Reviving The Guarantee Program for SMEs
Business Options
Manila Bulletin
May 17, 2001

A policy accident happened sometime last year as government economic managers sought to stop the hidden bleeding of government coffers due to its exposure to big private loans.  In a very rationale move, government stopped the issuance of new guarantees to private loans, especially those arising out of BOT arrangements.  Apparently, there was no actual monitor of how large government’s contingent liability has grown.

The problem with the policy decision was it failed to discriminate and, in one sweep, also stopped the developmental function of guarantees to small and medium entrepreneurs.  By lumping SME’s together with the big BOT projects, government abruptly halted a critical credit supplementation service solely need by SMEs in this difficult economic era.

Admittedly, the general policy action made sense as in the past,  government guarantees played a major role in bailing out big companies that failed, at great economic expense.  Among other issues raised are the problems of moral hazard;  that guarantees are hidden subsidies; that the support is not sustainable over time; and that the impact to the economy is negligible.

But then guarantees to the so-called behest loans for big business, especially those with international flavour, are very different from credit guarantees to SMEs.

First, the total SME loans in the country is paltry compared to those extended by banks to big business.  The magnitude of SME loans is less than five percent of total loans, which will not cause economic collapse, or crisis in the very unlikely event all these loans go sour at the same time.

Second, credit guarantees are given to help SMEs grow.  These are not arbitrary loans but those which passed careful scrutiny of the lending bank and validated by the guarantee agency. The multi-level approval system discourages behest loans.  By their nature, credit guarantees will help SMEs become competitive businesses not only in the domestic economy, but in the global marketplace as well.

In last year’s conference and training program of the Asian Credit Supplementation Institution Confederation (ACSIC), an organization of credit guarantee agencies in Asia, various country experiences in credit guarantee operations debunked the issues raised by critics against the credit guarantee system.

The credit guarantee system actually helps the economy by staving off bankruptcies.  Its usefulness was tested during the financial crises when it helped SMEs avoid closure, by making possible a loan restructuring program to get them on the road to recovery. Japanese economy.  As a result, the guarantee system has saved 7,800 enterprises from bankruptcies, of which 7,700 are SMEs, and Y1.6 trillion in liabilities, and kept intact some 77,000 jobs. Our Asian neighbors have a lot to teach us in this regard. Its impact is not negligible, but significant.

The guarantee system is a catalyst.  It spurs business activity and growth by encouraging development of SMEs.  It causes the flow of funds to SMEs.  Helps in establishing new businesses, and grows existing ones.  Enterprises that are not able to borrow without the guarantee system are made bankable.  Yes indeed, in the guarantee system, there is additionality.

Credit guarantee for SMEs is not a subsidy.  It comes with a price, and is given only to enterprises that meets the eligibility criteria, those with a track record, and project viability.  Moreover, the guarantee is conditional, and is paid only in the event of loan defaults and business reversals.

The guarantee system is sustainable.  It has been proven by experience that a guarantee program may be sustainable even without periodic fund infusions.  The experience of the Guarantee Fund for SMEs (GFSME) has shown a fund leverage of 20 times the seed fund, return to government of the original fund infusion, and growth by more than three times over a period of 16 years – without any additional funding.

Finally, while insurance in general encourages moral hazard behavior, the credit guarantee system may incorporate mitigating measures to dissuade such behavior.  These mitigating measures will motivate lending institutions to upgrade the quality of credit evaluation and accounts management functions, thus promoting lending only to viable and economically beneficial enterprises.

In the country today, there are at least four agencies involve in credit guarantees for SMEs,  These are the Small Business Guarantee and Finance Corporation, the Guarantee Fund for SMEs, the Quedancor, and the Trade and Industry Development Corporation.  However, the sizes of these agencies are small.  Combined, their resources are a miniscule P 5 Billion.  As it is, the impact of the credit guarantee system is negligible not because it failed, but because support is lacking.  In short, more can be derived from the system in terms of the number of SMEs helped and enhanced competitiveness among SMEs if adequate attention is given the agencies’ programs.

It is about time the suspension on guarantees to SMEs be lifted.  Banks and small entrepreneurs are sorely missing this service.  And the agencies with mandates to help SMEs through guarantees are eagerly waiting in the wings.  Revive the guarantee programs for SMEs now, before it is too late.



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