putting in place the conditions to set-up a credit ... · to set-up a credit guarantee scheme for...

OECD Eurasia Competitiveness Programme 1

EASTERN EUROPE AND SOUTH CAUCASUS INITIATIVE

PUTTING IN PLACE THE CONDITIONS TO SET-UP A CREDIT GUARANTEE SCHEME FOR AGRIBUSINESS SMES IN UKRAINE

Sixth Task Force Meeting

Tuesday 23 February 2016, Kyiv

OECD Eurasia Competitiveness Programme

Today’s meeting

2

1 – Key directions

2 – Project management

a) Provide comments on primary and secondary features of the CGS

b) Provide comments on identified location options to register the scheme’s funds

c) Provide comments on recommended risk management tools (including risk policy manual;

asset/liability mismatch tool and accounting, tax and compliance tool)

d) Provide comments on the Presentation and the two draft project reports by 29 February 2016

e) Endorse and provide comment on next steps following project completion (appointment of parties responsible for pursuing seeking funds from donor institutions, etc.)

FOR ACTION


Primary features Secondary features

To design a CGS for Ukraine, the OECD identified a set of primary and

secondary characteristics

Those aspects which constitute the basic concept

of the CGS – the “public policy” decisions of the

scheme

Definition

Including:

Definition

Including:

All other design features of the CGS. They are

developed based on an analysis of how best the

primary features of the CGS can be developed

within the specific institutional and market

context and the projections of a financial model

Mission

Targeting

Type

Guarantee product

Funding and registration

Governance and staffing

Guarantee process

Monitoring and evaluation

A B


To increase credit access for target group

4

Primary characteristics decisions

Agricultural SMEs, based in Cherkassy, Kharkhiv, Poltava and

Vinnytsia

Internationally-funded, public/private entity

Mission Targeting

Type

A

Primary characteristics form the basic concept of the CGS

Primary characteristics REMINDER


Strategy: Supervisory Board (public/private)

Operation: Lean management team (private)

Fund seeded with €3 million

Guarantee application: banks

Loan appraisal: banks

Partners: 2-3 banks

Products: WC/E/I

Eligibility: firm size +

nature; loan nature

Guarantee

Processes

Claim: foreclosure begun

Claim payment: staggered

Collateral recovery: banks

In case of default

Recovery income: 50/50

Monitoring and

evaluation

Guarantee

Product

Secondary characteristics

Coverage rate: 50%



Bank-focused LLC / NBFI

providing individual guarantees


Pricing: 1% + 1%

Sustainability elements

Additionality elements

B

From these characteristics a set of secondary features has been

developed, based on the specific institutional and market environment….


…. as well as modelling various assumptions in a financial model that has

been developed for the CGS in Ukraine

Development of a financial model

Analysis of Ukrainian

environment and target

group

OECD / CESEE best practice

Discussions with

stakeholders

Design features based on …

Secondary characteristics B







Partners: 2-3 banks

Products: WC/E/I


nature; loan nature

Guarantee

Processes




In case of default


Monitoring and

evaluation

Guarantee

Product

Secondary characteristics: guarantee product

Coverage rate: 50%






Pricing: 1% + 1%

First, recommendations have been made on the scheme’s product

offering

2

1

3

4

5

AGENDA





Guarantees would be provided on three types of loan product

8

PRODUCTS 1

Investment capital - machinery: seed drills, combines, land

€80,000-500,000 Av.: €120,000 (~₴2.8 mn.)

• Type: Equipment/investment loan • Seasonality: None required • Average maturity: 36mth av.

Light trucks, trailers, transport equipment

€60,000-120,000 Average: €75,000 (~₴1.76 mn.)

• Type: cash/equipment/investment • Seasonality: some may be required • Average maturity: 18-20mth av.

Working capital - small machinery: seed drills, combines

€20,000- 60,000 Average: €40,000 (~₴940,000)

• Type: cash loan • Seasonality: usually, yes. May need

to be paid before winter • Average maturity: 8-10 mnth av.

Production Equipment Investment

A review of the loan products of select commercial banks in Ukraine found that:

• 88% offered working capital loans (here: production)

• 78% offered short-term investment loans (here: equipment)

• only 22% offered long-term investment loans (here: investment)

For which the target group was eligible



9

Quality check

Limited tender

2-3 Initial group of CGS

partner banks

Relevance check

Pre-selection

7-10 Based on quantitative

questionnaires and

qualitative interviews

Eligibility check

Initial screening

17/43 Check based on positive

(e.g. history of

sustainable agricultural

lending, presence in

pilot regions) and

negative criteria (e.g.

transparency & stability)

Delivered by a carefully-chosen set of partner banks, based on the

agreed bank selection methodology

Preliminary assessment of first two steps conducted

PARTNERS 2



The final selection of which would be based on a tendering and due-

diligence process

10

Tendering process

1. Limited tender

— only open to eligible &

relevant banks

2. Transparent

3. Demanding

Annual review and tender renewal

1. Selection of add. partner banks

2. Monitoring / quality checks

3. Knowledge sharing

4. Review of pricing

Due diligence process

Assessment of bank:

1. Policies

2. Procedures

3. Processes

4. Concrete lending results

5. Future targets

Technical support to be provided by NBU or international experts

The quality assessment would also provide

information for the application of a risk-

based pricing model.

PARTNERS 2


Agenda

Participants

Agricultural production technology

Financial analysis tools for agricultural entities (II)

Financial analysis tools for agricultural entities (I)

• Characteristics and segmentation of target group

• Key indicators /factors that influence production outcomes

• Strategic planning and risk management

• Risks affecting production outcomes & ways to minimize

• Special tools for evaluation of agricultural producers

‒ Technological maps and crop analysis

‒ Livestock movement statements and livestock analysis

• Balance sheet for agriculture

• Income statement for agriculture

• Cash flow statement for agriculture

• Ratio analysis

‒ Continuation of (I), plus:

• Determination of loan conditions; minimum and maximum loan

amounts; amount of loan relative to owner's investment;

repayment conditions and schedules; interest rates; fees and

penalties

Since our last Task Force meeting, the OECD has held capacity-building

seminars for bank representatives that could participate in the scheme

Agricultural finance Theme

Representatives of:

Crédit Agricole, ProCredit, Raiffeisen

Bank Aval, Pravex, Ukreximbank,

Ukrsotsbank, Oschadbank, Megabank,

UkrSibbank


Five days of training

(1-5 February 2016)

TRAINING



12

A. Eligibility criteria (Yes/No) Yes/No Result

1 Land size Segment of 100 - 2,000 ha? Yes Proceed

2 Location of borrower Located in target region? Yes Proceed

3 Type of business Agriculture more than 75% income? Yes Proceed

4 Business experience At least two seasons/cycles? Yes Proceed

5 Annual turnover USD 30,000 to USD 1,500,000? Yes Proceed

6 Loan term 5 yrs or less (inv.) or 1.5 yrs or less (w/c)? Yes Proceed

7 Loan purpose Business use? Yes Proceed

8 Credit history Negative check? Yes Proceed

In order to be guaranteed, the project recommends that the scheme’s

client should meet certain eligibility criteria

ELIGIBILITY 3

Nature of loan

Other characteristics

Firm size Criteria based on land size and annual turnover

Criteria based on loan term and loan purpose

Criteria based on location, business experience and credit history



And in its early days the scheme would guarantee 50% of the loan

principal

13

COVERAGE 4

Risk coverage of 50% is recommended, given the

newness of the scheme & homogeneity of the target

An individual scheme can usually accept

more risk (60-80%)

Schemes that just target agriculture

usually provide lower coverage (50-

60%) due to higher covariant risks

Schemes that are new

don’t usually start by

covering a high share of

risk

Coverage must be sufficiently

attractive to banks

Raise

Lower

Coverage rate could be increased to 70% as the

scheme matures, depending on agricultural sub-

sector

-0.4

-0.2

0.0

0.2

2016 2017 2018 2019 2020

Ch

ange

s in

pro

fit

ove

r b

ase

rat

e (

mn

.)

Result of adjusting coverage rate up or down*

40% 45% 55% 60% 70%

Anticipated impact on profitability of rate adjustment



It is proposed that the pricing of guarantees should initially be an

upfront 1% of loan principal and an annual 1% of guaranteed amount

14

PRICING 5

In Yr1/Yr2 of operation:

it is proposed that the pricing of guarantees is based on international best practice,

analysis of the Ukrainian context, and the projections of the scheme’s financial model

Afterwards:

A pricing model can be developed based on expected operating costs and the

ultimate net loss probability, as well as additionality aims

Upfront fee:

1% of principal

Annual fee:

1% of

guaranteed

amount

TBD as scheme

matures

> with greater

coverage?

During this time the scheme will build up its knowledge base


Secondary characteristics: funding and registration

15






Partners: 2-3 banks

Products: WC/E/I

Guarantee

Processes




In case of default


Monitoring and

evaluation

Guarantee

Product

Coverage rate: 50%






Pricing:

Second, the OECD has made recommendations on the size of the fund

and its legal form

AGENDA

1

2




nature; loan nature



16

Model projected for 5 yrs

Capital: seeded with €10 mn. & €1.5 mn. TA for

start-up and administrative costs over 24 months

Coverage rate: 50%

Recovery rate: 20%

Interest rate on deposits: 2%

Tax rate on profit: 18%

No. guaranteed loans: 4,620 over 5 years

Av. guarantee size: €75,000

Av. guarantee term: 24 months

Leverage: 1.5 – Yr1; 5 – Yr5

Financing costs: 5% annually

Dividend payout ratio: 50% on after-tax net

income from Yr3; 0% expected for first 3 years

Assumptions Outcomes

Claims rate: 2% in Y1; 2.8% by Y5

Counter-guarantee: 50% from Yr2

The recommendation on fund size has been calculated based on the

projections and assumptions of the scheme’s financial model

FUNDING 1



17

The nature of its funding should be a lump-sum contribution provided

by international donors

Decision 1: who will

finance guarantees?

International

donors

Decision 2: how will they

be funded?

Lump-sum

contribution Equity

State Commercial

actors

Decision 3: where will funds

be localised?

Decision 4: provided as a

loan or grant?

Decision 5: how much

required?

Outstanding

questions

FUNDING 1

€10 million, based on projections

of scheme’s financial model

provided as a grant, with dividend

payments possible after year 3

Lump-sum recommended

as the only form of

finance that would

provide the scheme with

sufficient liquidity (as a

scheme that provides

individual guarantees) and

credibility to banks that it

can honour its guarantee

committments



18

Although the decision must be made by the Task Force and the scheme’s

donors on where the funds are localised

TO BE DISCUSSED

Local registration Foreign registration

• Risk of F/X and dividend

restrictions

• Greater potential of possible

misuse or misallocation

• Relatively easy and simple to

form

• Relatively cheap to form

• Greater access to relevant

legal services

• More credible to partner

banks

• Can mitigate loss in fund

value stemming from LCY

devaluation and other types

of F/X risk

• Better shield against

resource misallocation

• High transaction costs

• Significant legal costs O

P Pros

Cons

FUNDING 1



19

Two examples of

OECD CGS

registered in a

foreign

jurisdiction

ACGF* EPGF**

In September 2014, the ACGF was

registered in Germany as an

incorporated foundation under

German civil law in accordance with §

2 StiftG NRW

Status

Benefits

Registering a CGS as a foundation in

Germany means that the inherent

risk can be transferred and, at the

same time, strongly protected

against third parties

Costs

However, registration and operation

of the ACGF as German foundation

turned out to be a complex and very

bureaucratic undertaking, which

caused high legal and other

transaction costs

Status

Benefits

Costs

The Stichtings don’t have any legal

owners so that they can put money

or other assets outside the reach

of government authorities or

other interested parties

The EPCGF, so called a “Dutch

Stichting”, is a legal person, created

through a legal act, with no

members or share capital that exists

for a specific purpose

If funds are to be registered in a foreign jurisdiction, a number of options

already exist in OECD countries

Key: * Afghan Credit Guarantee Foundation; ** European-Palestinian Credit Guarantee Fund

Fairly high legal and other

transaction costs, albeit less so than

with other jurisdictions. More study

needed by qualified legal firm to

quantify these costs.

FUNDING 1 TO BE DISCUSSED



20

It has been recommended that the scheme is registered as a Limited

Liability Company (LLC) and a Non-Bank Financial Institution (NBFI)

REGISTRATION 2

Registration of the scheme as an LLC

provides it with more flexibility than

registration as a foundation or a joint-

stock company. It is the only legal

form that Natskomfinposlug have said

that they would accept for such a

scheme.

Registration as an NBFI is in-line with

the regulation of guarantee issuance

under Ukrainian law

Regulated by

Natskomfinposlug *

* However a draft law is currently being discussed by

Parliament which sees the dissolution of

Natskomfinposlug & the transfer of its responsibilities to the NBU and the National

Commission on Securities and Stock Market (NCSSM)



21

D

Register as a legal entity in the State Register of Legal Entities

Register as a legal entity in the FSC’s formal register of FIs

Obtain an FSC license for provision of specific CGS activities

Finally, a preliminary review has been conducted to identify the steps for

registering the scheme as both an LLC and an NBFI

Processes required to register as a financial service and begin operations

• An accounting system that meets FSC & legal requirements

• CEO with experience and qualifications meet requirements

Requirements

Requirements

Requirements

1

2

3 • An exhaustive list of financial services to be provided

• Evidence of CGS document regulating its FS procedure & contracts

• An accounting system that meets FSC & legal requirements

• The required share / capital funds

• Compliance director & chief accountant qualifications meet requirements

• Evidence of owned/leased premises, as registered in SRoLE

• Documents on company ownership and purpose

• Company formation application signed by founders

• The required share capital funds

• Identification of KYC rules for bank account opening

REGISTRATION 2


Secondary characteristics: governance and staffing

22






Partners: 2-3 banks

Products: WC/E/I

Guarantee

Processes




In case of default


Monitoring and

evaluation

Guarantee

Product

Coverage rate: 50%






Third, recommendations have been made on the scheme’s governance

and staffing

AGENDA



Pricing: 1% + 1%


nature; loan nature

1 2



23

A two-tier governance structure has been proposed, with a Supervisory

Board for strategy and a Management Board for operations

Organisational structure

GOVERNANCE 1

Quality

assurance

Supervisory Board Strategy & supervision

General manager Team & institution

Credit risk management

Governance body Organisational Committee

Financial risk management Legal risk management

In addition, an external quality assurance committee, which reports to the Supervisory Board, has

been recomennded, and three committees which report to the General Manager

• 1 general manager • 1 DM/risk manager • 1 lawyer • 2 loan officers • 1 administrative staff

Staffing in yr1



24

It is proposed that these four committees should be responsible for

designing, executing and overseeing key policies and procedures

• Establishes how the CGS shall operate within the

policy direction of the board of directors

• Addresses business strategy, investor relationships,

CGS funding issues, and approach for implementing

board policies generally – such as guarantee

monitoring and administration, claims and asset

liability management

Management committee

Guarantee & bank partnership comm.

• Assesses the duration and gap between CGS

guarantee asset maturities and the maturities of

liabilities funding these assets

• Ensures that assets and liabilities are carefully

managed so CGS income and profitability does not

become adversely affected by interest rate or

foreign exchange movements

Asset/liability management comm.

Quality assurance committee

• Approves applications from new partner banks and

reviews guarantee applications above internally-set

threshold (recommendation: €250,000 of individual

loan exposure)

• Reviews problem loans and guarantee pay-out

procedures in order to update policies and modify

as needed

• Externally assesses CGS operations and performance

on a semi-annually basis before each supervisory

board meeting

• This task consists of one week of onsite and one

week of offsite monitoring and compliance review

for reporting to the board

Operational committees

GOVERNANCE 1



25

And the duties and composition of the scheme’s Supervisory Board and

the general management are proposed as follows

• Support the establishment of the CGS institution

• Negotiates with the regulatory bodies

• Authority to appoint and dismiss general manager

• Approves guarantee policies and procedures

• Provides strategic direction

• Provides assistance and guidance as needed

Supervisory Board (3-4 persons)

Management Board (3-4 persons)

Board representation * Role

Lead investor rep. (TBD) Chairperson

1-2 ministry rep. (TBD) Co-chair

Independent expert Provide independent

expertise, e.g. audit skills

Committee Member

Credit risk

management

Deputy manager and snr.

guarantee officer

Financial risk

management


guarantee officer

Legal risk

management


legal specialist

Quality assurance Consist of a CGS expert and a

local lawyer

Suggested composition Function

* It is recommended that the board should start out lean, and grow as the scheme expands

and matures. The scheme’s representative from the government would be responsible for

coordinating with the other ministries when inputs and policy facilitation is required

STAFFING 2

General manager:

• Manages CGS business

• Leads interface with various stakeholders (i.e.

supervisory board, CGS committees and partner

banks)

Deputy manager:

• Manages operational processes such as fee-setting

Snr. guarantee officer:

• Managing credit analysis and PB due diligence

Snr. legal specialist:

• Ensures legal compliance in guarantee transactions

TO BE DISCUSSED


In order to ensure effective governance and staffing, the OECD is holding

capacity-building seminars on regulation and management

22

Feb

CGS regulation and management

Session on CGS overview and

management

23

Feb

Advanced session on CGS

Regulation

24

Feb

Advanced session on CGS Risk

Management

Background & challenges to establishment of a CGS

Specific features of a CGS

Date

Eligibility criteria for CGS beneficiaries & partners

Formation and Governance of the CGS

CGS Regulatory issues

Supervision and government oversight roles

CGS Prudential standards

CGS Guarantee activities

CGS Principles of Risk Governance

CGS Risk mitigation and management tools

IAS, IFRS and ICC standards for CGS schemes

AML from prospective of a commercial bank

Topic Agenda

Theme

Secondary characteristics: governance and staffing TRAINING


Secondary characteristics: guarantee processes

27






Partners: 2-3 banks

Products: WC/E/I

Guarantee

Processes




In case of default


Monitoring and

evaluation

Guarantee

Product

Coverage rate: 50%






Fourth, recommendations have been made on the scheme’s processes for

granting and paying guarantees

AGENDA

1

2



Pricing: 1% + 1%


nature; loan nature

Application



An individual guarantee mechanism has been proposed, yet one that is

light-touch

28

APPLICATION 1

Is there a maximum guarantee ceiling?

It is proposed that managerial authorisation should be

required if guarantee amount is above €250,000

Appraisal

Bank or CGS conducts credit appraisal?

Application

Ex-ante or ex-post? Bank or client applies?

If former, how does CGS appraise applications?

What is the criteria?

Ex-post Bank applies to CGS Criteria identified in the

product offering

Bank should conduct credit appraisal

It is proposed that guarantee is granted if bank’s risk

management procedures perform well & loan meets

CGS eligibility criteria



The same approach is envisioned in the event of loan default, with banks

taking the lead on collateral recovery

29

DEFAULT 2

Recoveries

Bank or CGS responsible?

When can claim be called? Validation criteria

How are recoveries shared?

How many days to process claim?

Proposed that this is once legal proceedings have been

initiated & foreclosure begun

Proposed that fund transfer would approved if proper risk

management followed

2-3 days envisioned

Recommended that bank is responsible for collateral claim

Claims

50/50 allocation recommended

Method of payment Sequencing of payment How many days to pay claim?

Cash transfer envisioned, as needed

Staggered process recommended

50% after 90 days; 50% after 180 recommended


Secondary characteristics: monitoring and evaluation

30






Partners: 2-3 banks

Products: WC/E/I

Guarantee

Processes




In case of default


Monitoring and

evaluation

Guarantee

Product

Coverage rate: 50%






Fifth, recommendations have been made on the monitoring and

evaluation aspects of the scheme

AGENDA



1

2

Pricing: 1% + 1%


nature; loan nature



31

An important part of assessing and ensuring the scheme’s sustainability

is to manage the multiple risks to which it is vulnerable

CGS Bank

is the risk of a change in value

caused by the fact that actual

losses, incurred for inadequate

or failed internal processes,

people and systems, or from

external events (including legal

risk), differ from the expected

losses

is the risk of an asset/liability

mismatch that renders the CGS

unable to meet its payment

obligations within the stipulated

timeframe

is the risk of losses in the value

of an investment due to

movements in market prices

Credit risk is the risk of

default in the event that the

borrower is unable to make

the required payments

The scheme’s credit risk will

be shared with partner

banks. The partner bank will

be responsible for mitigating

the majority of the credit risk

The CGS’s role in credit risk

mitigation will be restricted to

monitoring the performance

of its portfolio and

diversifying to the extent

possible, as well as screening

the bank’s credit appraisal

procedures

Credit

Operational

Liquidity

Market

SPECIAL FEATURE: RISK MANAGEMENT SUSTAINABILITY 1



32

To this end, a number of risk management tools have been designed

tailored to the CGS in Ukraine

CGS Bank

Credit

Operational

Liquidity

Market

Asset/ Liability Mismatch (ALM) tool

Accounting, tax and compliance tool

1. Screening direct counterparty (banks):

Partner bank assessment & monitoring

2. Screening indirect counterparty (SMEs):

Financial indicator & benchmark analysis

Risk Policy Manual




33

Which can be used by the scheme’s future staff to monitor and offset

specific risk exposures, as well as to collect data for strategy decisions

• Scores the client on key financial indicators, as well as the risk of both the loan and the client

Description Tool

Financial

indicator &

benchmark

analysis

Partner bank

assessment &

monitoring

Risk Policy

Manual

Asset/ Liability

Mismatch (ALM)

tool

Accounting, tax

and compliance

tool

• Provides analysis that the client will generate sufficient cash from operations to repay the loan

How it mitigates risk

• Scoring tool to measure bank performance on various indicators related to credit allocation, as well as HR, management and IT

• Ensures that the partner bank has sufficient systems and procedures in place to be trusted to give responsible and prudent loans

• Risk policy document describing overall risk mitigation techniques

• Puts in place a mechanism for the CGS to provide guarantees prudently and in accordance with the direction of the Board

• Analysis process to identify and mitigate risks related to possible asset/liability mismatches

• Involves development of an MIS architecture, as well as cash analysis solutions

• Ensures that risks related to possible asset/liability mismatches are tracked and mitigated

• Ensures that the CGS has a framework in place to operate in accordance with Ukrainian laws




34

It is recommended that the CGS adopts the COSO framework as a

comprehensive risk management system for internal control

Component 1: Control

environment

sets the “tone at the top”,

demonstrating an institution’s

commitment to integrity and

ethical values

Component 2: Risk assessment

clear objectives have been

specified and risks to the

achievement of these objectives

have been identified, along with

appropriate risk management

techniques

Component 3: Control activities

the institution develops control

activities that contribute to the

mitigation of risks enabling the

institution to operate effectively

in line with its risk tolerance

Component 4: Information

and communication

the institution uses robust

information to support the

internal control function. It

communicates this internally,

including objectives & internal

control responsibilities

Component 5: Monitoring

activities

ongoing evaluations are carried

out to determine whether

internal control components are

functioning as expected. Deficits

are assessed & identified &

communicated to parties

responsible for corrective

actions in a timely manner

1.

2.

3.

4.

5.



An important element of risk management is supervision, and to this end

the OECD will hold further capacity-building seminars

24

Feb

Supervision and management

Advanced session on CGS

Supervision and Agricultural

Lending

25

Feb

Advanced Session on CGS

Agricultural Lending

Dispute resolution (collateral) for CGS schemes

Dispute resolution (collateral) for CGS in UKR context

Date

Agricultural sector segmentation and risks

Access to finance bottlenecks

Agricultural SME credit assessment

Lending approaches and credit technologies

CGS as tool for agricultural SMEs

Recommendations to policy makers

Topic Agenda

Theme

Secondary characteristics: monitoring and evaluation SUSTAINABILITY 1


It is proposed that robust data systems are in place to monitor indicators

of the scheme’s sustainability and additionality

Secondary characteristics: monitoring and evaluation SUSTAINABILITY 1

Data warehouse system

It is estimated that the cost of such a system would be under EUR 100,000, and this is factored into the €1.5 mn. in TA funds recommended for the first 24 months of operation

For data storage, reporting and analysis (particularly as the CGS grows in size)

Sustainability indicators Additionality indicators



37

It is recommended that this database monitors key financial performance

indicators in order to keep track of the scheme’s sustainability

SUSTAINABILITY 1

Monitoring

Pay-out rate

Factors that could be monitored include …

Net loss rate

Recovery rate

Guarantee portfolio at risk

Transaction cost per unit of currency guaranteed, average no. of days

taken to issue a guarantee & average no. of days taken to pay a claim

Losses incurred

Net losses incurred

The capacity of CGS & lender

to recover losses

Portfolio quality

Operational efficiency

Indicator Measures …


It is recommended that these indicators, plus updated financial accounts,

are compiled & evaluated by operational committees & fed up to the

Supervisory Board for policy decisions Secondary characteristics: monitoring and evaluation SUSTAINABILITY 1

Evaluation (annual/quarterly)

• Decreasing leverage rate

• Increasing guarantee fees

• Decreasing coverage rates

• Portfolio diversification

• Increasing operational efficiency

It is recommended

that the relevant

indicators of the

scheme’s financial

performance are

reviewed at regular

intervals by the

various operational

committees, and

results fed up to

Supervisory Board

Levers to increase

sustainability

include:

• Liquidity forecast

• Portfolio report

• Profit and loss statement

• Balance sheet

Tools to assess

sustainability

include:

Decision made by Supervisory Board,

based on compiled reports & advice

Compiled and assessed by

various operational committees



39

It is recommended that the database monitors the nature of guarantees

provided by the scheme in order to later evaluate the CGS’s additionality

ADDITIONALITY 2

Monitoring

Growth in the volume and number of guarantees

Factors that could be monitored include …

Characteristics of guaranteed firms and the loans they receive

Characteristics of loans granted

Financial additionality

Financial and economic additionality

Financial additionality

Indicator Measures …



40

B. Economic additionality Weight Min. target

score 1 2 3 4 5

1 Size of active ha. (1 cattle=100ha) 15% 3 1,500-2,000 1,000-1,500 400-1,000 200-400 100-200

2 Level of income applied to agro 10% 3 — — 75-90% — 90-100%

3 Annual turnover (USD) 15% 3 1,200,001-

1,500,000

700,001-

1,200,000

250,001-

700,000

110,001-

250,000 30,000-110,000

4 Collateral coverage (without G.) 5% 3 — > 100% 50-100% 31-50% 10-30%

5 Level of previous borrowings 10% 3 loan in last

2 years —

no loan in

last 2 years never had loan

6 Loan term and purpose 10% 3 — w/c w/c & equip equipment investment

7 Age of current equipment 5% 3 < 7 years — 7-12 years — 12 years

Subtotal 70% 2.10

C. Socioeconomic additionality Weight Min. target

score 1 2 3 4 5

1 Number of employees 10% 3 — 1-10 empl. 10-20 empl. > 20 empl. family farm

2 Location of borrower 15% 3 — — KHA/PO — CH/VI

3 Local roots 5% 3 — — foreign lives in city lives on farm

Subtotal 30% 0.90

Total 100% 3.00

Level of additionality Medium 2 = low 2 to 3.5 = medium > 3.5 = high

In order to later assess the performance of the scheme and partner banks

in this regard, a scoring matrix has been developed

ADDITIONALITY 2

Evaluation


Decision made by Supervisory Board,

based on compiled reports & advice

Compiled and assessed by

quality assurance committee

41

It is recommended that annual/bi-annual additionality targets are set in-

line with the CGS’s operational objectives, and performance against these

targets measured, with findings fed up to the SB for policy decisions Secondary characteristics: monitoring and evaluation ADDITIONALITY 2

Evaluation (annually/bi-annually)

• Increasing leverage rate

• Increasing coverage rates

• Advisory services/technical

assistance for SMEs or banks

Levers to increase

additionality include:

• Growth of guarantee portfolio

• Scoring matrix

• Study measuring the growth of

firms receiving guaranteed

loans vs. control group

Tools to assess

additionality include:

It is recommended

that the relevant

indicators of the

scheme’s financial

performance are

reviewed at regular

intervals by the

various operational

committees, and

results fed up to

Supervisory Board


As the project comes to an end, it is important to review the risks

identified and assess their relevance in the current context….

Next steps REMINDER

Type Mitigation measure

Inte

rnal

Limited funding resources

Limited funding resources can be overcome by mobilising financial resources from international donors. The elaboration of a donor strategy would allow the targeting of relevant bilateral donors and international financial institutions (IFIs) able to provide financial and technical support for the establishment of a CGS.

Lack of buy-in

The attractiveness of the scheme can be ensured through a proper risk-sharing design as well as dialogue with banks. To fully ensure take-up of guarantees, the CGS must work closely with local banks to make sure that the scheme’s terms and conditions are beneficial to all parties, especially end-users.

Limited managerial capacity

The risk of limited managerial capacity is being addressed by the project. A series of capacity-building seminars are being organised, and the training material will be made available for future reference.

Limited lending and technical capacity

A sound screening of banks eligible to participate in the CGS should be conducted based on the specific multi-stage method developed for this purpose. In addition, technical assistance could be provided to selected banks to strengthen their knowledge of the agricultural-SME business cycle.

Low financial literacy of farmers

Banks are likely to only extend loans (even with guarantees) to farmers with adequate financial literacy and the scheme may also need to be coupled with financial education programmes. The OECD has already conducted work on financial literacy amongst farmers in Ukraine and prepared a set of policy recommendations to address this barrier (OECD, 2015d).

P

+

+

+

+


… the external risks remain valid, and more needs to be done to ensure

they are properly addressed

Next steps REMINDER

Type Mitigation measure

Exte

rnal

Unstable macroeconomic environment

Such a scheme should only be established once the macroeconomic environment is stable. Risk assessment such as sensitivity analysis should be conducted frequently, and once the pilot is completed the Supervisory Board should consider different avenues for portfolio diversification – such as opening to rural enterprises or food processing companies. This process may involve identifying firms that are less vulnerable to macroeconomic shocks and encouraging their participation.

Political influence Ensuring the selection of a completely independent and skilled management team through public tender and to separate it from the political leadership would mitigate the risk of political influence.

Corruption, related-party lending, and the presence of “pocket banks”

Banks should be carefully selected. The bank selection tool mentioned previously looks not only at “positive criteria” but also at “negative criteria” – such as the strong risk of high related-party lending risk.

Limited banking sector liquidity

The application of a sound bank selection method would ensure that the most suitable partner banks for the CGS are identified and selected. In addition, it is recommended that the tendering process be limited in its pilot phase to 2 or 3 banks that have the resources to provide loans to the targeted SMEs. In addition, IFIs could provide credit lines to participating banks in order to boost their liquidity.

Challenging legal and regulatory environment

While the “Law of Ukraine on Financial Services and State Regulation of Financial Services” might initially seem sufficient for the operation of a CGS, a full in-depth legal assessment should be conducted in order to anticipate any legal barriers and any requisite legal changes.

P

O

+

+

+


To set-up the CGS in more suitable conditions and maximise its potential

for sustainability, other related policy reforms should be put in place

Next steps FOR DISCUSSION

• The lifting of the moratorium on land sales

• Stabilisation of the financial sector and the macro-economy more broadly

• Strengthening of credit rights

• Increased training for banks on agricultural credit technology

• Put in place programmes to increase financial literacy

• Definition of the regulatory body and carry out a further legal assessment in

the new context

• Set-up of the Supervisory Board with public sector representatives

It is suggested that the Credit Guarantee Scheme for Agribusiness SMEs in Ukraine is considered once Ukraine is back to political and economic stability


Conclusion of project and steps going forward …

Next steps

1 – Key directions

2 – Project management

TF Proposals to be submitted to the

OECD-Ukraine Co-ordination Council

FOR ACTION

d) Provide comments on the Presentation and the two draft project reports by 29 February 2016

e) Endorse and provide comment on next steps following project completion (appointment of parties responsible for pursuing seeking funds from donor institutions, etc.)

a) Provide comments on primary and secondary features of the CGS

b) Provide comments on identified location options to register the scheme’s funds

c) Provide comments on risk management tools (including risk policy manual; asset/liability mismatch

tool and accounting, tax and compliance tool)

Contact details

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Antonio Somma Head of Programme OECD Eurasia Competitiveness Programme Tel: + 33 1 45 24 93 90 Email: [email protected]

Gabriela Miranda Project Manager Ukraine OECD Eurasia Competitiveness Programme Tel: + 33 1 45 24 95 01 Email: [email protected]

Annie Norfolk Beadle Policy Analyst OECD Eurasia Competitiveness Programme Tel: + 33 1 85 55 64 01 Email: [email protected]

Yerim Park Project Co-ordinator OECD Eurasia Competitiveness Programme Tel: + 33 1 85 55 64 13 Email: [email protected]

46

mailto:[email protected]








BACKUP

47


Elaboration of credit risk management tools

Credit risk – Partner bank assessment tool

(3) Recommendations on risk management

Scoring category Paper Practice Paper Practice Bank

score Pass

Credit –

Marketing & selection 12 20 6.5% 9.9% 72% YES

Credit –

Application processing 23 23 12.5% 11.3% 76% YES

Credit - Prequalification 17 17 9.2% 8.4% 82% YES

Credit - Underwriting 55 55 29.9% 27.1% 93% YES

Credit - Closing & funding 24 24 13.0% 11.8% 79% YES

Credit - Monitoring 23 23 12.5% 11.3% 88% YES

HR - Employee selection 23 16 12.5% 7.9% 94% YES

Management –

Business model 13 18 0.0% 0.0% 92% YES

IT - MIS 7 25 3.8% 12.3% 89% YES

Total 197 221 100% 100% 86.4% YES

Partner bank assessment tool

Credit



Credit risk – Financial indicator and benchmark analysis –pt.1

(3) Design of risk management procedures

Financial indicator and benchmark analysis tool - 1

Key financial indicators

Indicator Value (in EUR)

Financial

result

Revenue from operations in P 1* 1,269,000

Revenue from operations in P 2** 1,152,000

Net profit after taxes in P 1* 200,000

Assets Working capital 250,000

Total assets 800,000

Liabilities

Short-term liabilities:

- bank loans 50,000

- other loans from financial institutions 2,000

- commodity loans 45,000

- other short-term liabilities 0

Total short-term liabilities 97,000

Total liabilities 497,000

Requested

loan

Amount of the loan 150,000

Loan maturity, months 12

Total installments during loan maturity

(max. 12 months) 160,000

Collateral value 80,000

Total installments of other loans during loan maturity (max. 12 months) 105,000

Loan repayment overdue (Y/N. If yes, additional clarification is needed) No

Credit



Qu

an

tita

tive a

naly

sis

№ Financial ratios Weighted Calculation (formula) Options Points Result Score

1 Current ratio 5% Current assets

/ Short-term liabilities

≥1 1 2.58 0.05

<1 0

2а Turnover coverage

ratio

25%

Turnover / Loan(s)

installments

≥3 1 4.79 0.25

<3 0

2b Profit coverage ratio Net profit / Loan(s)

installments

<1 0

0.75 0.00

≥1 &

<1,2 0.3

≥1,2 &

<1,5 0.8

≥1,5 1

3 Equity share 10% (Total assets - Total

liabilities) /

Total assets

<0,5 0

0.38 0.00 ≥0,5 1

4 Ratio of equity to loan

amount 10%

(Total assets - Total

liabilities) /

Loan

<1 0

2.02 0.10 ≥1 1

5 Collateral coverage

ratio 5%

Collateral value / Loan

amount

≥0 &

<0,5 0

0.53 0.04 ≥0,5 &

<1 0.8

>1 1

6 Growth of revenue 15% (Revenues P1 /

Revenues P2) - 1

≥0 1

0.10 0.15 > -0,25

& <0 0.5

≤ -0,25 0

Subtotal (max. 70% = 0,70) 70% 0.59




Risk assessment indicators - 1 Credit



Qu

ali

tati

ve a

naly

sis

№ Indicator Weighted Options Points Result Score

1

Does the client/

principal owner of

business own property

other than those

provided as collateral?

5%

Real estate (including non-

agricultural land), vehicles,

production equipment

1

0 0.00

No other property 0

2 Credit history 10%

overdue 0-7 days / has never had

delay 1

0.8 0.08 overdue 8-30 days 0.8

overdue 31-90 days 0.5

overdue 91-180 days 0.1

overdue over 180 days 0

3 Business experience 10%

over 5 years 1

0.3 0.03 3-5 years 0.6

1-3 years 0.3

4 Age of the client 5%

24-55 years 1

0.5 0.03 56-65 years 0.8

up to 24 years and over 65 years 0.5

Subtotal (max. 30% = 0,30) 30% 0.14

Total (max. 100% = 1,00) 100% 0.73




Risk assessment indicators - 3 Credit