Priorities for the Japanese Economy in 2019 (January 2019)

Reform of the Credit Guarantee System—Will the reform lead to the enhancement of support for SMEs?

YAMORI Nobuyoshi
Faculty Fellow, RIETI

A New Credit Guarantee System Launched in April 2018

The Act to Partially Amend the Small and Medium-Sized Enterprise Credit Insurance Act, etc., which is intended to promote the improvement and development of the management of small and medium-sized enterprises (SMEs), was enacted in June 2017 and was put into force in April 2018. The amendment aims to improve the productivity of SMEs by enhancing support for them. The main specific points of the amendment are as follows:

(1) Creating crisis-related guarantee program
A crisis-related guarantee program has been created as a new safety net that can be promptly invoked at the time of large-scale economic crises like the Lehman Shock and major natural disasters such as the Great East Japan Earthquake. The application period has been set at one year from the date of the event in principle, based on the lesson learned from the emergency guarantee program that dragged on unnecessarily.

(2) Enhancing support for micro businesses
The upper limit on the insurable value under the special small-lot insurance program has been increased (from 12.5 million yen to 20 million yen) in order to make it easier for micro businesses to raise new funds when struck by a sudden business emergency, further aiding them in rehabilitating their business.

(3) Enhancing startup-related guarantees
The government has made clear its stance of supporting business startup through guaranteed credit, by increasing the upper limit on the guaranteed value under the startup-related guarantee program (from 10 million yen to 20 million yen), as the startup stage is viewed as a corporate life stage in which support through guaranteed credit is particularly important.

(4) Expanding the scope of funds in which credit guarantee associations can invest
Credit guarantee associations, which were already permitted to invest in business rehabilitation funds, are now also permitted to invest in other funds.

(5) Cooperation between credit guarantee associations and financial institutions
In order to further improve the management and productivity of SMEs, cooperation between credit guarantee associations and financial institutions is now prescribed legally, and as a result, the two sides are required to flexibly share risks through an appropriate combination of non-guaranteed loans and guaranteed loans in accordance with the actual circumstances of individual SMEs.

(6) Managerial support by credit guarantee associations
Managerial support for SMEs is now legally prescribed as part of credit guarantee associations' operations in order to strengthen their consultation service.

Efforts Required of Credit Guarantee Associations

In order to continuously improve the productivity of SMEs in accordance with the purpose of the legal amendment, credit guarantee associations must make efforts to resolve various issues. The major issues are as follows:

(1) Realizing appropriate risk sharing with financial institutions
The amended law requires the provision of non-guaranteed loans depending on the situation of borrower companies, which means that there is room for flexibility. Given the room for flexibility, individual credit guarantee associations face the serious challenge of preventing moral hazard problems at financial institutions and successfully encouraging the institutions to make efforts to provide appropriate support for borrower companies.

(2) The availability of personnel capable of performing difficult "core operations" such as supporting business launches and rehabilitation, and organizational infrastructure.
As credit guarantee associations are required to play an increasingly large role, they must secure sufficient personnel and establish sufficient organizational systems to fulfill the roles. For employees who have joined associations in the hope of contributing to local communities, the work is challenging but worthwhile. It is necessary to develop an environment that enables these highly motivated employees to improve and exercise their skills.

(3) Maintenance of sound management
In line with a decrease in the balance of guaranteed debt, revenue from fees is decreasing. On the other hand, the support role added to the scope of guarantee associations' operations itself does not generate revenue or profit. While they are still sufficiently financially sound, credit guarantee associations must establish new business models to address these changes.

(4) Increase IT Implementation (improving efficiency and speed)
On the assumption that the volume of guarantee services for companies in the growth stage, which had until now been large, will decrease, it is essential to reduce expenses. In addition, SMEs need a faster and more responsive guarantee service, so credit guarantee associations must make effective use of IT and Fin Tech.

(5) More creative information disclosure
The status of non-guaranteed loans to companies is now being disclosed through the Small and Medium Enterprise Agency, and this is expected to prevent moral hazard problems at financial institutions. On the other hand, in order for the Japanese people to better understand the credit guarantee system, it is necessary to provide information in a way that clarifies how the system is contributing to local economies. Individual associations must make creative efforts to do that.

(6) Preparation for crises
The true value of credit guarantee associations is tested at the time of large-scale economic crises and major natural disasters. While it is necessary to reduce expenses, it is important to maintain readiness to quickly and aptly respond to such emergencies.

The Year 2019 Will be Critical for the Future of SME Finance

It is less than one year since the amended law was put into force. However, credit guarantee associations across Japan have been making active efforts to adapt to the changes since before its entry-into-force, and we have a favorable assessment of the efforts so far made. Even so, although the associations may have adapted to the changes on the surface, we cannot say that they have produced successful results unless their efforts lead to productivity improvements within SMEs. "Well begun is half done," as the saying goes: the beginning is also important for reform. The future of SME finance beyond 2019 will hinge on how successful credit guarantee associations will be in resolving the abovementioned challenges in 2019.

December 26, 2018

January 31, 2019

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