Observations on credit guarantee schemes

Ananth has an oped that shines light on the important reform area of SME credit. I agree with the broader point about reforms to the credit guarantee schemes and unlocking more value from them. 

A few additional points 

1. This is an example of an area requiring a clear policy-focused research agenda. Perhaps for SIDBI to commission?

Guarantees assume fiscal support. It would be useful to consolidate the annual fiscal outgo from all the different guarantee schemes for the past few years.

I also assume guarantees have a twin objective - unlock more capital AND for certain categories of borrowers. The challenge then is this - given this fiscal outgo, what forms or structures of guarantees can best serve this objective? What can empirical analysis of lending practices among different lenders inform us in this regard? What are the global best practices on this? 

This can be invaluable in the design of a good guarantee scheme. This would also be a good example of policy-relevant research.

2. For sure guarantees are an important instrument. But we should be realistic in our expectations. I am not optimistic that there is any type(s) of guarantee program(s) can unlock extra resources of anything even remotely close to ₹10 trillion from a ₹1 trillion guarantee. The weak interest in the recently announced 100% credit guarantee scheme is a case in point. 

The conventional wisdom is that the binding constraint faced by MSMEs to accessing credit is one of supply availability. Instead, for MSMEs (at least the small enterprises) what if the greater binding constraints are cost of capital, excessive risk-aversion and gate-keeping by lenders, timeliness and convenience of access, and so on? In other words, the availability of capital at the right price and right level of accessibility. 

Incidentally, credit-guarantees have been the holy grail for multi-lateral infrastructure and development finance lending - offer some guarantees to unlock private capital from elsewhere, especially domestic credit sources. But the limited success with the World Bank's Multilateral Investment Guarantee Agency (MIGA) underscores the challenge. 

3. The oped writes,

While SIDBI’s Credit Guarantee Fund Trust for Micro and Small Enterprises is a credit guarantee programme, it guarantees MSME customers individually and offers fairly generous credit coverage in theory. However, all banks report significant delays in payment of these guaranteed amounts. The low off-take of a 100% guarantee structure announced in the context of the MSME covid relief measures, particularly among private banks, is a reflection of the low credibility of the guarantee administration.

This underlines the importance of the small details of such programs - ease of borrowers access to credit, ease of reimbursement claims etc - which are almost always the difference between a good program and an unsuccessful one. I blogged earlier about the same challenge with initiatives like eNAM and TReDS.

4. Finally, in this working paper, I have discussed the issue of Development Finance Institution (DFIs) meeting their development mandate and the problems of DFI governance, from both the global and Indian experiences. I also proposed eight design features of a new generation of DFI.