Last month, as part of replies submitted to the estimates committee of the Lok Sabha, former RBI Governor Raghuram Rajan had warned about growing contingent liability at the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) as the next set of NPAs. However, the operating structure of CGTMSE shows Rajan’s comments are “mis”founded, more so in the light of recent structural changes in CGTMSE operations that limit its liabilities.
CGTMSE has been functioning for over 17 years, and over this period, the trust has never faced issues related to shortage of funds. It has been self-sustaining, with capital seeded by the Centre. The period of the trust’s existence has covered a full economic cycle, and thus, it can be concluded that the model is sustainable.
CGTMSE has always been responsive and proactive in ensuring its own sustainable growth while meeting the needs of the MSME sector. Over the past three years, CGTMSE has experienced healthy growth, with outstanding guarantees at ~Rs 70,000 crore. CGTMSE, thus, has been self-sustaining, able to meet its claims every year based on the income generated from operations and interest accrued from corpus. The ratio of total claims received to outstanding guarantee amounts has shown a decreasing trend.
The trust has registered a net surplus in all years of its operations, with the surplus increasing significantly in the past three years. This helped grow its fund amount to sustain it during a downturn or crisis. CGTMSE has implemented multiple reforms in past financial year with an aim of efficiently managing the overall risk.
The two key features implemented in the past financial year are: Introducing risk premium in guarantee fee, with premium reviewed every year based on historical claim rates of member lending institutions (MLI). It extends guarantees for MSE credit extended by MLIs. The cover is extended after charging a fee to MLI. The fee depends upon default rates experienced by the trust on loans guaranteed by the MLI. This ensures risk-based pricing. Implementing payout cap, i.e., putting an upper ceiling to the amount of claims that a MLI can make.
This payout cap currently stands at twice the fee paid and the recoveries in a particular year by the MLI, thus limiting the overall liability of the trust to two times the inflow. This measure ensures overall liability to the trust for its guaranteed loans is limited and measureable, and thus can be accounted for. CGTMSE is currently operating at a leverage of 7.15 (August 31)—in line with guarantee schemes in Asia and globally.
Operating leverage has been significantly improved from the past financial year due to fresh corpus allotment by the government. The government has also committed another Rs 1,300 crore more, which should further improve the operating leverage of the trust. In an extremely stressed scenario, where the MSE sector experiences significant defaults and all MLIs claim their maximum redeemable limit, CGTMSE would still be sustainable and would experience only 4.5% reduction in its corpus, with 95% still intact to run the scheme.
As per our calculation, for all cases where claims made by MLIs total is 80% or less of their allowed overall cap, there would be no change in corpus and, hence, CGTMSE would be able to meet the liabilities on its own. CGTMSE being a forward-looking trust, it has embedded effective risk management tools to ensure sustainable running and growth of the MSE sector. There is no liability on the government of India due to guarantees extended by the trust and the funds available with CGTMSE are sufficient to sustain it even under the severe stress scenarios. The sustainability of trust over past 17 years and it is constantly benchmarking its performance with global benchmarks, ensuring that the trust runs on solid foundation.