Public guarantees to SME lending: Do broader eligibility criteria pay off?

This study evaluates the causal effects of admission to the Italian credit guarantee program on SMEs’ profitability, financial health, investments, borrowing costs, and creditworthiness. It further investigates how access to the public guarantee scheme (PGS) affected the firms that became eligible only after the program's creditworthiness assessment criteria were eased following the credit rationing that especially hit SMEs after the sovereign debt crisis. Deterioration of financial conditions, rise in debt payback period, worsening of balance between current assets and current liabilities, increase in borrowing costs, and greater weight of interest expenses on sales were found in beneficiary firms. These negative effects were stronger for firms that were admitted to the PGS following the softening of the eligibility criteria. Therefore, having a less severe public guarantee scheme contradicts its counter-cyclical function as the enduring deterioration of the admitted firms’ financial conditions threatens their resilience to adverse market conditions.