Credit Guarantee: Promoting Collateral free lending culture in India
The collateral free lending ecosystem will stimulate the entrepreneurship and support the growth of SMEs in India.
Recently Govt of India has announced setting up of Rs 2000 crore Credit Guarantee Scheme for Startups (CGSS) that will enable startups to raise loans without any collateral for their business purposes
The proposed scheme will provide credit guarantees up to Rs 5 crore per case inclusive of the term loan, working capital or any other instrument of assistance extended by Member Lending Institutions (MLIs) to finance an eligible borrower i.e. a start-up recognised by the Department of Industrial Policy and Promotion (DIPP).
Member Lending Institutions under the scheme can be Scheduled Commercial Banks and Financial Institutions, RBI registered NonBanking Financial Companies (NBFCs) and SEBI registered AIFs among others. The scheme will function under the trusteeship management of the National Credit Guarantee Trustee Company (NCGTC).
Credit Guarantee Culture:
Credit Guarantee culture is relatively lesser known in India, though the business of insurance has taken roots for more than a century. There were some sectoral specific initiatives like the ECGC cover for exports and DICGC for small value loans.
Globally many countries have adopted Credit guarantee scheme decades before India, to enable citizens to seek support financial assistance to give shape to their entrepreneurial venture.
In India, more focused attention to support the entrepreneurship through credit guarantee schemes come into existence in the year 2000 after formation of CGTSME(Credit Guarantee Trusts for Micro and Small Enterprises).
However, the orbital shift into the credit guarantee culture came into existence in the year 2014 with the formation of National Credit Guarantee Corp. Under NCGTC ambit, so far five schemes are started and two are in the making.
The serious emphasis of the Govt is perceived in how the whole guarantee programme is structured. Different schemes are stared for different sectors. This enables to meet the sectoral specific needs and guarantee cover can be aligned.
Why guarantee is important:
It is well known that India is witnessing increasing population growth albeit the rate is slowing down. It is a duty of the Govt to support employment generation through various programmes. One such initiative is supporting entrepreneurship.
However, the serious limitation in supporting entrepreneurship is the lack of capital. Govt has been working on this and brought in many policies in the past like bank nationalisation, extending capital support to PSBs to lend more into social sector, supporting the growth of cooperative lending institutions, micro finance etc.
However, these initiatives have suffered when it comes to supporting an individual entrepreneur beyond the level of very small loans without collateral.
The amount of loan available under the above institutional support is not enough to stimulate capital formation in the business leading to the creation of collateral for securing more loans for further growth.
Many entrepreneurs have been resorting to seeking funding support from informal sources which are not only costly but very short term in nature.
On the other had entrepreneurs do not have access to sources like supply chain financing which itself is not matured in India (Under Supply Chain Financing, entrepreneurs can discount the bills and improve the liquidity in more organised and transparent platform which brings banker, entrepreneur and buyer together).
In order to meet this gap in securing the loan, credit guarantee plays an important role. New initiatives like sectoral funds with specific focus may help to develop better products suiting the specific characteristics of the borrowing class.
Member Lending Institutions (MLIs)- Expanding the reach:
The new initiative reflects more serious commitment of govt in terms of expanding the access to finance. Under CGTSME, the scope of institutions who can seek guarantee was limited to Banks. The new initiative encompasses most of the institutions engaged in providing finance to entrepreneurs thus provide last mile connectivity in the mission.
NBFCs is a major class of lending institutions who can be benefitted of the new policy. It is well-known fact that NBFCs have better capability to design new products for specific needs or group of borrowers.
So far NBFCs are playing on the fringe in giving small ticket business loans. They are averse to collateral free loans even if there is very attractive cash flow or good credit rating. Credit guarantee will augment the gap and improve the competition in the market place.
Having more types of institutions will expand the reach and help the entrepreneurs to secure funding support.
Persecution of failed entrepreneur- a blot
So far we have been emphasising how new policy initiatives are good for entrepreneurial ventures in India. However, there is one caveat. How an entrepreneur is treated if he fails.
As per the present guidelines under CGTSME schemes, if an enterprise fails, the bank should file a case in the court before making the claim for guarantee cover.
This is obnoxious and lack of application of mind on the concept of entrepreneurship. If you see any successful entrepreneurs, there are mistakes and failures in the journey. Society should not disown and persecute a failed entrepreneur. As Oscar Wilde rightly put it- “Every saint has a past and every sinner has a future”.
In the above backdrop, govt should act immediately and remove the condition. Otherwise, they may advise the banks to proceed under Insolvency and Bankruptcy code(IBC 2016) and liquidate the defaulted firms before seeking the claim under credit guarantee.
Collateral free loans are need of the hour to accelerate the growth of budding entrepreneurs. The support mechanism will stimulate innovations and generate employment opportunities. The new institutional mechanism will augur well for it.