Presenter: Alejandro Drexler Co-authors: Kevin Cowan, Álvaro Yañez

1. The Effect of Partial Credit Guarantees on the Credit Market for Small Businesses.The case of FOGAPE (Small Businesses Credit Guarantee Fund of Chile) Presenter: Alejandro Drexler Co-authors: Kevin Cowan, Álvaro Yañez Partial Credit Guarantee Schemes Experiences and Lessons The World Bank, Washington DC, March 13-14, 2008

2. Description of FOGAPE • Governmental Credit Guarantee • For Small Businesses • Yearly sales Under US$ 1,000,000 • The fund started its operation on 1998 • Maximum Coverage • 80% Long Term Investments Loans and Credit Lines • 70% Short Term Investments Loans • Capital: US$ 80 millions, can lever 10 times (Can Insure US$ 800 millions) • 30,000 operations a year • Average operation US$ 15,000 • Concentrated in Retail (30%), Transportation (20%), Services (14%), Agriculture (10%)

3. Description of FOGAPE • Resources Allocated Through The Formal Financial Institutions • Resources allocated through sealed bid auction, institutions bid on • Amount • Coverage (lowest coverage wins) • FOGAPE charges a fixed fee for the insurance • Fee is different for each institution • Depends on former default rates • Default rates between 1.2-1.9% in the last 4 years • 17 institutions participate in the auction • 5 biggest institution allocate 90% of the resources

4. Questions • Does FOGAPE generate more loans • Alternatively FOGAPE could be used to insure loans that would have been issued anyway • Does FOGAPE affect the incentives of banks and investors? • Do banks reduce screening or monitoring? • Do clients reduce effort? • We measure performance with default rates

5. Data • Loan: Total loans issued by institution i in month t • Bid: Amount requested to FOGAPE by bank i • Allocated: Amount allocated to institution i • Delay1: Delay in payment between 30 and 59 days • Delay2: Delay in payment between 60 and 89 days • FDelay1: Delay between 30 and 59 days 1 year after loan was issued • FDelay2: Delay between 60 and 89 days 1 year after loan was issued

6. Data • Only loans below US$ 200,000 • Only long term investment loans • We distinguish new from old clients • Average loan for new clients US$ 20,000 • Average loan for old clients US$ 35,000 • Total loans 40 US$ million (35% for new clients) • Insurance per month 9 US$ million • Observations 5 banks 45 month = 225 data points • Period: January 2003 – September 2006 • 1 data point dropped

7. Methodology • Panel Regression • Controlled for time and institutional fixed effects • Robustness • Heteroskedasticity • SE clustered by institutions

8. Additionality of FOGAPE on the amount of loans

9. Additionality of FOGAPE on the amount of loans • Strong effect of PCG on loans • More loans in the market • 1 dollar insurance generates .8 dollars of loans for new clients and .7 dollars for old clients • Possible explanation: failure in equity markets • Problems • Endogeneity • Approach to reject endogeneity • Split the sample

10. Additionality of FOGAPE on the amount of loans, split sample Insurance Intensive Sectors Non Insurance Intensive Sectors

11. Effect of FOGAPE on Default Rates

12. Effect of FOGAPE on Default Rates • No effect of PCG on default rates • We expected higher default rates • Moral hazard adverse selection • Explanations • Bank decision maker minimizes default rates • Low income investors have high cost of defaulting the system • Investment is important compared to total wealth • Bank is only source of financing

13. Conclusions • Important effect of PCG on credit markets • No significant effect on default rates • Possible failure in equity markets • Has to be further explored • High cost of default for low wealth individuals • Has to be further explored