The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), founded in 2000, has made some progress in its 12 years of existence. However, given the size and scale of the SME sector in India, a much broader credit guarantee scheme with higher credit limits should be enabled by the Government of India to address the needs of the sector. This initiative, coupled with defined mandates for banks to implement the scheme, could dramatically improve access to finance for SMEs that account for almost half of India's industrial output and exports.
SMEs in India have traditionally been hamstrung by poor access to capital to fund their growth needs. As per RBI data for 2010, 94 per cent of non-consumer banking accounts have less than 30 per cent of the non-consumer bank credit facilities, which clearly highlights the dearth of access to banking facilities for SMEs. While the Government has clearly identified this as an area of concern several years ago, very few initiatives have been taken to address this lacuna.
Credit guarantee schemes, with certain minimal risk sharing by the lender, and significant credit loss absorption by the Guarantor, will significantly improve access to credit facilities for SMEs, as has been witnessed in several other countries. Japan and Korea, both with vibrant SME sectors, have outstanding SME credit guarantees in excess of 5 per cent of their GDP, as compared to approximately Rs 10,000 crore, accounting for less than 0.2 per cent of GDP in India.
Credit guarantee in India started in 2000 with a well-defined scheme — central government guarantee against default for loans to SMEs that are extended without any collateral, upto 75 per cent of the credit loss to the lending bank. Even new enterprises without any performance record can avail this facility, if the proposal meets the credit requirements of the lending bank. However, 12 years later, most banks haven't popularised this product, and are still reluctant to freely extend collateral-free loans to SMEs. Also, the cap on the amount, recently enhanced from Rs 50 lakh to Rs 100 lakh, is still measly in the current context, and needs significant upward revision to, say, Rs 5 crore.
Once the government-supported institutions prove the business model, private sector participation in creating credit guarantee institutions — by banks, insurance companies, etc. — can be encouraged. Simultaneously, the banking regulator should actively encourage banks to give thrust to this product, in ways similar to the incentives provided to the housing finance by banks.
Despite the current fiscal scenario faced by the Central Government, credit guarantee schemes can be easily supported by the Government, as corpus fund contribution by the Government can support credit to the tune of more than 50 to 100 times the contribution, as funds may be needed only to meet the credit losses of 1-2 per cent, more than the guarantee fees collected.
(The author is ex-Director Ratings, CRISIL, and Co-founder, RiverBridge Investment Advisors.)