The government has reduced the subsidy it has been providing for insurance coverage premium for enterprises and insuring credits extended under the government’s subsidised loan scheme.

The government provides subsidised loans to different groups and for different kinds of enterprises without collaterals but since there is a chance of default the loans have to be insured.

According to the amended Working Procedure on Interest Subsidy released by the central bank on Tuesday, the government will only provide a 50 percent subsidy in premium to be paid to the insurance company for projects promoted by targeted groups.

Earlier, such a subsidy on insurance coverage was 75 percent of the total premium to be paid. As per the working procedure, insurance coverage of the project is a must to get the loan under this scheme.

“The main reason behind the government reducing its cost for insurance premium and credit insurance, could be to expand the net of beneficiaries instead of limiting the facility to a limited number of people,” said Dev Kumar Dhakal, executive director at the central bank. “ While reducing support to an individual beneficiary, the government has increased the total size of the budget for providing subsidy under this scheme. This shows that the government aims to increase the number of beneficiaries.”

According to Dhakal, the government has allocated nearly Rs14 billion for the subsidy this fiscal year, a sharp rise from the Rs5 billion allocated in the last fiscal year.

Under this scheme 10 different types of loans are provided. They include: commercial farming and livestock credit; educated youths self-employment credit; credit to returnee migrant workers; women entrepreneurship credit; Dalit community business expansion credit; higher and technical education credit; credit to earthquake affected people for constructing private homes; textile industry credit.

Under this scheme, credit is provided either based on project or collective guarantee rather than on collaterals.

Likewise, the government has also reduced its subsidy in credit guarantee on possibly default by borrowers.

As per the amended working procedure, the government will provide just 50 percent of the total fees to be paid to the Deposit Insurance and Credit Guarantee Corporation for credit guarantee while the concerned bank or financial institution that extended loans, should bear half of the cost for the credit guarantee facility. Earlier, the government used to cover 75 percent of the fee to be paid for credit insurance and the commercial banks and final institutions 25 percent.

Credit guarantee or insurance means the Deposit Insurance and Credit Guarantee Corporation will repay the loans if the borrower fails to pay the loan to the concerned bank or financial institution.

A new category of credit for technical education training and youth self-employment credit has been added in the latest amendment. Under this scheme, a person graduated with secondary level education can get a loan up to Rs500,000 for self-employment. One must have taken the training of at least seven days from government run training agencies to get this credit. The working procedure has stated that the people affected by earthquake, floods and landslides should be given priority to provide this category of loans.

According to Dhakal, this has opened the window for less educated people to get credit. Earlier under the educated youths self-employment credit category, only those who have passed diploma level education can only get the credit.

The government provides an interest subsidy of five percent in most categories of credits under this scheme. In the case of women entrepreneurship credit, the government will provide the interest subsidy of six percent. For credit provided for commercial farming and livestock above Rs50 million, the government will provide two percent interest subsidy.