The role of the Rural Credit Guarantee Foundation (AVHGA) in sustainable rural development

Abstract

The Rural Credit Guarantee Foundation (AVHGA) plays an important role in rural development by issuing credit guarantees for small- and medium-sized (SMEs) rural enterprises. AVHGA was founded in 1991 and has since issued more than 30,000 credit guarantees connected to more than 550 billion HUF credit. The aim of credit guarantees is to increase the creditworthiness of SME's, to improve their access to finance, and to ensure their financial viability. A credit guarantee is a type of credit collateral, in the legal form of an on-demand guarantee. With such a guarantee creditable enterprises can get financing from banks, even though they do not have enough collateral to cover the credit. In case of a bankrupted credit, AVHGA pays a certain percent (the maximum guarantee coverage is 80%) of the loss to the credit institution immediately. This makes credit guarantees one of the most efficient forms of state subsidy, because effective monetary payment occurs only in the case of defaulted loans. In this study we describe the activity of AVHGA and provide detailed analysis of data by rural development areas, financial products, and borrowers' experiences. Keywords: Rural Credit Guarantee Foundation, credit guarantee