Download Entrepreneurship and Economic Development

The Typology of Partial Credit
Guarantee Funds around the World
Thorsten L. Beck, Leora F. Klapper, Juan Carlos Mendoza
World Bank, Washington D.C.
I. Summary

This paper presents data from a survey of 76 partial credit
guarantee schemes across 46 developed and developing
countries

We discuss different organizational features of credit
guarantee schemes and risk management devices and their
variation across countries

We focus on the respective role of government and private
sector and different pricing and risk reduction tools and how
they are correlated across countries

We find that government has an important role to play in
funding and management, but less so in risk assessment and
recovery

Schemes with more government involvement are less likely to
use risk-reducing devices and have higher loan default rates
1
II. Survey Design
 General questions on the characteristics of the fund:
- General characteristics
- Ownership
- Type
 Detailed information on operational characteristics:
- Eligibility
- Pricing structures
- Risk management
 “Output” measures of PCG activities:
- Number of loans guaranteed
- Average value of loans guaranteed
- Number of loan defaults
2
III. Summary Statistics
Summary Statistics, Medians
Total
Total
Outstanding
No.
No. of
Outstanding
Median
No. of
of
Guarantees
Age
Countries
Guarantees/ Employees
(US$
Obs.
GDP
million)
All
schemes
By Income
High
Middle/Low
By Region
Asia
Latin Am.
Transition
46
76
15
3,700
0.61
18
20
26
34
42
27
13
909
360
0.21
0.30
15
21
5
13
8
6
24
11
23
11
14
41,143
682
149
4.7
0.06
0.35
179
11
25
3
IV.1. Results - Corporate Structure of Schemes
 Mutual Guarantee Associations (or Societies): collectives of
independent businesses and/or organizations that grant collective
guarantees to loans issued to their members; may receive government
funding (i.e. Italy)
 Publicly Operated National Schemes: government initiatives at the
local, regional, or national level; generally established as part of a public
policy objective (e.g. promoting SMEs); although publicly funded, these
might be managed by private groups (i.e. Korea)
20
17
15
15
10
7
7
5
0
Mutual
High
Low/Middle
Public
4
IV.2. Results - Responsibilities
Government
Government-Related
NGO
Private
Funding
Management
36%
2%
8%
42%
17%
9%
5%
50%
Credit Risk
Assessment
11%
8%
6%
60%
Recovery
9%
2%
8%
66%
 Governments have an important role in funding, but a much more
limited role in management, risk assessment and recovery
- Even funds with government management and credit risk
assessment responsibilities are significantly more likely to use
private parties to recover loan losses
 The Private Sector shares in funding with governments, and is
dominant in management, risk assessment and recovery
- Financial institutions generating the loans being guaranteed are
mostly responsible for credit risk assessment and recovery of
defaulting loans
5
IV.3. Results – Risk Management I
0
20
40
60
Operational
Mechanism: Loan
Basis/ Selective
Operational
Mechanism:
Portfolio / Global
Approach
14
 Firms that use a
portfolio approach are
significantly more likely to
receive government
funding – and use the
private sector for credit
risk assessment
60
40
Guarantee
Coverage:Principal
Coverage Ratio
Guarantee
Coverage:Interest
payments
100
 Firms that use a loan
basis are significantly
more likely to have a
guarantee limit
72
Guarantee Limit ?
Maxmimum
guarantee period?
80
80
34
6
IV.3. Results – Risk Management II
0
20
40
60
80 100
56
Fees paid by Borrower
21
Fees paid by FI
63
Fee Per Loan
30
Fee Annual
Bank Offers Loan for Higher Rate/
Collateral
55
Basis to Compute Fees: Amount
Guaranteed
57
Basis to Compute Fees: Loan
Amount
Penalties are Imposed for Fis with
Below-Average Loan Performance
 Schemes that are restricted
to SMEs are more likely to
have elements in place that
base pricing and payouts on
risk
26
21
Fee Adapted to Risk of Borrower
Repayment of Loans Lower the
Price of Future Guarantees
 Risk-based pricing does not
vary significantly with the
level of economic and
financial development
7
10
7
IV.3. Results – Risk Management III
0
20
40
Time of
Payout: At
Time of
Default
34
Time of
Payout: After
Bank Initiates
Recovery
Time of
Payout: After
Loan Write-Off
80
100
Schemes where loan repayments lower
the cost of future loans have significantly
higher guarantee limits and later payouts
Schemes that payout at the time of
default are less likely to have no risk
management program, whereas the
reverse is true for PCGs that payout later
42
It appears that banks that take on more
ex-post risk and recovery costs, correct
for this by charging risk based fees
14
Collateral
Provided by
Borrowers
Risk
management:
(Re)Insurance
or Portfolio
60
57
25
Schemes with government responsibility
for credit risk and recovery are
significantly older and more likely to
guarantee loan portfolios, payout after the
bank initiates recovery, and have no risk
management program
8
IV.4. Results – Total Loans and Defaults Rates
# obs
Means
Average value
of loan
guaranted
85,177.48
% of loan
defaults
50
Total number
of loans
guranteed
117,133.20
32
12
26,102.53
408,441.90 **
86,437.54
89,782.00
5.97%
4.22%
12
3
14,050.55 *
133,375.30
38,715.50
7,884.00
2.24%**
18.00%
16
31
67,048.38
89,134.60
15,247.20
52,608.05
5.28%
6.78%
19
27
38,612.45
188,354.50
75,759.93
107,043.90
7.75%
3.56% *
5.37%
Guarantee type:
Loan
Portfolio
Ex-post risk management:
None
Insurance or securitization
Payout:
After default
After initiation of recovery or
writeoff
Govt_Responsibility (P):
Greater than zero
Equal to zero
9
IV.5. Results – Findings
 Default rates are higher in older schemes
 There is no significant variation in default rates between
countries at different levels of economic and financial
development
 Schemes that are more restrictive in their eligibility criteria
do not suffer from higher loss rates
 There is a strong correlation of default with the
government’s role in partial credit guarantee schemes
 While government funding and management is not
correlated with the default ratio, government involvement in
credit risk assessment and recovery is associated with higher
default
10
V. Conclusions

We find an important role of government in the funding and
management of PCG funds, but less so in risk assessment and
recovery, roles that are mostly confined to the private sector

There is a variety of specialization among PCG funds

Similarly, pricing, risk assessment and risk management
strategies differ across the different schemes

There is a surprising dearth of schemes that reduce risk
through risk-adjusted and performance based pricing and
payout only after the lender starts legal action against a
defaulting borrower

The role of government in risk assessment and recovery, as
observed in a few PCG funds, is associated with higher loan
default rates
11
VI. Future Work

The effect of different characteristics of PCG schemes on
banks’ risk-taking decisions

The effect that credit guarantee schemes have on access
to credit, entrepreneurship and job creation

A proper cost-benefit analysis of PCG funds compared to
other SME government interventions
 This research require time-series, loan- and borrowerlevel data, preferably over changes in specific
characteristics of guarantee schemes
11