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Impact of PCGs on Beneficiaries: Subsidy vs. Non-subsidy, Risk Perception, and Cost of Borrowing

This article explores the impact of PCGs (Public Credit Guarantees) on beneficiaries, analyzing the effects of subsidies, risk perception, the cost of borrowing, and the success measurement of PCGs. It examines both PCGs with explicit subsidies and those without subsidies.

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Impact of PCGs on Beneficiaries: Subsidy vs. Non-subsidy, Risk Perception, and Cost of Borrowing

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  1. PCGs – Impact on Beneficiaries PCGs can be arranged with a significant intended subsidy element or without

  2. Without any explicit subsidy intention • Intention is to compensate banks’ for their “mistakenly cautious” risk perceptions • Is there credit expansion or substitution? • Stringent “pre-specified scoring system” prevents misuse, but likely “skimming of best credits” • Is there a reduced cost of borrowing? • Success of system is difficult to measure – may best be measured by lack of recourse to the guarantee?

  3. With an explicit subsidy • Guarantees as a means to direct/channel funds • Targets riskier borrowers who can’t afford ‘high’ interest rates • Enters territory banks try to avoid – few participants/users of the subsidy • Banks risk appetite may be contained by interest rate ceilings • Skewed risk-sharing (mostly govt.) and weak incentive to pursue defaulting borrowers • Clear interest rate subsidy element – low and/or delayed repayment, arrears etc. • Uncertain who is the final recipient of the subsidy

  4. Impact measurement(Zecchini & Ventura) • Macro-impact is small, but still significant (guarantee fund reaches 3% of total lending) • Eligibility criteria preferably stringent & simple, but this may increase tendency for substitution of existing credits (fungibility) • Very low default rates – relying on banks’ debt recovery process • Average subsidy per unit of guarantee less than 1% • Evidence that guarantees decrease financing costs (15% to 20%) and increase lending (14%)

  5. Impact Measurement(Cowan, Drexler & Yanez) • Criteria target selectivity: only new loans; banks bid for lowest coverage ratio, fees paid by banks according to default history • Positive causality between availability of insurance and more loans – but risk transferred to Govt, so there may be more moral hazard • Due to bank screening and debtor risk aversion insurance does not increase tendency to default – even though risk is passed on to insurance provider – so there may be less adverse selection

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