Explainer: What is loan guarantee scheme? What is the benefit of the common man from the announcements of the Finance Minister?

On Tuesday, Finance Minister Nirmala Sitharaman announced a new loan guarantee scheme for the health and tourism sector to bring the country’s economy battling Corona back on track . So at the same time, the ECLGS started last year for MSME etc. has also been expanded. But do you know what is this loan guarantee scheme and how does it benefit the common man or the economy. Learn here…

Whenever we go to take any kind of loan from the bank, the bank asks for the guarantee. In case of home loan, the guarantee is the papers of your house. Whereas in other types of loans, a person becomes the guarantor. The job of the guarantor is to assure the bank that the person taking the loan will repay the loan and if it is not repaid, it will be his responsibility.

The credit guarantee scheme of the government is in a way to assure the banks that they should not hesitate to give loans to the needy people, because the government guarantee will be there on the loan they distribute under this scheme. That is, if the loan is not recovered, the government will give that much money to the bank. But does this reduce the borrower’s responsibility to repay the loan?

In the credit guarantee scheme, even though the government becomes the guarantor of the loan, it does not mean that the borrower can avoid repaying the loan. The responsibility of repaying the loan remains on the borrower as before. If he fails to repay the loan, he will be considered as a defaulter, his CIBIL will be bad and he will face problem in availing the loan in future.

The common man will benefit from the loan guarantee scheme that whenever he applies for a loan in the bank under the scheme, the bank will not hesitate to give the loan. Because due to the government’s guarantee, the bank’s risk associated with giving loan will be of the government. In such a situation, people will be able to get loans easily and they will be able to fulfill their needs.

Nowadays, there are also options like loan insurance in the market. These also help in reducing the risk of the bank and act as a guarantor for the borrower. Under loan insurance, the borrower has to pay a fixed amount and in return, the insurance company is responsible for his entire loan. If any untoward incident happens to the borrower during the tenure of the loan, the remaining amount of the loan is paid by the insurance company to the bank and in this case the guarantor at the time of taking the loan is relieved of the responsibility of repaying the loan.

The government’s loan guarantee scheme works to increase cash flow in the economy. When the risk associated with giving a bank loan is reduced, then people get loans easily. This increases the cash flow in the economy and helps in speeding up the stalled activities. In this way the wheel of the economy starts spinning again.