Lack of oversight on credit guarantees raises concerns
Just a year back, Pradeep Malgaonkar, the chief executive (CEO) of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme was extolling the great strides it made in the geographical space of such guarantees. The Trust has issued cumulative guarantees to 23.23 lakh MSE loans involving an aggregate credit of Rs1.08 lakh crore over the past 16 years. Its corpus grew to Rs4,328 crore as of 31 March 2016. About 133 member lending institutions are participating in the scheme.
But the Reserve Bank of India (RBI) in its Annual Report for 2016 expressed concerns about overleveraging of corpus and the way the guarantee scheme is functioning. Information asymmetry and adverse selection on the part of member lending institutions seem to worry the regulator. More worrisome issue is the absence of regulatory oversight on this institution.
The structure of the Fund is such that government contributes four times that of Small Industries Development Bank of India (SIDBI). The Funds from this corpus are invested in several long-term securities with accumulated returns. Any default payout is adjusted using these funds and returns from them.
Since the Corpus for the Trust is contributed by the Government of India (GoI) and SIDBI, the guarantee for the leveraged loans is treated as sovereign guarantee and therefore under Basel II regulations. Banks are exempt from making provisions against the loans guaranteed by the CGTMSE when they become non-performing assets (NPAs). Such exemption is available because the guarantees are also shown as contingent liabilities of the GoI in its Budget annually.
The CGTMSE’s self-image is that it has reached a level of maturity in handling the processes enabling it to extend the cover within a week of receipt of applications as also release the claims within a fortnight.
Although it expressed willingness to work with state governments through special schemes the first state that expressed willingness, Kerala had to backtrack as the CGTMSE wanted it to be a contingent liability of the state government. This condition in effect means that there is virtually no risk sharing by the CGTMSE. Further, for the state government such provisioning would affect the fiscal responsibility and budget management (FRBM).
The National Credit Guarantee Trust Co under the Union Ministry of Finance has released different loan products for Micro Units Development and Refinance Agency (MUDRA), low cost housing loans of National Housing Corp (NHC) and education Loans and these are on the same technology platform of CGTMSE. The CGTMSE charges a service fee of Rs0.35%. In effect, the CGTMSE is managing the entire gamut of risks attached to the micro, small and medium enterprises (MSEs), retail loans under MUDRA, education and housing with no regulatory oversight. This should be naturally a cause for worry.
Other Guarantee schemes are that of the Industrial Finance Corp of India (IFCI) that opened exclusive cover for the entities set up for the scheduled caste entrepreneurs. While more than 90% of MSMEs, according to the Fourth MSME Census constitute proprietary units, and only 0.2% is in the corporate domain, it is doubtful whether the scheme would ever take off.
International Experiences in Guarantee and Credit Insurance
Taiwan stands out in the support to the SME sector. Its guarantee fund has been functioning effectively because it works in an ecosystem unique in the world. The Guidance System under its Ministry of Economic Affairs covers eleven portfolios to reinforce the guarantee mechanism. It has only a few risks to cover: start-up and incubation, management, finance, quality up gradation, production technologies, marketing support, information management, mutual aid and collaboration, pollution prevention, industrial safety and research and development. SME Agency, Bureau of Industrial Development and Bureau of Foreign Trade and Department of Commerce, and the Department of Industrial Technology are held responsible for SME Development – the prime engine of the country’s growth.
Other countries that are extending credit guarantee and credit insurance mechanisms are – Chile, Malaysia and Italy. For example, Chile has CEPRI (Centro De Productividad Integral) as the first private second-tier institution consisting of manufacturing associations and companies, covering about 10,000 companies of a broad variety of sectors. The CFPRI receives 25% commission from the government and it provides the Government a guarantee through a bank or insurance company covering all funds received until each project is completed and accepted. Mexico and Brazil implement more support services programmes for the development of SME sector and not specifically provide guarantees. But they ensure that the services generate responsible entrepreneurship.
Other countries like Italy that has a large cluster based lending programme supported by the United Nations Organization for Industrial Development (UNIDO), Sri Lanka and Malaysia operate guarantee schemes at a guarantee fees of 1% to 3% of the loan to guarantee up to 80%. One major problem noticed has been sustainability as the funds are provided either by the donors or the governments. Most guarantee funds cover investments in production facilities and few are prepared to guarantee the financing of working capital.
In many cases SMEs have been granted financing for investment but have not been able to raise funds to implement the investment because guarantees for the financing of working capital were considered too risky, says a report from the UNCTAD: Development Strategies and Support Services for SMEs (2000): Issues concerning SMEs’ Access to finance)
Hopefully the one-man Committee, the Prabhatkumar Committee, appointed by the Prime Minster would look at the issues comprehensively in consultation with the RBI, SIDBI and the GoI and consider emulating the Taiwanese model.
(Dr Yerram Raju Behara or Dr B Yerram Raju is a former senior executive of SBI and an economist and risk management specialist. He is also MSME Lead Consultant for the Government of Telangana. The views expressed in the article are his personal.)