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.)
http://www.moneylife.in/article/lack-of-oversight-on-credit-guarantees-raises-concerns/48344.html
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