The Effect of Credit Guarantees on Credit Availability and Delinquency Rates

Partial credit guarantees are among the most important interventions designed to improve financial opportunities to small- and medium-size entrepreneurs (SMEs). Here, a third party, usually the government, guarantees the repayment to the lender in the event that the borrower defaults. Almost 100 countries have some form of PCGs; and, in the US alone, PCGs support US$ 62.5 billion in loans to SMEs. Despite the magnitude of this intervention, the empirical evidence about its effectiveness and its impact on economic incentives is contentious. We use novel data to examine whether credit guarantees affect the credit available to small- and medium-size entrepreneurs (SMEs), and whether they affect repayment. We find that credit guarantees increase the amount of credit; in particular one additional dollar of insurance increases the total credit for SMEs by US$ 0.65. We also find that borrowers are 2% less likely to repay insured loans compared to uninsured loans. A decrease in the collection effort by the bank explains this decrease in the repayment rate. However, the monitoring effort remains unchanged