Session 4. Improving lending infrastructure for SME financing

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Why SMEs need Government Assistance?

■ Characteristics① Lack of collateral

② High risk of default

③ High transaction cost

■ Consequence① Limited access to finance

② Credit allocation by banks

③ High interest rate

④ Lack of long-term financing

“ Government Intervention Required !!”“ Government Intervention Required !!”

Underdeveloped SME Financing MarketUnderdeveloped SME Financing Market

Information asymmetry

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Bank loanInterest subsidy

Equity investment

Direct fundDirect lending

Grant

Fund of funds

Credit Guarantee

OthersSME loan ratio

Credit information infrastructure

Issues : source of fund, selection, risk-taker, sustainability, efficiency, market-friendly

SMEsSMEs BanksBanks

CreditEvaluation

CreditEvaluation

Guarantee (Reduce

Credit Risk)

Guarantee (Reduce

Credit Risk)CGSCGS

Hurdles of financingHurdles of financing

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CGS(Credit Guarantee Scheme) provides guarantees on SME loans to cover the default risk of the borrowers. It is known as the most effective and market-friendly government intervention in SME financing.

What is Credit Guarantee Scheme?

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Why Credit Guarantee Scheme?

CGS

Gov’t Banks

SMEs• Access to formal finance

• Low interest rate

• Long-term investment

• Reliable collateral

• Expanded SME market

• Capital adequacy ratio

• Economic development

• Job creation

• Social safety-net

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CGS in the World

Active Moderate

Active

ActiveInactive

More than half of the countries has introduced CGS but many are not so successful

Establishment1976

Market share51%

Source of fundCentral GovernmentBanks

Korea Credit Guarantee Fund

Korea Technology Finance

Corporation16 Regional Credit

Guarantee Foundation

Establishment1989

Market share24%

Source of fundCentral GovernmentBanks

Establishment1999

Market share25%

Source of fundLocal GovernmentCentral GovernmentBanks

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KODIT is the largest credit guarantee institution in the world as a single entity

Status: Non-profit, Non-capital Special Legal Entity

Establishment : 1976

Capital Fund : USD 4.7 billion

Outstanding Guarantee : USD 42 billion* New supply (in 2016): USD 12.1billiion

Number of guaranteed companies : 205,361

Number of Employees : 2,300

Business network : 1 Head office, 9 Regional HQs, 107 Branches

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How the Scheme Works?

① Ordinary Procedure ② SMEs Defaulted

④ Loan

⑤ Repay ① Default

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Key Operational Principles

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Sources of Fund

Government(irregular)

Banks (regular)Banks

(regular)

Others (irregular)

Subject to yearly budget of the government

Mandatory donation in proportion to outstanding corporate loans (APR 0.225%)

Occasional contributions from banks or large enterprises

5%

Government Banks Others

44% 51%

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Performance and outcomes

In Korea 1/3 of MSMEs are credit guarantee customers (MSMEs : 3.5 million)

KODIT is financially sustainable by bank funding w/o government budget

CGS generated 63% of additional credit and 3.1% lower interest rate (2012)

Improved performance, more job creation of guaranteed SMEs

Increased tax revenue for government

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Category

1975

Amount(bil USD) %

LEs 1.1 64.3%

SMEs 0.7 35.7%

Total 1.8 100.0%

2016

Amount(bil USD) %

128 19.4%

490 80.6%

618 100.0%

Guaranteed loans take 13.0% of total SME loans of Banks

Guaranteed loans take 13.0% of total SME loans of Banks

SME loan market grew up to 80% of total corporate loan market

SME loan market grew up to 80% of total corporate loan market

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-5%

0%

5%

10%

15%

20%

25%

-20%

0%

20%

40%

60%

80%

100%

'83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

(1 USD = 1,150KRW)Source: Bank of Korea, KODIT

Asian Financial Crisis

Burst of IT Bubble &

Credit Crunch

Global Financial Crisis

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② Operational Efficiency

Key Issues to Design a Successful CGS

① Financial Sustainability

Who pays the fund for guarantee?

Seed capital may not be enough for the sustainability

How to share fund among three parties (Government, Bank, SMEs)

How to design optimal operational framework?

- Direct (CGS) vs. indirect (banks), Individual vs. portfolio* Consideration : development of banking sector, credit information infrastructure

such as CB and PCR

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③ Risk management

Key Issues to Design a Successful CGS

④ Regulator and Performance Evaluation

Credit risk of SMEs credit assessment tools (Direct method)

Moral hazard of banks maximum payment ceiling (Portfolio method)

Who will regulate CGS? Financial regulators or relevant ministries

What we measure? Outreach, additionality, financial sustainability

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Thank you !