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.
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 our survey of lending institutions and beneficiaries. The cumulative coverage for the year ending March, 2009 was 150,034 proposals with a total coverage of Rs 4,824 crore. Public sector banks, namely, the State Bank of India and Canara Bank have disbursed the highest amount of loans (around 30% of the cumulative coverage) while RRB’s disbursed only 4.5% of the same. Around 53% of the proposals covered pertained to the category of credit up to Rs 1 lakh while only 0.24% of the proposals pertained to the upper band of Rs 50-100 lakh. It is interesting to note that the claims paid cumulatively is only Rs 18.77 crore (0.38%) towards 784 cases. The amount of claims settled cumulatively is very low, indicating that the guarantee scheme has been used cautiously and prudently by banking institutions.
Lending patterns across banks revealed some useful data. Only 5% of the loans were disbursed to start-ups (less than two years) and majority of the disbursements were for primarily existing clients whose risk profiles were very well known. Some had obtained the credit as a term loan raising questions on intended risk-behaviour changes in the lending institutions. From a principal-agent perspective, the major weakness was the principal (CGFTMSE) not asking the financial institutions (agents) to use a different scoring model for start-ups and established firms or even across various industrial sectors. The result: many a needy entrepreneur could not access credit since on several parameters such as DSCR, leverage, etc, their business plans fell short of the traditional lending norms. Most significantly affected were high technology and capital intensive sectors such as alternative energy projects. CGFTMSE needs to bring out new norms favourable to start-ups to improve financial availability.
What changes should be brought about to improve financial availability? The current coverage of credit guarantee may be raised from Rs 1 crore to Rs 3 crore for certain capital intensive industries and accordingly the norms for project appraisal should be revised industry-wise. While limited and partnership firms are eligible for CGFTMSE funds, self-help groups (SHG) are not covered. SHGs with their effective peer-pressure norms and history of repayments could be targeted to increase the reach of the scheme. Currently, trading, training institutes and educational organisations are excluded under CGFTMSE scheme. With a growing need for private institutions in the training and educational arena and a burgeoning population, these enterprises are less likely to fail. From a gender perspective, women-led enterprises accessing the scheme were few and far between. To ensure more women-led enterprise inclusion, CGFTMSE can reduce the upfront fee by 1% and annual service fee to 0.5%.
One major weakness that needs to be addressed is the awareness about the programme. Many in the industry perceive this to be a ‘subsidy’ or a government-scheme (with all its unintended message of get and shove). Awareness at industrial incubation centres, even at institutes of higher learning such as National Institutes of Technology, and other autonomous institutions, is pretty low. Industrial associations have been the primary channel used till now to inform and educate SMEs about the credit fund. Many members of these associations would otherwise be the target of other schemes and hence training institutes, colleges and other student bodies should be targeted to raise the awareness among the public.
To summarise, it is a great initiative by the government which is performing reasonably well even though the reach has not grown as expected. If the above suggestions are considered and the norms were fine-tuned accordingly, then the performance of the scheme would improve significantly and benefit many more entrepreneurs.
The writer is associate consultant (Financial Consulting Group) at Browne & Mohan. Email: baruna@browneandmohan.com.