1. 1 The Effect of Partial Credit Guarantees on the Credit Market for Small Businesses. The case of FOGAPE (Small Businesses Credit Guarantee Fund of Chile) Presenter: Alejandro Drexler Co-authors: Kevin Cowan, Álvaro Yañez Partial Credit Guarantee Schemes Experiences and Lessons The World Bank, Washington DC, March 13-14, 2008

2. 2 Description of FOGAPE Governmental Credit Guarantee – For Small Businesses – Yearly sales Under US$ 1,000,000 The fund started its operation on 1998 Maximum Coverage – 80% Long Term Investments Loans and Credit Lines – 70% Short Term Investments Loans Capital: US$ 80 millions, can lever 10 times (Can Insure US$ 800 millions) 30,000 operations a year Average operation US$ 15,000 Concentrated in Retail (30%), Transportation (20%), Services (14%), Agriculture (10%)

3. 3 Description of FOGAPE Resources Allocated Through The Formal Financial Institutions Resources allocated through sealed bid auction, institutions bid on – Amount – Coverage (lowest coverage wins) FOGAPE charges a fixed fee for the insurance – Fee is different for each institution – Depends on former default rates – Default rates between 1.2-1.9% in the last 4 years 17 institutions participate in the auction 5 biggest institution allocate 90% of the resources

4. 4 Questions Does FOGAPE generate more loans – Alternatively FOGAPE could be used to insure loans that would have been issued anyway Does FOGAPE affect the incentives of banks and investors? – Do banks reduce screening or monitoring? – Do clients reduce effort? – We measure performance with default rates

5. 5 Data Loan: Total loans issued by institution i in month t Bid: Amount requested to FOGAPE by bank i Allocated: Amount allocated to institution i Delay1: Delay in payment between 30 and 59 days Delay2: Delay in payment between 60 and 89 days FDelay1: Delay between 30 and 59 days 1 year after loan was issued FDelay2: Delay between 60 and 89 days 1 year after loan was issued

6. 6 Data Only loans below US$ 200,000 Only long term investment loans We distinguish new from old clients Average loan for new clients US$ 20,000 Average loan for old clients US$ 35,000 Total loans 40 US$ million (35% for new clients) Insurance per month 9 US$ million Observations 5 banks 45 month = 225 data points Period: January 2003 – September 2006 1 data point dropped

7. 7 Methodology Panel Regression Controlled for time and institutional fixed effects Robustness – Heteroskedasticity – SE clustered by institutions

8. 8 Additionality of FOGAPE on the amount of loans New clientsOld Clients Allocated0.8560.703 [0.094]***[0.166]*** Bid0.020.18 [0.094][0.166] Observations224 Adj. R-squared0.690.58 Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

9. 9 Additionality of FOGAPE on the amount of loans Strong effect of PCG on loans – More loans in the market – 1 dollar insurance generates.8 dollars of loans for new clients and.7 dollars for old clients Possible explanation: failure in equity markets Problems – Endogeneity Approach to reject endogeneity – Split the sample

10. 10 Additionality of FOGAPE on the amount of loans, split sample New ClientsOld Clients allocated0.5430.383 [0.053]***[0.066]*** bid-0.0330.116 [0.053][0.066]* Observations224 Adj R-squared0.740.59 Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1% New ClientsOld Clients allocated0.1640.054 [0.103] bid0.0730.116 [0.103] Observations224 Adj R-squared0.190.36 Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1% Insurance Intensive SectorsNon Insurance Intensive Sectors

11. 11 Effect of FOGAPE on Default Rates New Clients Old Clients FDelay1FDelay2FDelay1FDelay2 Allocated-11.006-1.368-4.178-1.79 [7.223][3.343][5.521][3.327] Bid4.491-4.4537.3350.035 [7.307][3.382][5.510][3.320] Delay10.7460.0230.6120.159 [0.140]***[0.065][0.067]***[0.041]*** Delay2-0.0750.4590.1790.383 [0.386][0.179]**[0.186][0.112]*** Observations224 Adjusted R-squared0.250.20.550.43 Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

12. 12 Effect of FOGAPE on Default Rates No effect of PCG on default rates We expected higher default rates – Moral hazard adverse selection Explanations – Bank decision maker minimizes default rates – Low income investors have high cost of defaulting the system Investment is important compared to total wealth Bank is only source of financing

13. 13 Conclusions Important effect of PCG on credit markets No significant effect on default rates Possible failure in equity markets – Has to be further explored High cost of default for low wealth individuals – Has to be further explored