The Finance Ministry looks set to propose for cabinet consideration on Tuesday the draft bill for the National Credit Guarantee Agency (NaCGA), a new facility for small and medium-sized enterprises (SMEs) that provides direct guarantees for a low fee.
This legislation represents a challenge for the government, which is striving to increase access to formal credit for domestic entrepreneurs. Surveys indicate 40% of the country's 3.2 million SMEs still face difficulties accessing formal credit.
Purpose of NaCGA
The push for the NaCGA bill -- which the cabinet has already approved in principle -- aims to reform the credit guarantee system currently operated by the Thai Credit Guarantee Corporation (TCG), to allow broader access to credit for entrepreneurs.
However, the draft bill stipulates that financial institutions must contribute to NaCGA's fund, which will serve as a capital source for providing credit guarantees. This is in addition to government contributions, which are required to provide initial funding of 10 billion baht, and the guarantee fees paid by the entrepreneurs themselves.
The bill proposes that financial institutions must contribute to the fund at a rate not exceeding 0.3% per year of the total volume of domestic business loans issued by commercial banks and specialised financial institutions. The effective rate will later be announced by the ministry via regulation.
A source from the financial sector who requested anonymity said at present financial institutions are not required to contribute to a fund for use in credit guarantees for entrepreneurs, making them reluctant to make such contributions.
Meanwhile, Deputy Finance Minister Paopoom Rojanasakul said the draft law is expected to go before the cabinet on May 13, following the earlier approval in principle of the bill.
According to Mr Paopoom, while the maximum contribution rate is 0.3% of each financial institution's total business loan portfolio, the actual contribution rate may be significantly lower once this law is enforced.
He said mandating contributions from financial institutions is meant to incentivise them to utilise NaCGA's services more frequently. This will help reduce the cost burden of credit assessment for the financial institutions, as NaCGA will take over the role of evaluating loan quality on their behalf.
Controversies and concerns
During the public hearing process for this draft law, which is required under the constitution, some participants suggested that the contribution to the fund -- calculated based on the domestic business loan portfolio of financial institutions at a rate not exceeding 0.3% -- should only apply to the portion of loans for which NaCGA provides credit guarantees to business operators.
Meanwhile, others suggested that the contribution rate from financial institutions should be reduced to no more than 0.1% per year, in order to avoid creating an excessive financial cost burden for commercial banks and specialised financial institutions.
Some suggested that the calculation of financial institutions' contributions should be based on the loan portfolio specifically extended to SMEs and micro-enterprises, rather than on the total business loan portfolio of commercial banks or specialised financial institutions.
Other participants emphasised that NaCGA's operations must remain independent, free from political interference and unrelated to financial interest groups, in order to ensure professional decision-making.
This is especially important in the selection and performance evaluation of the director and senior executives, which should be based on clear, transparent and performance-oriented criteria.
A source from the financial sector who requested anonymity said the independence of NaCGA is critical to its long-term viability. If the institution is subject to political interference, it risks being used as a tool for gaining political popularity, without regard for the potential negative impact on the state budget or the financial burden imposed on contributing institutions.
Operational differences
The concept of establishing NaCGA to replace the current TCG is modelled on the Korea Credit Guarantee Fund (KODIT), a specialised, non-profit public institution in South Korea. KODIT provides a wide range of credit guarantees and is funded by government contributions, domestic financial institutions and other sources such as donations from large domestic corporations.
Under NaCGA's credit guarantee system, the guarantee fee will be based on the individual risk profile of each entrepreneur -- unlike the current portfolio-based fee structure that does not reflect the actual credit risk of each borrower.
In the NaCGA model, the agency itself will assess the credit risk of individual loan applications requesting guarantees.
Entrepreneurs can then use the issued guarantee to apply for a loan from a financial institution. This means NaCGA will effectively take on a critical role of financial institutions -- risk assessment -- bringing it closer to being a financial institution itself, lacking only the authority to directly lend.
The key question is whether NaCGA will truly have greater expertise in credit risk assessment than financial institutions, the source noted.
Additionally, once NaCGA issues a credit guarantee to an entrepreneur, the collateral (if any) may be registered under NaCGA's name -- subject to mutual agreement -- unlike the current system where the TCG guarantees loans while the collateral remains with the financial institution.
NaCGA's credit guarantee system will shift from a portfolio-based to a risk-based pricing model, to more accurately reflect actual credit risk.
Some entrepreneurs pay guarantee fees that exceed their actual risk, while others with higher credit risk pay lower fees based on the product rather than their individual profile.
Role and expectations
NaCGA's scope of guarantees will also be broader than that of the TCG. The agency will be able to guarantee loans from commercial banks and non-bank financial institutions, as well as guarantees for debt instruments or asset securitisation.
However, this does not include equity instruments or loans provided by other businesses involved in capital sourcing, as determined by the policy committee, and also excludes equity or equity-like instruments.
It may also guarantee loans provided by other funding-related businesses, as determined by policy directives -- again, excluding equity or quasi-equity instruments. This broader mandate is designed to better address the liquidity needs of entrepreneurs.
Entrepreneurs eligible for guarantees from NaCGA are not limited to SMEs; other types and sizes of businesses may qualify, as defined later by the board of directors.
NaCGA can also propose plans directly to the cabinet in urgent cases where there is a need to support entrepreneurs or promote credit access in alignment with government policy goals, such as the development of strategic sectors or the national economy.
Beyond improving SMEs' access to formal credit and reducing reliance on informal funding sources, NaCGA is expected to serve as a stabilising mechanism in times of economic volatility, particularly during crises marked by high risks and uncertainties in the financial system.