Spotlight 4.1 Public credit guarantee schemes
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ublic credit guarantee schemes (PCGSs) are a policy tool used widely by governments to ease access to finance for firms—especially small and medium enterprises (SMEs)—while limiting the burden on public finances. Akin to an insurance product, a PCGS provides a guarantee on a loan to a firm by covering a portion of the default risk of the loan. In the case of default by a firm, the lender recovers the value of the guarantee. The lender is also usually obligated to proceed with the collection of the loan and share the proceeds with the guarantor. Guarantees are usually provided for a fee covered by the firm, the lender, or both.
PCGSs, typically operated by an independent company, a development finance institution, or a government agency, are used to alleviate the constraints facing SMEs in accessing finance.1 Lenders are usually reluctant to extend credit to firms that do not have the necessary amount and type of assets that could serve as collateral for the loan. Moreover, SMEs, especially small and young companies, have a limited credit history and opaque financial statements. Sometimes, they are unable to prepare bankable business plans. As a result, many SMEs with economically viable projects cannot obtain the necessary financing from the formal financial sector. In use by many countries since the beginning of the twentieth century, PCGSs experienced unprecedented growth in the aftermath of the 2007–09 global financial crisis, when they were widely embraced to stimulate the flow of countercyclical finance to small businesses. Thanks in part to that experience, during the COVID-19 (coronavirus)
crisis more than 40 countries, especially advanced economies and emerging markets, relied on PCGSs to support firms’ financing needs arising from pandemic-induced shocks.2 The expansion of PCGSs triggered demand for good practices in their design, execution, and evaluation. An effective, efficient PCGS is one that maximizes outreach (the number of firms served) and additionality (among other things, its intended outcomes in terms of additional credit mobilized, improved terms and conditions, and jobs created), while maintaining financial sustainability. Against this background, in 2015 the World Bank, in partnership with international associations of PCGSs and lenders and with the support of the FIRST Initiative, developed a set of high-level principles to guide the operations of PCGSs.3 The principles recommend adoption of a set of legal, regulatory, governance, and risk management arrangements. They also include operational conduct rules for PCGSs, which are expected to
PUBLIC CREDIT GUAR ANTEE SCHEMES
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