Reviving The Guarantee Program for
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 governments 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 SMEs 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.
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 years
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.
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
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.