Credit guarantee schemes may come under one roof

New Delhi: The finance ministry plans to bring all government credit guarantee funds under one roof by forming an umbrella company to better administer these schemes across priority sectors such as micro and small enterprises, housing, education and skill development.

The plan, which is being discussed, is aimed at giving a thrust to priority sector lending and providing greater synergies, according to government officials and analysts.

The finance ministry has circulated a note seeking views from various stakeholders, two government officials said, requesting anonymity.

“There will be around three-four credit guarantee funds once the education and skill guarantee funds take off. We are exploring the possibility of having one umbrella company under which all these funds will operate,” said a finance ministry official. “These funds need investment as well as an information technology platform. An umbrella company will help in bringing these synergies.”

Both the finance and human resource development (HRD) ministries have already discussed the umbrella company while hammering out the structure of a credit guarantee fund for education loans.

On 6 June, Kapil Sibal said the credit guarantee fund would have a corpus of about Rs 5,000 crore and that his ministry officials were discussing with the finance ministry to give it final shape.

“The plan so far is, we can have an umbrella company that will take care of the four priority sectors including education and skill development. We are fine with it,” said an HRD ministry official. “This move will bring more accountability to the system and from the government standpoint, it will make the tracking of inward and outward flow of funds systematic,” the official said.

The finance ministry official cited above added that although the proposal was on the table, “the final contours of the company” will emerge soon. “It could be a section 25 company,” the official added.

A section 25 company is a firm where profits and any other income are applied only to promote the objects of the company and no dividend is paid to members.

As part of efforts to ensure easier availability of credit to priority sectors, the government has set up funds to guarantee loans provided by banks to certain specific sectors and thus reduce the risks associated with such loans.

The government already has a credit guarantee fund for micro and small enterprises to strengthen credit flows to this growing sector. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), set up by the government and the Small Industries Development Bank of India, will facilitate collateral-free loans of up to Rs 1 crore.

In the low-cost housing space, finance minister Pranab Mukherjee had announced a mortgage risk guarantee fund for housing loans in his 2011 budget speech for borrowers in the informal sector. The fund, with a corpus of Rs 1,000 crore, will be run by the National Housing Bank and will guarantee loans up to Rs 5 lakh.

For providing protection against defaults to banks associated with education loans, the government is in advanced discussions for setting up the Rs 5,000 crore credit guarantee fund for loans to needy students. The HRD official cited above said that if everything falls into place then even the interest subsidy scheme for education loans would come under this umbrella firm. The HRD ministry will spend about Rs 800 crore on this scheme. Interest incurred on a study loan during the moratorium period is paid by the government. Students belonging to families with an annual income of less than Rs 4,50,000 are eligible for such benefits.

In the last five years, the amount of educational loans has increased two and half times and the number of student beneficiaries under the scheme has more than doubled, Mukherjee said on Tuesday after a meeting with state-run banks.

Such loans can help create a base of knowledge workers that would help the economy, the government expects. Currently, the education loan portfolio of all banks put together is more than Rs 50,000 crore.

“For the government, it means that from instead of multiple levels of intervention, they will have to intervene at one level, and such an approach would lend itself to better audit trails and operational efficiencies,” said Robin Roy, associate director at audit and consulting firm PricewaterhouseCoopers.

prashant.n@livemint.com