Cabinet approves credit guarantee institution for MSMEs

The Cabinet of Ministers this week approved the proposal to set up a credit guarantee institution to underwrite the loans obtained by micro, small and medium enterprises (MSMEs) when they are unable to provide a security to a bank or a finance company regulated by the Central Bank. 

What is referred to as ‘The National Debt Securities Centre’ will come into function once the specifics of the structure of the proposed setup is finalised. 

Mirror Business a month ago revealed that a Cabinet paper was being prepared to propose the establishment of an institution to provide guarantee for loans that are applied by the MSMEs, as the non-availability of adequate collateral remains one of the biggest impediments of the entrepreneurs to expand their capacity or start anew. 
The proposal and subsequent setting up of the agency will nicely juxtapose with last week’s Monetary Board’s decision to stipulate priority sector lending targets for banks under the broader MSMEs sector. 

Under the rule, the banks are required to extend 20 percent of loans to MSMEs in 2021 from the level stood at the end of last year. 

The Central Bank in an earlier instance welcomed the idea of setting up an agency in the style of a credit guarantee institution as for one; they can achieve the desired goals in private sector credit and then second, to do away with various interest subsidy and refinance schemes, which were launched at various times, sometimes in an ad hoc basis. 

On the side of the cons of such an agency, any bad loans if occur will befall on the taxpayer, as the National Treasury is expected to guarantee credit to the MSMEs, which don’t have sufficient security.

Hence, the proposed agency will have to make a closer tab on how these MSMEs spend the moneys taken from banks to ensure that the money is spent on intended areas in their project proposal submitted prior to applying the loan. 

In the case of venture capital or private equity, the venture capitalist or private equity partner will sit on the board of the company to ensure that his money is spent on intended purposes, which can generate sufficient return for his money and also to enhance value of the company so that he can exit at a capital gain.