Contact Your Financial Adviser Money Making MC
29
September 2016
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| SME(The Total Investment & Insurance Solutions) |
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. The Total Investment & Insurance
Solutions
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. The Total Investment & Insurance Solutions
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. The Total Investment
& Insurance Solutions
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. The Total Investment & Insurance
Solutions
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.The Total Investment & Insurance
Solutions
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