Sa-Dhan Newsletter Volume 4 Issue 2

Community Based Organisations

GUARANTEE FUND: FREQUENTLY ASK QUESTIONS

Sa-Dhan In-House Research Team

In which sectors can Credit Guarantee Funds play

What is a Credit Guarantee Fund

a significant role in improving access to small

It is an entity set up to provide guarantees, usually to the

loans

lender, pertaining to advances made to a specified category of

Agriculture, small-scale industry, housing, and MFIs.

borrowers. The Credit Guarantee Fund is intended to provide

the necessary incentive and comfort to the lender for extending

How will the credit guarantee mechanism help the

need-based credit to the target client by means of providing

MFI sector

surety for a responsible to pay the lender, if the borrower fails

The demand for credit from the MFI sector would increase

to repay the loan, under certain circumstances.

substantially in the future, but the banks are still not ready

to capture this opportunity. Bankers see financing MFIs as

How does the guarantee support from the Credit

highly risky because (i) MFIs cannot offer collateral (ii) MFIs

Guarantee Fund work

are generally informal bodies (iii) MFIs not professionally

managed (iv) credit rating reports on MFIs are not readily

The facility of guarantee support will ensure financing of

available to the general public, and (v) a majority of MFIs do

viable projects, selection of dependable customers, and sound

not have equity. Guarantee mechanisms can, therefore, enable

lending practices by lender institutions. It will take into

the banks to step up lending to MFIs.Ideally, who should set

account the specific requirements of the target clients. It will

diversify the risk and responsibilities between the borrower,

up Credit Guarantee Fund for MFIs

lender and guarantor in order to have sustainable operations

Government of India has been showing a lot of interest in

in a professional and commercial manner.

promoting MFIs. Therefore, a Guarantee Fund for MFIs set up

and co-promoted by Government of India and development

Are there Credit Guarantee Funds in India

financial institutions will go a long way in improving the

As per available information, there are three Credit Guarantee

credit flow to the MFIs. The identified development financial

Funds in India -- Deposit Insurance and Credit Guarantee

institution/s should have a sound understanding of the MFI

Corporation (DICGC), Credit Guarantee Fund Trust for Small

sector. The initial corpus can be augmented through funds

Industries (CGTSI) and Mutual Credit Guarantee Fund. The

from donors.

first two are funds promoted by the Government of India,

while the third is supported by an NGO.

What other roles can a Credit Guarantee Fund for

MFIs play

DICGC established in 1978 by the RBI has since stopped

Many MFIs are not professionally managed. The fund can also

providing credit guarantees. CGTSI was set up in July 2000

focus on capacity building of MFIs. The Guarantee Fund

to encourage collateral free loans to all small-scale industrial

should have a database on the MFIs in order to make

manufacturing units, including information technology and

independent assessments of their credit-worthiness. The

software industrial units, which avail of credit facilities up to

assessment of credit-worthiness of MFIs by the Guarantee

Rs. 25 lakhs. All scheduled commercial banks, select regional

Fund could make it easier for MFIs to attract equity from other

rural banks and other institutions notified by the Government

sources. This would help to ease the reluctance of banks to

of India are eligible to be covered by CGTSI.

finance MFIs because of their lack of equity.

Mutual Credit Guarantee Fund is being managed by the Indian

Institute of Rural Development (IIRD), an NGO. The objective

Can we think of other guarantee mechanisms for

of the scheme is to improve credit flow to hand-block printing

MFIs

textile clusters located in Bagru and Sanganer blocks of

The MFI network can think of setting up of a mutual guarantee

Rajasthan. Here the artisans have organised themselves into

fund the corpus for which can be built with contributions

homogeneous groups of 10-12 members each. A corpus fund

from the member MFIs. Additional contribution to the corpus

was created at the group level by each member contributing,

can be sought from donors and other sources. Apart from

initially, a minimum sum of Rs. 5000. SIDBI makes a

providing guarantees, the network can do the preliminary

matching contribution by way of interest free loans. The

loan appraisals emanating from member MFIs.

combined amount is deposited with the lending agency as

collateral security. The maximum loan sanctioned to the group

Intermediate institutions like Rashtriya Mahila Kosh can

is twice the amount of such deposit. IIRD is currently in the

withdraw from direct financing and use their resources for

process of introducing the scheme in some pockets of Kerala

providing guarantees to the banks to enable them to lend to

and Tamil Nadu.

MFIs. This would help in leveraging funds, as banks would

have greater confidence in providing loans to the partners of

these intermediate institutions. Banks would also acquire

skills in appraisal of MFIs.

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