Special Workshop on Sourcing and Financing of
Technology for Small & Medium-sized Enterprises
Credit Guarantee Schemes for SSI
By
N.Venkatasubramanyan
Chief Executive Officer
Credit Guarantee Fund Trust for Small Industries
15:45 hrs –16:15 hrs
December 4, 2001
APCTT, New Delhi
Subramanyan" <nvenkats@hotmail.com>
Credit Guarantee Schemes
– A global perspective
Banks view lending to small business as an activity with certain
inherent difficulties and not a profitable proposition on account of –
- high fixed cost element in appraising loan proposals;
- problem of asymmetric information; and
- inadequate collateral to compensate the risk proceeds
In financial markets, which are subject to Government policy controls,
small business is given a priority sector status for targeted lending.
With deregulation and privatisation, direct lending per se may not be
effective tool. Alternative mechanisms to be found to enhance credit
to the targeted sectors.
(1)
Economic Function of Credit Guarantee Scheme:
It is moot point whether guarantee schemes can be justified
from a free-market economics perspective.
Where there is market imperfection of some kind, requiring
Govt. to address the need and to enable credit to targeted
segments, Credit Guarantee Scheme play a role.
Where there is no such subsidy element is involved, economic
function of a self-sustaining guarantee scheme is to develop
innovative products like securitisation of guaranteed loans.
The key test of benefit of guarantee schemes is any additional
lending to the targeted groups.
The ideal guarantee scheme is one which helps banks
gradually moving away from a completely risk averse stance
towards SMEs.
2
As compared to other kinds of intervention, guarantee schemes
have a number of attractive features. Savings are not being
pre-impted and credit is not being subsidised. Schemes in
principle are working with the grain of the market and not
against it both static and dynamic sense because what is
provided is guarantee capacity on the basis of credible reserve
fund of some kind, and not the loanable funds themselves,
considerable financial leverage can be achieved.
Guarantee schemes are acting as a financial instrument for
stimulating business development.
Even though SME lending schemes have in the past, on
occasions, proved ‘more risky’ and have involved a greater
number of loan losses and defaults, in reality, experience in
developed economies seem to indicate that with appropriate
screening by the lenders / guarantors and effective portfolio
management and debt collection, most SME portfolios have a
default rate of less than 5%.
In developed economies, the guarantee schemes have smaller
subsidy element as compared to the economic gains.
Understanding the political, economic, financial and competitive
aspects of the environment in which the guarantee scheme is
operating is essential, if any judgements are to be made about
its contribution in relation to the objectives set out for it.
The dangers are obvious in schemes which are politically
driven, not set within a sensible economic policy framework,
and which provides no commercial incentives for banks to
undertake guaranteed loan activity.
Where the guarantee scheme is set up as an instrument to
channel funds to certain targeted groups without a serious
3
concern as to the loss rates to be incurred, guarantee funds are
normally eroded quite quickly in these circumstances.
(2)
Economic context
Whether guarantee schemes will work only during the period of
buoyant macro economic conditions. There is no systematic
evidence for this. It is true however; that the launching or relaunching of number of schemes in Asia, for example, in Japan,
Korea, Indonesia and Malaysia were associated with a period
of rapid economic growth, particularly export lead growth.
Clearly as with all small business lending, default rates and
hence claims rates are likely to rise during recessions, [e.g.
Korea in 1990s]. This argument can in fact be turned around.
With the guarantee organisation to observe some of the risks
commercial banks may be more willing to lend to small firms
during recessionary conditions.
(3)
Financial context
In the 1970s & 1980s much small business credit in developing
countries was delivered using public sector liquidity at
subsidised rates [monetary policy being heavily interventionist
with no freedom to banks to set interest rates for both sides of
the balance sheets]. This resulted in excess demand and
rationing inadequate spreads to cover operating costs. Banks
had no incentives to select borrowers.
Directed lending to SME sector is a policy stance in some
developing countries. Targets are set by Central Banks in terms
of percentage of Assets or Deposits or in absolute amounts.
Sometimes penalty waiver, special levies of deposits to be held
at the Central Bank or with refinance institutions. Guarantee
Scheme may provide a legitimate means to help banks to fulfil
SME lending targets if it allows a substantial part of the
associated risks to be effectively removed from the balance
sheets in return for a reasonable premium. Even if all or part of
4
the premium can be passed to borrowers, the level of
participation in the scheme will normally be distorted and
consequently so will its default rate.
It is the Bank’s risk of borrower defaults that a guarantee
scheme is designed to reduce [in Paraguay in 1970s, a
Scheme supported by USAID, Banks were either unable or
unwilling to lend their own funds to SMEs even with the
guarantee which led to the collapse of the scheme] It can be
made an attractive preposition if liquidity aspect is addressed.
For example, in USA and Spain secondary market has been
developed for securitisation of guaranteed loans.
(4)
The Competitive Context
If there is little or no business incentive for banks to use a
guarantee scheme, it will be active only to the extent that
external regulatory or political pressure or public relations gains
have an influence. SME borrowers represents potentially a
significant segment of banks business. Though they represent
a marginal market.
As a general rule, banks, which have plenty of profitable
opportunities outside the SME sector, are much less likely to
adopt the guarantee scheme as a serious business strategy.
Many schemes have low maximum lending limits and are
restricted to small-scale borrowers as a part of the policy
targeting. This restricts use of the scheme for upper end of the
SMEs requiring larger finance unless banks are encouraged to
collateralise such finances.
Guarantee scheme in a fairly uncompetitive market can result in
higher effective profit margin for banks because Banks pass on
full guarantee premium to the borrower. However, some
5
schemes have restrictions on the maximum rates that can be
charged;
Where the guarantee scheme is well established in a
competitive market, interest rates on guaranteed loans can be
driven down by market forces so that the banks’ profit margin is
reduced to reflect their lower risks, while the cost to the
borrower, including the guarantee premium, will be only slightly
higher than that of unguaranteed loans. [e.g. in Japan,
Germany, UK and USA]
II.
ODA Study – Comparitive International Studies of Credit
Guarantee Schemes (Source : Graham Bannock & Partners
Ltd.)
1.
2.
3.
4.
1.
Financial Instrument Target:
Enterprise Group Target
Form of Organisation and Funding
Delivery Mechanism
Financial Instrument Target
Central thrust of guarantee schemes is the guaranteeing of
lending for working capital needs, fixed capital investments or
both.
There are special guarantee schemes like Export Credit
Insurance or Crop Insurance. These are outside the scope of
our discussion.
Eligibility of schemes are determined based on maximum loan
size, minimum loan amount, borrower segment. Fixed Capital
investment often may include land purchase, some schemes
allow fixed interest rates, some both fixed and floating rate of
interests. Certain schemes disallow lender from taking personal
guarantee of the entrepreneur while others insist on it as it is
not a collateral but it is evidence of commitment to repay. Some
6
schemes disallow third party guarantee and some partial
collateral to be obtained.
2.
Enterprise Group Target
Variations here are the size, sector and age of the firms. Size
is depend in terms of employment criteria, investment limit per
turnover.
Definition in terms of Employment maxima is
prevalent in many countries.
Financial services and real estates are the more common
exclusions under guarantee schemes.
In both advanced and developing economies, schemes restrict
eligibility to firms, which are wholly, or majority owned. There
are schemes which are targeted explicitly or implicitly or certain
ethnic groups women or backward communities where a policy
aim is to encourage entrepreneurship. Certain schemes in
advanced economies are linked to policy objectives,
environmental improvement [Norway and Netherlands] and
encouragement or young entrepreneurs [Japan and Korea]
A number of schemes in developing countries are narrowly
targeted on transformation lending.
3.
Form of Organisation and Funding
There are unfunded schemes [pay as you go] and there are
funded schemes.
Once a separate fund is created, there has to be a minimum
level of organisation and accountability.
In UK and the Netherlands, guarantees are directly provided by
Govt. Ministries through budget allocations. In the USA by the
SBA, a federal agency. Where there is no separate guarantor
organisation, the power to grant guarantees is often laid down
in a piece of enabling legislation.
7
The constitution of Credit Guarantee Corporation may be
subject of a special legislation [Asian countries and in Europe]
or can be established under the General Rule of Financial
Institutions, Credit Cooperatives, etc.
The Corporation may be especially exempt from tax as a nonprofit organisation or been subject to favourable treatment, if
tax exemption is not given.
Where guarantee organisation qualifies as a body owned by
Sovereign Government, banks do not have to reserve against
liabilities it has guaranteed [India].
Donor agencies, bilateral, multi-lateral are involved in providing
technical assistance for setting up as also in contributing to the
financial capacity of the guaranteeing organisation. [Poland
backed by PHRD, Kenyan Scheme backed by ODA, Peru
scheme backed by Netherland Aid Programme]
Financial structure of the funded credit guarantee organisation
can take various forms. In some cases banks are shareholders.
In some cases, establishment of the guarantee corporation is
initiated by the banking authorities or at the behest of the
government initiative.
Funding to the Credit Guarantee Corporation is provided
through special borrowing on short terms and grant support
from govt. sources.
The financial engineering of the
corporation is a key factor in determining its guarantee
capacity. It cannot borrow on commercial terms from the
financial sector or has the capacity to tap the market directly.
Credit Guarantee Corporation provides other services to SMEs
such as management consulting and earns fee-based income.
8
Mutual Guarantee Organisations [MGO] are contributed by
members of SMEs, Chambers of Commerce, Trade
Associations, Development Agencies and local Govt. bodies.
The mutual form of organisation for the guarantee issuing
institution though founded and working well in Europe, the
concept has rarely been exported to other parts of the world.
Attempts to do so in West Africa have not been successful
[Balkenhol 1992], a Scheme in Kenya supported by KfW,
Germany and USAID collapsed in 1985 while another in
Philippines has not progressed well.
The participation of the banks, which utilise guarantee services
as partners in the equity of a national, or a regional guarantee
corporation is quite common feature of recently created
schemes in both advanced and developing economies.
The most complex schemes involve more than one tier of
guarantee organisation. The upper tier at the National level
provides reinsurance or co-guarantee to the lower tier at
Regional or Local level [Japan and Spain – Two Tier Systems].
Developing country schemes tend not to have genuine
reinsurance elements. GCs used as a channel to reimburse
banks on losses they have suffered from onlending on govt.
sponsored credit programmes.
A unique organisation form, which provides no domestic
guarantee funding capacity, is the Loan Portfolio Guarantee
scheme [LPG] operated by USAID. This is a series of
international bilateral commercial guarantee agreements
between a dept. of USAID called the Centre for Growth and
some 60 individual commercial banks in 20 or so countries.
The arrangement allows for the maximum guarantee facility,
lasting initially for three years but renewable, in multiples of
USD 0.5m, out of which the bank can allocate risks from its
portfolio of eligible loans. Banks pay one time facility fee of
9
0.5% and a quarter usage fee, which varies from 1.5% to 2%
p.a. The risk is sharing percentage is 50 in case of normal loan
and upto 70 in case of loans to micro enterprises. 33 countries
have so far benefited by the LPG programme. Geographical
distribution of the portfolio has been in the order of 32% in
Africa / Near East Region, 36% in Asia, 27% Latin America and
5% in Europe.
Schemes, whose delivery mechanisms, in a variety of
commercial and financial environments, have allowed them to
achieve a high level of activity, without running into financial
problems, are the most important models. This implies that
there is a successful balance between incentives, risks,
responsibilities and financial capacity.
4.
Design Features
A variety of types of guarantee schemes having different
objectives and working in different environments are being
implemented in various parts of the globe. Nevertheless, there
are some necessary conditions for a guarantee mechanism to
be effective and sustainable. These are :
 Banks can make profitable guaranteed loans to the target
population.
 Risk is shared between the borrower, lender and the
guarantor
 The level of guarantee coverage reflects the risks
 Guarantee Fees are high enough to prevent banks using the
guarantee for loans that do not need it, but low enough not
to put off borrowers.
 Fees and investment income for the guarantor are high
enough to cover expenses and defaults
 The guarantor is credible; pays out quickly and in welldefined circumstances.
 Lenders achieve good repayment through prudent loan
screening, monitoring and collection procedures.
10
 Banks desired to work with the target group, but lacks
experience and information.
Design features are grouped under the following headings:
1.
2.
3.
4.
5.
6.
Eligibility Criteria [Lenders / Borrowers]
Risk Sharing
Delivery Mechanisms
Governance of Guarantee Organisation
Composition of Guarantee Fund
Fee Structure
Once goals are set for a Guarantee Organisation, the need to
have a coherent marketing plan to achieve them, either by
direct communication with the targeted SME groups or through
the banks as the distribution channel becomes a primary focus.
There is also a need to monitor the progress and adjust the
strategy accordingly.
Following are the steps involved in running a guarantee
operation.
1)
2)
3)
4)
5)
6)
Marketing the guarantee service to lenders and to SMEs
Approving applications for guarantee cover
Issue of guarantee cover.
Claims handling
Post claim loss recovery
Managing guarantor – lender relations.
The marketing messages to lenders need to emphasise:
 The commercial benefits in terms of increased profitable
business.
 The simplicity and low cost of the guarantee issuing
procedures.
11
 The credibility of the guarantee and the clarity of payment
triggers.
 The high standards expected of lenders in extending credit,
monitoring and recovery of SME loans.
The marketing stance has to be backed up by delivery of
efficient performance in processing guarantee transactions and
in meeting claims; otherwise the trust of lenders can be lost.
Marketing activity cannot be separated from education and
training. Many schemes around the world have adopted the
practice of holding regular small-scale seminars for local bank
managers and representatives of the SMEs and of offering
training materials for use by the banks’ lending officers.
The lenders can be requested to set a minimum target of
guaranteed loan transactions per branch, so that this will
ensure that all branches have some familiarity with the
guarantee scheme. Most powerful is demonstrating that the
guarantee scheme contributes significantly to a branch’s overall
performance.
The marketing message has to be very clear, particularly to
the borrowers. It should not give a signal to borrower to
increase the danger of moral hazard by allowing any
suggestion that the scheme enables people to obtain bank
credit, which does not have to be repaid, because default
will be refunded by a public body.
5.
Approving applications:
There are two routes. One is automatic guarantee cover.
Another is screening of individual proposal.
Where there is an accreditation so that banks are free to
approve eligible loans for guarantee without prior referral to the
guarantor, the automatic route is followed. On a fully automatic
12
scheme (Indonesia, Pakistan), there is little or no information
flow to the guarantor except when claims arise. Fees are
based on priority sector lending declarations to the Central
Bank.
Where the procedure requires guarantor’s prior approval, two
variance are possible. Either the borrower approaches the
guarantee first and obtains a certificate, which can then be
used to negotiate a loan with an accredited bank. Or bank is
well aware of the eligibility norms / conditions of the scheme
and uses the standard form (specified by the guarantor) to
cover all necessary points in a checklist. This form is then
forwarded to the guarantor for approval of guarantee. The form
should be designed ideally to provide all the information that
bank requires for loan underwriting as well as the guarantor’s
need so that information is recorded once only (in providing
technical assistance to the newly set up guarantee scheme in
various East European countries, notably Slovakia, Slovenia,
Czech republic, Hungary and Romania, the Austrian Burges
Forderungsbank paid considerable attention to optimising
documentation and decision making procedures.
6.
Claims Handling:
a. Default events triggering claims
b. Claims validation
In early guarantee schemes initiated in developing countries
tended to ignore putting into place suitable procedures with
adequate staffing for handling claims for payment of guarantee.
There is a need to have clarity in determining the default events
triggering claims. When drafting the claims trigger conditions it
is vital to have a realistic perception of practicable and time
scale of legal recovery processes Proof that legal processes
have been initiated by bankruptcy or asset recovery may be a
13
more reasonable standard than obtaining judgement in many
countries.
The arrangements for triggering and validations of claims
should work in a complementary manner, and a more stringent
approach to validation can be justified where guarantee
approval has been delegated under a portfolio arrangement.
The most common trigger event is fixed period after the
occurrence of a single missed payment of a amortisation
instalment (commonly known as NPA norms, set by the Central
Bank of a country).
Trigger events can include a medium period from laon
disbursement before any claim is admitted (lock in period).
This can deter over credit appraisal of short-term loans by
lenders.
The toughest trigger condition is to prefer claim after all legal
processes have been exhausted.(Israel, Egypt, Morroco)
The severest validation is one where every claim is subject to
documentary audit before payment is made (Pakistan).
There are schemes, which require ex-ante validation only for
larger claims and use a random or occasional procedure expost for smaller claims.
In principle, some rejection rate is desirable to keep bank
procedures under discipline, but very high rejection rates are
usually a sign that things are going wrong.
14
Reasonable requirements for triggering a claim payout are
proof that the following have occurred:
 Arrears and non-payments of loans for 90 days
 Lender has contacted defaulters, sending out warning
notices on time
 Calling in of total loan after time has lapsed and warning
given and ignored
 Writing-off of loan in accounts of lending institution
 Initiation of legal steps to foreclose on any security (primary
or collateral) and for recovery of loan.
7.
Interest element in claims
Typically the best schemes allow interest up to the date of the
default event (NPA determining date).
Some schemes permit interest on term loan and working capital
loan. In some schemes, interest on term loan is not permitted
to be covered under the guarantee requiring the lender to bear
the risk.
8.
Post claim loss recovery
Guarantor in some schemes exercises subrogation rights,
whereby; the responsibility is assigned to the guarantor for
recovery from sale of assets of the defaulter borrower. In some
schemes, it is responsibility of the lender who has better control
over / access to the borrower.
While post claim recovery rate is as high as 54% of the
subrogated amount (Japan) and ranging from 22% – 25% in
other developed economies (Korea). The recovery is as low as
7% (India).
9.
Managing Guarantor Lender Relations
Success of guarantee schemes depends first and foremost on
obtaining the collaboration on participation of the lending banks.
15
Many failures of the earlier guarantee schemes in many
countries occurred because the banks were reluctant to take
part, not holding the guarantee to be credible or cost effective.
Both the parties have to be responsible in playing the
respective roles sincerely. The guarantor should approve
guarantees and settle claims without delay. The lender should
also take due care in apprising loan request, adequately
supervise the borrower and should not fail to pursue debt
collection vigorously.
More recently guarantee organisations have become aware of
the need to generate confidence in the banks and have spelled
out in much greater detail the situation and procedures for
defining their respective roles and relationships and for
obtaining practical cover under the guarantee. This situation
can be helped greatly if the guarantor itself has a structure
allowing participating banks a voice in its operational
arrangements. Conflicts of interest, which might occasionally
arise on an individual transaction basis, should not prevent this
relationship from being fruitful.
Where the scheme is participated by several banks,
comparative monitoring of individual lender is possible,
examining reasons for larger claims and if the lending
behaviour is in any way falling below agreed standards in the
banking industry or breaking any eligibility condition, this can be
dealt with by reducing the coverage or increasing the guarantee
fee for the particular bank. At times, accreditation rights or
even complete participation may have to be curtailed at least
temporarily while the problem is investigated.
The ability of the banks to benefit commercially, directly
and indirectly from their use of guarantee scheme is of
course paramount and it is an issue, which the guarantor
must have in mind, in managing the relationship.
16
The cost of administering the guarantee scheme can be
reduced by use of technology or appropriate software. The
data compiled by guarantor on the defaulted borrowers can be
shared with the lenders.
There could be interest rate ceiling restricting the spread of the
lender so as to ensure cost effective lending to help a targeted
segment of entrepreneurs (first generation / young / women
entrepreneurs). However, in a competitive market place there
may be exceptional cases where interest ceilings are justified.
10.
Managerial competence
Well-designed schemes can be badly implemented and fail if
the resources to introduce and manage them are inadequate.
Guarantees are a relatively sophisticated financial instrument,
and running a fund on a sound actuarial basis in difficult or
unstable economic or financial conditions is not easy. The
ability to negotiate guarantee arrangements either on an
individual transaction or ona portfolio basis with commercial
bankers, who may be very experienced and seeking a financial
advantage, is a clear requirement for guarantor staff.
A key requirement is for the guarantee to be credible to
bankers. Partly this is a matter of design, for example in the
setting of fair and transparent conditions under which a claim
will be met. Partly though, it is a matter of sound management.
Payments to meet claims need to be made promptly and
according to the rules. A banker’s trust is hard to earn, and
once lost even harder to recover.
Lenders accredited to the guarantee scheme need their
lending, delegated approval, and delegated post-claim recovery
activities monitored. Adequately marketing the scheme directly,
or through lenders, to the target group can be particularly
difficult to achieve cost effectively. The question of whether or
17
not the organisation should have its own branch network is
relevant here. People with the right level of commercial and
financial experience have to be attracted and offered
appropriate rewards and career development opportunities in
the guarantee organisation.
It is quite common for the guarantee organisation to offer
additional services to borrowers or lenders. These may include
credit references, project appraisals, business plan preparation,
and training of bankers and / or SME managers.
------------------------------------------------------------------------------------
18
Indian experience of Credit Guarantee Scheme
Since 1960, a Govt. sponsored scheme administered through a
special Section of the Central Bank of the country, the Reserve
Bank of India, had been providing credit guarantees to small
scale industries as defined in priority lending targets. Schemes
were designed for meeting the needs of specific borrowers viz.
industrial borrowers and non-industrial borrowers. There were
two large schemes, small loans guarantee schemes 1971 for
small non industrial borrowers and small scale industries
schemes 1981 for units covered by the small scale industries
definition which includes cottage, khadi, village industries and
artisans. The scheme participation was made mandatory for
the lending institutions, which was relaxed for SSI scheme.
Deposit Insurance and Credit Guarantee Corporation (DICGC),
a wholly owned subsidiary of Reserve Bank of India, operated
the schemes.
The schemes were operated on an automatic bulk coverage
basis. The guarantee fee was payable in advance at 2.5% for
small loan guarantee schemes and 1.5% for SSI schemes,
respectively on whole of the outstanding balance under priority
sector advances. The guarantee cover, which was initially for
90%, was brought down to 60% by 1985. The claims were not
allowed until a 3-year period has passed from disbursal. From
1995, before a claim was preferred the bank had to write off the
loan rather than treating it as a bad and doubtful of recovery.
Both schemes have operated at a very high volume of claims
activity, probably because banks could achieve at least some
recovery for losses on the huge volume of directed lending to
the priority sector. Though, the guarantee schemes served their
purposes in the initial period, owing to limitation of the capital
base and investment income, it could not meet the claims
19
demand. Further, on account of blanket automatic route, many
loans were also reportedly unwritten by banks without due
diligence. Certain stringent conditions were brought in to
discourage excess claim activity.
By early 1990s, the guarantee scheme had lost its flavour as
many banks had started withdrawing their participation. The
S.L. Kapur Committee, appointed by Reserve Bank of India to
look into the credit related aspects of SSI, recommended that
the DICGC Scheme be scrapped and replaced by a more
objective and suitable scheme to be operated by a new
Corporation. The Committee while making recommendation
had in its view the guarantee scheme being operated by SBA.
The Committee also recommended that the new Corporation
should cover all loans sanctioned by public sector banks and
financial institutions where the principal amount does not
exceed Rs.10 lakh. According to the Committee, the new
Corporation should have a corpus of Rs.500 crore to be
contributed by the Govt. of India, SIDBI, NABARD, State
Governments and Commercial Banks.
The recommendations of the S.L. Kapur Committee have been
examined by the Govt., which felt a need for launching a new
credit guarantee scheme to address the particular issue of
problems faced by tiny units in the small-scale industry in
arranging collateral security for accessing formal banking credit.
This initiated the process of launching a new Credit Guarantee
Scheme for Small Industries.
20
Credit Guarantee Fund Scheme for Small Industries
The small industries sector, which has a wide spectrum of
industries in small, tiny and cottage segments, plays pivotal role
in the development of Indian economy. Though the contribution
from SSIs has been significant to the overall economic
development of the country, the sector has been beset with
certain handicaps. One of the main problems is non-availability
of adequate credit from the banking system without collateral
security or third party guarantee. To resolve the problem, the
Ministry of Small Scale Industry, Govt. of India, in consultation
with Small Industries Development Bank of India (SIDBI)
formulated the Credit Guarantee Fund Scheme for Small
Industries (CGFSI).
The objective of the Credit Guarantee Scheme is to guarantee
the loans and advances up to Rs.25 lakh so as to help the new
and existing industrial units in the SSI sector including units in
Information Technology and Software Industry, in getting
collateral-free/third-party guarantee free credit from eligible
lending institutions viz. Scheduled Commercial Banks, select
Regional Rural Banks (RRBs) or such of those institutions as
may be prescribed by the Government. Eligible RRBs are
those, which fall in the category of ‘sustainable viability’. The
scope of the Scheme with regard to eligible activity,
eligible institutions and eligible credit ceiling may be
modified depending on the needs.
The guarantee cover under CGFSI is available for credit
facilities extended by eligible lending institutions, in respect of a
single eligible borrower, not exceeding Rs.25 lakh by way of
term loan and / or working capital facilities after entering into an
agreement with the Trust. CGTSI provides guarantee cover of
up to 75% of the amount of the credit facility extended by the
21
lending institution to an eligible borrower, subject to a maximum
guarantee cover of Rs.18.75 lakh per borrower.
1.
Guarantee Fee and Annual Service Fee
The Trust charges one time guarantee fee @ 2.5% of the
amount sanctioned by the Member Lending Institution and
annual service fee @ 1% p.a. on the outstanding amount, as on
31st March of every year, to the debit of the borrower’s account,
covered under the scheme.
2.
Administrator of the Scheme
GOI and SIDBI, who have executed an Indenture of Trust, set
up Credit Guarantee Fund Trust for Small Industries (CGTSI)
on July 27, 2000 to administer the Scheme. The Trust’s
registered office is at Nariman Bhavan, 227, V.K. Shah Marg,
Nariman
Point,
Mumbai-400
021.
Website
www.creditguarantee.org.in
3.
B2B on-line transactions
Transparency and real-time service to the customers are the
two sides of technology based operating environment.
Towards this end, CGTSI operations are crafted in tune with the
emerging trend. CGTSI has taken steps to set up a fully
integrated on-line system that can process variety of
transactions in large volumes and cater to customer information
more efficiently.
4.
Corpus Fund of CGTSI
During FY2000-01, GOI and SIDBI contributed Rs.125 crore in
the ratio of 4:1 towards the Corpus Fund of CGTSI.
The
settlors have contributed Rs.75 crore in 2001-02, thus
increasing the fund to Rs.200 crore. The Settlors have agreed
to enhance the corpus fund of CGTSI up to Rs.2500 crore, in
the coming years, depending on the needs.
22
5.
Member Lending Institutions
Since October 2000, eligible institutions have started becoming
Member Lending Institutions (MLIs) of CGTSI. As at the end of
October 31, 2001, 18 Public Sector Banks viz. Allahabad Bank,
Andhra Bank, Bank of Baroda, Bank of India, Bank of
Maharashtra, Canara Bank, Central Bank of India, Corporation
Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab
National Bank, Punjab & Sind Bank, Oriental Bank of
Commerce, Syndicate Bank, UCO Bank, Union Bank of India
and Vijaya Bank and 2 Private Sector Banks viz. HDFC Bank
and IDBI Bank have become MLIs of CGTSI. Besides, two
Regional Rural Bank, Sri Saraswathi Grammena Bank,
Adilabad and Prathama Bank, Moradabad, have become MLIs
of the Trust. As prescribed by GOI, NSIC and NEDFi have also
become Member Lending Institutions of the Trust.
6.
Implementation Status of the
Scheme as on October 31, 2001
Total No. of MLIs – 24
Active MLIs – 13
Units covered under the Scheme – 2143
Credit covered under the Scheme – Rs.16.33 crore
Project outlay of these units –Rs.23.62 crore
Expected sales turnover – Rs.88 crore
Employment generation by these units – 4898 persons
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Mutual Credit Guarantee Scheme
While the existing credit guarantee scheme operated by CGTSI
would help the lending institutions to assist SSIs in extending
credit without taking any collateral security, the question of
containing or minimizing the default rate is still to be addressed.
In such a situation, besides close monitoring of the assisted
units and maintaining better customer-relationship, a sort of
guarantee forthcoming forward from an Industry Association, in
which the borrower is a member, would certainly enhance the
lender’s confidence level. Perhaps, Project Screening
Committee of the Industry Association could select the
proposals of its members based on merits before passing on
the same to the bank for financial assistance. In such a
situation, the peer-level pressure brings in certain amount of
discipline among the borrowers in proper conduct of their
accounts. Such a measure will go a long way in increasing the
quality credit flow to SSIs. In this backdrop, CGTSI proposes to
experiment with the successful Italian model of Mutual Credit
Guarantee Scheme (MCGS) and introduce a suitable model for
India. Under MCGS, an Industry Association creates a Mutual
Guarantee Fund (MGF) through contributions from its member
industrial units. The corpus of MGF is leveraged by the
Industry Association to extend credit guarantee in respect of
loans sponsored by it and extended by a bank. CGTSI would
extend counter guarantee to such guarantees extended by
Industry Association so that it would enhance the credibility to
the Associations as also flow of credit to the targeted sector.
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