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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
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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
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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 !