Dáil Éireann Debate, Thursday - 26 April 2012
48 Deputy Sandra McLellan asked the Minister for Jobs, Enterprise and Innovation the cost of administration of the new partial loan guarantee scheme; if these costs are fixed or relative to the drawdown of the scheme by small and medium enterprises; the expected loan default ratio; the cost to the State. [20896/12]
View answerThe costs of the Temporary Partial Credit Guarantee Scheme arise in relation to the expenditure on the guarantees paid out when loans default and the operational cost of administering the scheme. Costs will be partially offset by receipts of premiums paid by borrowers and recoveries achieved in respect of loan defaults.
It is important to note that the Scheme will facilitate new lending, encourage investment and company growth (scaling), save jobs and facilitate the creation of new jobs, and will boost trade.
The benefits forecast to arise from this intervention in each year of operation, on the basis of each tranche of €150m of additional lending to SMEs, include:
Over 1,300 jobs created;
Over €25m of exchequer benefits in tax revenues and welfare cost savings.
The net cost for an annual portfolio of €150 million of guaranteed lending is approximately €6.38 million, including estimated administration costs of €0.5m per annum. The proposed three year temporary nature of the scheme caps the costs to the exchequer at approximately €19m. Assuming that:
1. The Scheme is open for three years (i.e. supports three distinct annual tranches of guaranteed lending),
2. That for each loan guaranteed the Guarantee is valid for three years (or the term of the loan if shorter) and,
3. The maximum lag between a default occurring and a claim against the Guarantee being settled is two years,
then a delivery infrastructure will need to be in place for a total of eight years. The costs are broken down as follows:
Cost of Scheme Administration (estimated x 8 years) —€4.00m,
Gross Cost of Scheme Claims —€33.75m,
Premium Receipts —€18.60m,
Net Cost of Scheme —€19.15m,
Net Cost per €150m Annual Portfolio —€6.38m.
My Department does not have the inhouse infrastructure, capacity and skills resources required to operate the Scheme. Therefore, the Government have agreed that the operation of the initiative should be outsourced in order to maximise efficiency, ensure skills capacity and to manage relationships between the State and lenders.
Having considered a range of possible combinations of guarantee rate and portfolio default limit which, when applied to the guaranteed portfolio, will deliver the desired overall risk share, a guarantee rate of 75% and a portfolio default limit of 10% has been agreed by the Government. This sets the overall portfolio claim limit at 7.5% (75% x 10%). For a given portfolio of lending allocated to each bank, each loan in the portfolio would carry a 75% guarantee, but potential claims under the guarantee are capped by the 7.5% portfolio claim limit. Therefore, the actual default performance of a portfolio may in fact exceed the portfolio default limit. However, the extent to which the State covers overall losses is capped at the default rate of 10%, and any losses in excess of that must be borne by the Lender.
