FAQ's
Q : What is a Credit Guarantee Fund?
A: A Credit Guarantee Fund is an entity set up to provide guarantees, usually to the
lender, pertaining to advances made to a specified category of borrowers. The credit
guarantee is an agreement by the Credit Guarantees Fund intended to provide, the
necessary incentive and comfort to the lender for extending need based credit to
the target client by means of providing surely for a responsible to pay the lender, if
the borrower fails to reply the loan, under certain circumstances.
Q : What does the guarantee support from Credit Guarantee Fund expect to
achieve?
A: The facility of guarantee support will ensure financing of viable projects, selection
of dependable customers, and sound lending practices by lender institutions. It will
take into account the specific requirements of their target clients. It will diversify
the risk and responsibilities between the borrower, lender and guarantor in order to
have sustainable operations in a professional and commercial manner.
Q: Are there Credit Guarantee Funds in India?
A: As per available information, there are three credit guarantee funds in India viz.
Deposit insurance and Credit Guarantee Corporation (DICGC), Credit Guarantee
Fund Trust for Small Industries (CGTSI) and Mutual Credit Guarantee Fund. The
Government of India promotes the first two funds whereas the third one is
supported by an NGO.
DICGC established in 1978 by the RBI has since stopped providing credit
guarantees. CGTSI was set up in July 2000 to encourage collateral free loans to all
small-scale industrial manufacturing units, including Information Technology and
software industrial units, which avail credit facilities up to Rs. 25 lakhs. All
Scheduled Commercial Banks select Regional Rural Banks and other institutions
notified by the Government of India are eligible to be covered by CGTSI.
The Indian Institute of Rural Development (IIRD), an NGO, is managing mutual
Credit Guarantee Fund. The objective of the scheme is to improve credit flow to
hand block printing textile clusters located in Bagru and Sanganer blocks of
Rajasthan. Here the artisans have organised themselves into homogeneous groups
of 10 - 12 members each. A corpus fund is created at the group level by each
member contributing , initially, a minimum sum of Rs. 5000/- . SIDBI makes a
matching contribution by way of interest free loans. The combined amount is
deposited with the lending agency as collateral security. The maximum loan
sanctioned to the group is twice the amount of such deposit. IIRD is currently in the
process of introducing the scheme in some pockets of Kerala & Tamilnadu.
Q: In which sectors can Credit Guarantee Funds play significant role in improving
access to small loans?
A: Agriculture, Small Scale Industries, Housing and MFIs.
Q: How will the credit guarantee mechanism help the MFI sector?
A: The demand for credit from MFI sector would increase substantially in future, but
the banks are still not ready to capture this opportunity. Bankers see financing MFIs
as highly risky because (i) MFIs cannot offer collateral (ii) MFIs are generally
informal bodies (iii) MFIs are not professionally managed (iv) Credit rating reports
on MFIs are not readily available to the general public and (v) a majority of MFIs do
not have equity. Guarantee mechanism can , therefore, enable the banks to step up
lending to MFIs.
Q: Ideally, who should set up Credit Guarantee Fund for MFIs?
A: Government of India has been showing lot of interest in promoting MFIs.
Therefore, a Guarantee Fund for MFIs set up and co promoted by Government of
India and Development Financial Institutions will go a long way in improving the
credit flow to the MFIs. The identified Development Financial Institution/s should
have sound understanding of the MFI sector. The initial corpus can be augmented
through funds from donors.
Q: What other roles can a Credit Guarantee Fund for MFIs play?
A: Many MFIs are not professionally managed. The fund can also focus on capacity
building of MFIs. Guarantee Fund should have a database on the MFIs in order to
make independent assessment of their credit- worthiness. The assessment of credit
-worthiness of MFIs by Guarantee Fund could make it easier for MFIs to attract
equity from other sources. This would help to ease the reluctance of banks to
finance MFIs because of their lack of equity.
Q: Can we think of any other guarantee mechanism for MFIs?
A: Network of MFIs can think of setting up of a mutual guarantee fund the corpus
for which can be built with the contribution from the member MFIs. Additional
contribution to the corpus can be sought from the donors and other sources. Apart
from providing guarantees, network can do the preliminary loan appraisals
emanating from member MFIs.
Intermediate institutions like Rashtriya Mahila Kosh can withdraw from direct
financing and use their resources for providing guarantees to the banks to enable
them to lend to MFIs. This would help in leveraging funds, as banks would have
greater confidence in providing loans to the partner of these intermediate
institutions. Banks would also acquire skills in appraisal of MFIs.
Q : What has been the experience of Indian MFIs in availing Credit Guarantees?
A : Some MFIs in India have already availed loans through the credit guarantees
mechanism . Cases of Share Microfin Limited (SML), Society for Promotion of Area
Resources Centre (SPARC) and Youth Charitable Organisation (YCO) are discussed
below:
SML has raised three loans from international sources. On account of exchange rate
risk, SML did not prefer to avail in foreign currency. Through the credit guarantee
mechanism, SML could raise equivalent amount in Indian currency without having to
bear the exchange rate risk. Deutsche Bank, Mumbai granted a term loan of Rs. 2.7
crores on the comfort of a guarantee letter issued by Deutsche Bank, Luxembourg
on the strength of a loan of US $ 600,000 sanctioned by Dexia Micro- credit Fund,
Luxembourg. Under a similar arrangement, SML has borrowed from Calvert
Foundation and CORDAID.
SPARC availed a loan of Rs. 80 lakhs from Citibank against the guarantee of
Homeless International, U.K. It borrowed Rs. 3 lakhs from HUDCO which was
guaranteed by Bank of Baroda on the strength of guarantee by Guarantee Fund,
Luxembourg. YCO raised loans from HDFC, HUDCO and Indian commercial banks
and Homeless International Guarantee Fund, UK, guaranteed these loans. The loans
provided by the lenders were 4 times the value of Pound Sterling deposit guarantee
provided by Homeless International.