The Reserve Bank of India has cautioned the government that operations of one of the country’s largest credit guarantee funds, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), is not self-sustaining.

CGTMSE has given outstanding guarantees of `65,200 crore till September 2015. A senior government official said that the RBI, which reviewed the operations of CGTMSE, has pointed out that basic risk mitigation measures have not been implemented in the fund to make its operations self-sustaining.

“The RBI in its report has said that CGTMSE had a corpus of around Rs 4,500 crore by the end of September 2015 against which it has given outstanding guarantees of Rs 65,200 crore, a leverage of almost 14 times,” he said.

Set up in 2000 by Central Government and state-run financial institution SIDBI, the fund provides credit guarantee for Micro and Small Enterprises loans up to Rs 1 crore, without collateral and third party guarantee.

Guarantee of such funds to step in should the borrower default allows borrowers, many of who would otherwise not be eligible for the loans, to get loans at a small fee. Credit guarantee funds are supposed to have adequate capital to cover the potential defaults. However, in the case of CGTMSE, even a small percentage of liabilities arising can wipe out the entire capital of the guarantee fund.

The central bank has also raised concerns over the absence of a regulatory body and an adequate oversight of CGTMSE, said the official quoted earlier. Another government official aware of the deliberations said, “The concerns raised by RBI are significant especially in matters related capital adequacy, cap on leverage and due diligence norms. The government is in discussion with the regulator on the issue.”

The person said the Export Credit Guarantee Scheme, where the leverage ratio is 1:25, is another concern. The fund provides a cushion to lenders and insures up to 85 per cent of the default amount in case a firm that availed collateral free loan is unable to repay. The fund charges a guarantee fee of up to 1.5% from lenders, which can pass on this cost to the borrowers.

“There is urgent needs to ensure that the trust follows prudent risk measures and adequate disclosure norms and accounting standards,” said the above quoted official, adding that discussions are on whether to bring all such guarantee funds under RBI’s supervision. “We are in the process of reviewing functioning of other funds as well,” the person said.

Source: The Economic Times