Improve credit guarantee scheme to boost credit flows

: The medium and small enterprises (MSE) are major contributors to the Indian economy, both in terms of exports and employment. The main factors that limit their growth, more so when they are in start-up mode, is accessibility to institutional credit. Banks and other financial institutions shy away from extending credit as the perceived risk is high. To address these issues, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE) was set up by the government of India and SIDBI in 2000-01 with a corpus of Rs 125 crore. The objective was to create an institutional mechanism to support banks and financial institutions to ensure availability of credit facility and easy access to institutional funds to the MSE sector. CGFTMSE covers registered member lending institutions (MLI) which include Regional Rural Banks, public and private sector banks, foreign banks and financial institutions.

At the inception of the scheme, the focus was primarily on the manufacturing sector and recently its extension to the services sector has been approved. The scheme was initially targeted at SSI units and in July 2007 it was extended to cover all new and existing micro and small enterprises. The eligible loan limit under the scheme has been raised to Rs 1 crore from the earlier limit of Rs 25 lakh. To encourage micro enterprises and women entrepreneurs, the credit guarantee was raised from 75% to 80%. Annual additions were made continuously and the corpus balance for the year 2008-09 stands at Rs 1,754 crore. The CGFTMSE charges on time guarantee fee at the time of disbursement of loan and annual service charges for the loans covered.

How does one assess the performance of CGFTMSE? The world over, three parameters are used to evaluate the success of a credit guarantee scheme: financial additionality (FA), economic additionality (EA) and sustainability of scheme. Financial additionality refers to availability of funds to an SME that would not have been available in the absence of the scheme. Economic additionality refers to economic spillovers that accrue both at the beneficiary firm level and sector, because of increased access and availability of capital. The net cost of the administration of the scheme and the levels of EA & FA achieved indicate whether a credit guarantee scheme is economically sustainable.

While no impact assessment of the scheme has been available, some interesting insights emerged from...