Banking shares gain on credit line guarantee scheme for MSMEs; how banks stand to gain

Banking stocks attracted huge buyer interest on Wednesday after the Union Cabinet cleared an Emergency Credit Line Guarantee Scheme (ECLGS) with an outlay of Rs 18,100 crore to support MSMEs and airlines affected by the West Asia crisis. HDFC Bank, Bank of Baroda, Axis Bank, PNB, SBI, and Union Bank shares rose over 2% each in the afternoon session. 

The scheme involves supplying additional credit flow of Rs 2.55 lakh crore, including Rs 5,000 crore allocated for airlines.

Sentiment for lenders turned positive as the guarantee cover mitigates credit risk on incremental loans, prompting banks to carry out more lending while capping potential losses.

Subsequently, Nifty Bank rose 1318 points or 2.41% to 55,865 in the afternoon deals on Wednesday against the previous close of 54,547. 

The BSE Bankex too zoomed 2.51% or 1548 points to 62,979.29.  All 14 BSE bankex components were trading in the green led by private lender YES Bank shares which rose the most (8%) 

The Nifty PSU Bank index also gained over 2.33% during the session. Bank of Maharashtra and Canara Bank were among the top gainers, rising 3.23 percent and 1.6 percent, respectively. All 12 constituents of the index were trading in the green. 

The Nifty Private Bank index also rose 1.38 percent, with all 10 stocks trading in the green. YES Bank and RBL Bank led the gains, rising 7 percent and 1.7 percent, respectively.

Under the scheme, the government will provide 100 percent credit guarantee cover for MSMEs and 90 percent for non-MSMEs, including airlines. The guarantees will be extended to Member Lending Institutions by the National Credit Guarantee Trustee Company Limited against defaults on additional loans extended to eligible borrowers.

"The scheme is a net positive for banks, a modest loan growth tailwind and a more meaningful near-term asset quality buffer," analysts at Nomura said.

The scheme is directed at helping businesses maintain their operations, protect jobs, and sustain supply chains. The proposed credit guarantee scheme is a major step to help businesses, particularly MSMEs and airline sector, to ensure their additional working capital needs, are catered by the Banks & foreign institutions.

The scheme will help sustain the businesses and prevent job losses by providing timely liquidity. The scheme will also promote uninterrupted domestic production and maintain the resilience of the ecosystem.