“Union Finance Minister Nirmala Sitharaman today announced a collateral-free loan scheme for 26 sectors which also includes Aviation Sector that were earmarked as “stressed” by the Reserve Bank of India-constituted KV Kamath committee in September. Under the newly-announced Emergency Credit Line Guarantee Scheme 2.0 (“ECLGS”), entities under the  stressed sector with outstanding dues of up to Rs 500 crore will be eligible to avail for collateral-free loans worth 20% of their dues. The additional loan will be available for a tenor of five years and will include an interest moratorium of one year.

One of the key challenges faced by the stressed sectors is severe liquidity crunch in the wake of low demand. Considering that the sectors like Aviation sector has been facing cash flow problems for a lot longer  due to limited operations due to the coronavirus-induced lockdown, a direct economic stimulus package for the sector would  have been a more effective reform measure. This is because even in the reform measures announced in May, unlike the countries like USA, Australia, Brazil which have announced aviation sector specific financial reliefs, no direct financial support was provided for the Aviation Sector, which has made the sector’s financial position vulnerable. However, ECLGS scheme could help provide “interim” liquidity support to the Aviation Sector by helping entitles meet its short term liabilities and working capital requirements, till demand recovers. Further, the aforesaid scheme with cap on interest rates could also help meet some of the financial needs of aviation sector, without any immediate strain on the fiscal position for the interim period” Poonam Verma (Partner) at J Sagar Associates