GREETINGS from INDIA & Credit Guarantee Fund Trust for Micro and Small Enterprises

1. GREETINGS from INDIA & Credit Guarantee Fund Trust for Micro and Small Enterprises

2. Credit Guarantee Management under the Economic Crisis and Measures to Boost Economy Presentation by CGTMSE Team - India August 10, 2009 Bangkok, Thailand

3. CGTMSE • Set up as a Trust in August, 2000 and administered by a Board of Trustees • Government of India and Small Industries Development Bank of India (SIDBI) – the settlors – Contribution ratio 4 :1 • Initial Corpus – USD 26.27 million ; Present Corpus – USD 379.16 million ; Committed Corpus – USD 525.43 million @ 1 USD = 47.58 INR

4. CGTMSE - Objectives • Shift from collateral to merit based lending • Act as catalyst for entrepreneurship promotion • Facilitate institutional credit flow to MSE sector • Address growth constraints of MSE sector • Enable financial inclusion / employment generation • Revive confidence in credit guarantee mechanism

5. CGS - Operations • Operated through Banks / Lending Institutions registered as Member Lending Institutions (MLIs) • Scheduled Commercial Banks / select Regional Rural Banks (RRBs) / other lending institutions as approved by Ministry of MSME eligible to register as MLIs • 97 Banks / RRBs / other lending institutions registered as MLIs with CGTMSE • Operations done through web-based B2B E-Business software

6. CGS – Main Features • Micro & Small Enterprises as per MSMED Act eligible • Both Manufacturing and Service sectors covered • Credit Facility upto USD 0.20 million covered • All fund / non-fund based facilities covered • Maximum Cover of upto 85% of credit facility

7. CGS - Benefits Credit Guarantee Scheme - A tool for Widening of credit portfolio Better management of risk Faster recovery of dues Enhancement of profitability

8. CGS – Benefits • Entrepreneurs can access institutional credit for their projects, even if they cannot provide collateral, very helpful, especially for first time entrepreneurs and start-ups • Quicker dispensation of credit due to time saved on security creation / Title related issues of collaterals • Reduction in waiting period for recovery through legal process, realising the time value of money with hassle free & quick recovery of major portion of defaulted amount • In case of collateral, it is Bank’s responsibility to insure / secure the property when asset is taken over • Collateral-free loans ensure better appraisal of projects • Overall significant saving in Time & Energy cost of Bank’s human resources

9. CGS – Cost of Cover MLIs at their discretion may pass on the cost of Guarantee Cover to the borrowers. However, Trust collects the Guarantee / Service Fee from MLIs

10. Tenure of Guarantee Cover • Tenure of Guarantee Cover for Term Credit, Combined Working Capital & Term Credit and Composite Credit is tenure of Term Credit / Composite Credit • If tenure of Term Loan is 5 years, tenure of working capital will also be 5 years. After 5 years, if guarantee cover is to be continued for working capital, application for renewal to be lodged online • Where Working Capital facility alone is covered, the tenure is for a block of five years. Thereafter, MLI should apply for renewal of Guarantee Cover

11. Extent of Guarantee Cover

12. Claim Settlement Two stage claim settlement process First installment of 75% of guaranteed portion of Amount in Default will be paid within 30 days of receipt of complete information Interest at prevailing Bank Rate will be paid in case of delay beyond 30 days Second installment shall be paid on conclusion of recovery proceedings On conclusion of recovery proceedings, final loss is shared by CGTMSE and MLI, in the ratio ranging from 85 : 15 to 62.5 : 37.5, as the case may be

13. Yearwise Performance *(As on July 31, 2009)

14. Guarantees approved Data for FY2010 – Upto July 31, 2009

15. Average Size of Guarantee Value in USD * (As on July 31, 2009)

16. Slab-wise distribution (As on July 31, 2009)

17. Sector-wise distribution Top 5 Sectors (As on July 31, 2009)

18. Overall Impact (As on July 31, 2009)

19. Guarantee Management – Portfolio Analysis • To undertake a portfolio review so that underlying risk characteristics can be identified and means for effective hedging can be adopted. • To specify the data that should be collected for effective risk management process. • To suggest a better claim estimation methodology and the base of discriminatory risk pricing. • Examine the prospect of re-insurance of the portfolio of the Trust. • Some information like summary of major loan types, average maturity, business activities financed, risk and exposure taken by the Trust and non-performing loans are required for a more valuable analysis leading to better policy formulation and ensure its sustainability.

20. Guarantee Portfolio – Re-insurance • Re-insurance or re-guarantee of portfolio is a good way for eluding part of the Trust’s risk associated with performance of MSEs. • Exploration of risk sharing mechanism with an insurance company (national as well as international) will prove valuable for Trust and would help it to sustain its financial viability. • Pre-requisites for re-insurance is a proficient risk management system so that insurance company can complete its due diligence. A strong database would be of immense help for this.

21. Economic Crisis – Impact on MSEs • Slackness in institutional credit flow to Micro and Small Enterprises (MSEs); Lack of Demand – Domestic / Exports; Piling of Inventory; Increase in cost of raw materials; Closure of MSE units; Decrease in employment opportunities • However, the initial impact of the sub-prime crisis on the Indian economy was rather muted. The Reserve Bank of India had to sterilise the liquidity impact of large foreign exchange purchases through a series of measures like insurance in the cash reserve ratio and issuances under the Market Stabilisation Scheme. • The direct effect of the sub-prime crisis on Indian banks / financial sector was almost negligible because of limited exposure to complex derivatives and other prudential policies put in place by the Reserve Bank of India. The relatively lower presence of foreign banks in the Indian banking sector also minimised the direct impact on the domestic economy.

22. Measures to Boost MSEs • The GoI has been concerned about the impact of global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem. • The GoI Schemes are one part of the Government’s measures to ensure the stability of the financial system and to protect ordinary savers, borrowers and business. • The government announced major tax cuts across the board to boost demand and allocated additional funds and incentives for experts, housing textile and infrastructure to stimulate the economy, hit by the global financial crisis.

23. Measures to Boost MSEs • Increase in ceiling / extent of guarantee cover to boost collateral-free lending to micro and small enterprises that are facing a credit crunch, the Government doubled the current guarantee cover for loans to upto USD 0.20 million from the earlier limit of USD 0.10 million • Widening the scope of coverage • Introduction of new Credit Guarantee Products – Portfolio Coverage (PCGS – entire portfolio and upto USD 0.01 million) • Reduction in lock-in period • Sensitisation of potential participants • Relaxation for MSE units in Handicrafts Sector – Creation of a Special fund contributed by GoI. Accordingly, MSEs in Handicrafts Sector is getting coverage without GF / ASF

24. THANK YOU ALL www.cgtmse.in