SMEs, public credit guarantees and mutual guarantee institutions

Abstract

Purpose The purpose of this paper is to focus on public guarantees granted to micro-, small- and medium-sized enterprises (SMEs) by the Italian national credit guarantee programme (Fondo Centrale di Garanzia – Central Guarantee Fund – (CGF)). The CGF provides a direct guarantee to banks granting loans or a counter-guarantee to mutual guarantee institutions (MGIs) acting as first-level guarantors. Because the behaviour of MGIs could affect the default risk of counter-guaranteed loans, it is vital to investigate their operating and structural characteristics in order to identify an optimal design for public credit guarantee schemes (PCGSs). Design/methodology/approach Using regression models, the paper analyses the determinants of default for 33,229 SME loans guaranteed by an MGI and counter-guaranteed by the Italian CGF. The dependent variable is the ex-post default risk of SMEs’ counter-guaranteed loans in the 2010-2011 period. The explanatory variables are certain characteristics of the MGI. Findings The authors demonstrate that increases in an MGI’s leverage and the size of the counter-guaranteed portfolios increase the default risk. When the counter-guaranteed portfolio increases, MGIs are more risk taking but take less risk than when local and specialized MGIs are at play. Finally, direct public aid is relevant. Practical implications An appropriate design of the PCGS becomes crucial to controlling moral hazard in financial institutions and ensuring the financial sustainability of public intervention in favour of SMEs. Originality/value The paper evaluates an original and confidential firm-level data set that is not available in public documents or supervisory board statistics but is collected directly from the MGIs that participated in this study.

Effects of Soft Loans and Credit Guarantees on Performance of Supported Firms: Evidence from the Czech Public Programme START

“…In addition to the moral hazard, this might also be a case of adverse selection problem, e.g., [43,44]. Therefore, the supported enterprises may report even higher rates of the default and worse financial results when compared to the regular non-supported companies, which is of course not favourable for the taxpayers who have to pay the costs of the programme, e.g., [30,33,81,82].…”

“…A well-designed programme might boost the supported companies, nevertheless, the programme that is dominated by a moral hazard and adverse selection problems might lead to a waste of public resources on the burden of taxpayers. The outcomes of the programmes may, therefore, vary over the time and across the regions, e.g., [9,20,30,39,90,101].…”

“…Evaluations of the financial forms of entrepreneurship support in Europe on the firm level were in the past years mostly investigated by the scholars from the Southern European countries, such as Italy or Spain, e.g., [7,20,30,[45][46][47][48]. However, the empirical evidence investigating the outcomes of the soft loans and credit guarantees and generally questioning the outcomes of entrepreneurship policies in the Central and especially Eastern European countries have not deserved much research attention so far, e.g., [27,[49][50][51][52][53][54][55][56][57][58][59].…”

“…Financial institutions are not capable to obtain all of the relevant information about the loan applicants, therefore, they over-qualify applicant's risk of bankruptcy, especially for new projects/start-ups and as a result, entrepreneurs aiming to deliver innovation to the market, do not get enough of financial resources. Because of information asymmetries and high transaction costs, financial institutions are reluctant to lend to entrepreneurs, or they lend at very high interest rates, and, therefore, public intervention through soft loans and credit guarantees might be an option as to how to alleviate some of the market imperfections, e.g., [29][30][31][32][33][34].…”

Conflict of Legal Norms Regarding Regulation of Creditors of Encumbrance Rights Holders in the Debtor's Bankruptcy in Indonesia

“…[3] For the security of creditors from the risk of default on creditor receivables, it is important to control moral hazards in financial institutions and ensure financial sustainability from public intervention. [4] Regulation on mortgages is needed in credit management to anticipate the risks that financial institutions have to face. [5] The principle of guarantee in various countries including Indonesia, for immovable objects uses mortgages.…”