sectors were able to largely maintain a comfortable liquidity position.

"In last three months, the percentage of entities using their bank limits more than 95 per cent in healthcare was 9 per cent and there was no such entity in the other remaining sectors."