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Consummate the Credit Guarantee System for SMEs
Lu Wei
Since the trial work on credit guarantee for small and medium-sized enterprises (SMEs) was started in late 1998, it has been developing rapidly. At present there are about 200 credit guarantee institutions of various types, which form a SME credit guarantee system, mainly funded by fiscal revenue at the levels of province, municipality, autonomous region and county, supplemented by diverse sources of funds through various hinds of organizations.
In the past year, credit guarantee institutions have launched a valuable experiment on how to offer credit guarantee to SMEs and have played a noticeable role in helping banks expand the scale of their credit loans to SMEs. In some cases, credit guarantee has registered fairly good results. But problems still remain. Firstly, the governments at various levels have directly interfered in the selection of target applicants. Some local government pinpointed the enterprises to be guaranteed, leading credit guarantee to failure or a high compensation rate. Secondly, the scale of guarantee commutation fund is not large enough, with limited backup funds. Most of the governments injected moderate funds into credit guarantee institutions in a lump-sum. The result is that, on the one hand, the guarantee scale cannot be expanded, and on the other, banks do not have confidence in such guarantors who appear to be reluctant to underwrite guarantee business. Thirdly, there is a scarcity of professionals who are familiar with guarantee practice. As credit guarantee is still something new in China, inadequate supply of professionals cannot meet the development of guarantee institutions. Fourthly, the term of SMEs is not clearly defined. Some credit guarantee institutions have overextended their scope of guarantee targets, while others have even committed illegal operations in the name of offering credit guarantee to SMEs. They either engage in speculative activities with guarantee funds, or provide guarantee for loans with speculative purposes, thus posing potential guarantee risks.
All the above-mentioned problems cropped up in the initial stage of a new industry, they can be solved by intensifying management and will not affect the development of credit guarantee to SMEs. Therefore, it is a pressing task to consummate the credit guarantee system for SMEs and the management of credit guarantee institutions.
I. ABC Management of Credit Guarantee Institutions for SMEs
Credit guarantee for SMEs mainly takes two forms: policy guarantee and commercial guarantee. The purposes, nature and management measures of both kinds of guarantee institutions are different.
1. Policy guarantee institutions and their management mode
(1) Organizational form of policy guarantee institution funded by government
According to international practice, government-funded credit guarantee institutions are managed in the following four ways.
a) A designated government agency directly handles guarantee business. For instance, the Small Business Authorities (SBA) is an agency of the U.S. Federal Government, with its jurisdiction and functions being vested by the Congress to which SBA is directly responsible. SBA reports to the Congress each year on its implementation of the annual plan and submit an annual budget bill for the next year. The plan can be fulfilled only after the annual budget is approved by the Congress.
b) Special legal persons or corporate bodies financed by the government. For instance, Japan's Credit Guarantee Treasury for SMEs is a special legal person that receives capital funds from the central government. Japan's Association for Credit Guarantee for SMEs is also a public agency with the status of a special legal person. Its funds come from the Public Treasury for SMEs of the central government and donations by local governments, public associations and financial institutions as well as soft loans from the central treasury and local governments.
In Taiwan Province of China, the credit guarantee fund for SMEs has capital from donations by the local authorities and relevant financial institutions, with the former accounting for 80% or even more. Such is a non-profit corporate body, which covers its operational expenses and commutation with income from funds operations and the premiums from customers. The highest decision-making body of the fund is the board of directors, and the supervisory body is the board of supervisors. The board of directors comprises representatives of fund contributors, while the board of supervisors is composed of government officials and CEOs of banks. The government’s capital injection into the guarantee fund is non-sustaining.
c) Limited liability company established by the government. For instance, the credit guarantee institutions funded by governments in Europe are companies with limited liability. Some are non-profit policy guarantee companies, such as Austrian Financial Guarantee Company, and others are companies with mixed policy and commercial guarantee, such as French Credit Guarantee Company.
d) Special government agency. For instance, the European Community Commission entrusted the European Investment Company as its guarantee agency for SMEs. The relationship between the government and the Investment Company is one of trust and commission. The ECC signs a contract with the agency to specify the guarantee targets, the use of funds, the sharing principle of cost and loss as well as the form of capital injection.
(2) Characteristics of the management of policy guarantee institutions
a) They are governed by special laws and regulations. Policy credit guarantee institutions funded by the government use funds from fiscal budget. Most countries have special laws to govern such institutions and the use of their funds, such as the America’s Act on Small and Medium-sized Enterprises, Law of Japan's Association for Credit Guarantee and Law of Japan’s Credit Guarantee Treasury for Small and Medium-sized Enterprises. These laws have all specified the form of government-providing funds, and the nature, administration mode, business scope, guarantee targets of guarantee institutions, as well as relevant policies.
b) They implement a commutation system. Guarantee is an industry with high risk. The purpose of policy guarantee is to obtain social benefit. So there must be a certain amount of funds for commutation. Most governments offer constant financial commutation to policy guarantee for SMEs in varied forms. In the United States, the Congress approves the annual budget each year in light of the implementation of the plan on secured loans to SMEs and of the actual needs. In Japan, the guarantee loss incurred by the guarantee association is repaid by the Public Treasury of the central government with credit insurance fund. In France, when the credit guarantee company has to indemnify any loss under policy guarantee, the loss will be directly covered by the government and entered into a special project account. ECC makes financial replenishments to a given size in several years so that guarantee agencies can operate on their own.
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