The cabinet has approved in principle the establishment of the National Credit Guarantee Agency (NaCGA), a new facility that will provide financial risk guarantees for smaller businesses seeking loans, Deputy Finance Minister Paopoom Rojanasakul said on Tuesday.
The Ministry of Finance and the Bank of Thailand are expected to draft legislation to be submitted to the House of Representatives for approval, which is projected to take about six months.
The central bank has said that improving credit access for small and medium-sized enterprises (SMEs) is crucial for getting the country’s stagnant economy moving.
Less than half of Thailand’s 3.2 million SMEs have access to loans from financial institutions, according to the central bank.
In June, the cabinet approved credit guarantees worth 50 billion baht for SMEs to access loans.
Mr Paopoom said the new agency represents an overhaul of the country’s credit guarantee system. It will be a legal state agency, but neither a government agency nor a state enterprise, he said.
The agency will directly guarantee loans by assessing the credit risk of borrowers, including information verification, individual risk assessment, fee calculation, risk-based pricing, approval, and issuance of letters of guarantee.
The agency will earn income from three sources: government contributions, contributions from lenders, and fees from borrowers.
It will function in similar fashion to an insurance firm, but provide “financial risk insurance” to the public via several steps.
People seeking loans would contact the agency, which would assess the risk of each applicant. It will charge a low fee for loan guarantees based on risk, with contributions from the government and financial institutions.
A letter of guarantee issued by the agency, insuring against risk of default, can be used to apply for a loan from a financial institution.
The new agency is meant to complement the efforts of the existing Thai Credit Guarantee Corporation (TCG). The latter operates under the Ministry of Finance and supports businesses through various financial products and services.
Under the credit guarantee structure of the TCG, financial institutions providing loans to SMEs evaluate the risk of each customer themselves.
If they determine the risk is high, the financial institution will refer the customer to the TCG for assistance with a guarantee. If the agency provides the guarantee, the institution is quite likely to approve a loan to that SME.
In contrast, NaCGA will provide financial risk insurance and evaluate each borrower’s risk itself before issuing a guarantee.
TCG guarantees loans under a portfolio guarantee scheme for up to 30% of the portfolio. The NaCGA will provide individual guarantees based on risk-based pricing, resulting in a lower budget burden for the state compared with the portfolio guarantee approach.