ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Credit Guarantee Systems for SMEs in Asia

The First ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs Session 3, 6 March 2013, ADB HQ, Manila

Shigehiro Shinozaki
Financial Sector Specialist (SME Finance) Office of Regional Economic Integration (OREI) Asian Development Bank
This presentation was prepared under the authors responsibility. The views expressed here do not necessarily reflect the views or policies of ADB, its Board of Directors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this presentation and accepts no responsibility for any consequences of their use.

Agenda
I. Credit Guarantee Systems in Asia

II. Potential Negative Effects III. Key Challenges and the Way Forward IV. Conclusion

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

I. Credit Guarantee Systems in Asia

General Characteristics Expected Roles of Credit Guarantee Landscape of Credit Guarantee Systems

Credit Guarantee & SMEs Access

Net Profit & Loss of CG Institutions

General Characteristics
Public Nature
- promoting the MSME sector as a social mission

Institutions Guarantee
- standardized operation

Repetition & Continuity

- mostly not a single transaction

Not Gratuitous
- guarantee fee

Supplementary
- existence of credit to be guaranteed as a precondition

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Expected Roles of Credit Guarantee

Fill the supply-demand gap in SME finance Lower funding costs for SMEs Alleviate financing constraints for SMEs Reduce social opportunity costs (outreach to the underserved) Timely respond to external shocks
(e.g., financial crisis & disaster)

Mobilize SMEs savings to investment Increase long-term survival rate of SMEs

Provide a chance for SMEs to grow further

Contribute to a resilient national economy

Landscape of Credit Guarantee Systems in Asia

Credit guarantee as a popular tool to improve SME access to finance in line with national SME policies
Mostly govt-affiliated institutions established by special law MSMEs as target clients for government programs Supervised by Finance/Line Ministry or central bank

Risk-sharing arrangement
Partial credit guarantee (with/without collateral)

Centralized system
Regional CG arrangement yet to be established (excl. JPN & KOR)

Credit insurance
Re-guarantee system yet to be established (excl. JPN & KOR)

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Landscape of Credit Guarantee Systems in Asia

Country India Indonesia Institution Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) PT. Asuransi Kredit Indonesia (Askrindo) Perusahaan Umum Jaminan Kredit Indonesia (Jamkrindo) PT. Penjamin Kredit Pengusaha Indonesia (PKPI) PT. Jamkrida Jatim [East Java] PT. Jamkrida Bali [Bali] Japan Japan Finance Corporation (JFC) National Federation of Credit Guarantee Corporations (NFCGC) Korea Korea Credit Guarantee Fund (KODIT) Korea Federation of Credit Guarantee Foundations (KOREG) Korea Technology Finance Corporation (KOTEC) Credit Guarantee Corporation Malaysia Berhad (CGCMB) Deposit and Credit Guarantee Corporation (DCGC) Small Business Development Corporation (SBDC) Small Business Corporation (SBC) Central Bank of Sri Lanka (CBSL)
(no s peci a l i zed i ns ti tuti onfor CG)

Established 2000 1971 1981 1995 2010 2011 2008 1951

(CGCs : 1937-1961)

Corporate Type G P * *

Branch Office(s) 2 19 17 152 CGCs:188 99 CGFs:110 53 16 2 n/a, 13 3 9

Employee 12
(2012.03.31)

Net Asset
(US$ mi l .)

Regulator(s) Ministry of Micro, Small and Medium Enterprises

n/a, 371 520 0.7 5 n/a, 22,093 n/a, 5,693 n/a, n/a, 814 14 n/a, 44 5 1.5 382

389
(2012.04.09)

359
(2011.12.31)

7
(2011.07.01)

Financial Services Authority (OJK) [2013.01 -]

7 n/a, 7,461
(2012)

6,145
(2012.03.31)

Financial Services Agency (FSA); and Ministry of Economy, Trade and Industry (METI) Financial Services Commission; Ministry of Strategy and Finance; and Small and Medium Business Administration Central Bank of Malaysia Ministry of Finance Department of Trade and Industry Central Bank of the Philippines Ministry of Economic Affairs Ministry of Finance

1976 2000
(CGFs : 1996-2003)

2,139
(2011.12.31)

1,301
(2011.12.31)

1989 1972 1974 1990 2001

(SBGFC: 1991)

1,072
(2012.01.04)

Malaysia Nepal Papua New Guinea (PNG) Philippines Sri Lanka Taipei,China Thailand

482
(2011.12.31)

25
(2011.12.31)

n/a, 143
(2012.02.02)

1950
(CG s ta rted: 1967)

43
(2012.03.12)

Small and Medium Enterprise Credit Guarantee Fund of Taiwan (Taiwan SMEG) Thai Credit Guarantee Corporation (TCG)

1974 1991

335
(2011.12.31)

161
(2011.12.31)

Sources: ACSIC (2012), The 25th Anniversary Publication of ACSIC The 25-year History of ACSIC, various annual reports and websites of guarantee institutions in respective countries. Notes: [Corporate Type] G=government-affiliated institution; P=private company; *=local government-owned; - = non-existence or zero; n/a,= no information available

Landscape of Credit Guarantee Systems in Asia

Country India Indonesia Institution CG CGTMSE Askrindo Jamkrindo PKPI Jamkrida Jatim Jamkrida Bali JFC NFCGC (CGCs) KODIT KOREG (CGFs) Surety bond, customs bond, trade credit insurance, etc. Consulting services CI Business Operations Others Micro/Small MSME Target Clients Response to Economic Crisis Increase max. amount n/a, Response to disasters, etc. n/a, n/a, Coverage Ratio (%) 62.5-85 70-80 70-80 75 n/a, n/a, 80 50-85 85-100 Max. Leverage Ratio (%) n/a, 10x net worth 10x net worth n/a, n/a, 35-60x (av. 52.4) 20x capital funds 15x capital funds Guarantee Fee (%, a v.)
Approx.

Guarantee Terms
(month, a v.)

1.00

67 36 36 36 n/a, n/a, 63 24 12

1.20-1.50 2.28 1.50 n/a, n/a, 0.90 1.21 1.10

Japan Korea

MSME n/a, n/a, MSME n/a, n/a, Micro/Small n/a, n/a, Micro/Small n/a, n/a, MSME New products & New products MSME alter conditions (earthquake) Infra credit guarantee, consulting New products, increase guarantee All businesses services, etc. scale & coverage ratio New products & Consulting services, etc. MSME New products Technology appraisal & valuation, technology certificate, equity Tech-SME finance, M&A, technology transfer, business support, etc. Dilrct lending, securitization, equity financing, credit bureau MSME services, & consulting services Guarantee for savings & fixed SME/ deposits Priority sector Business training program, Start-up consulting services, etc. Dilrct lending, MSME note, preferred shares, capacity MSME building programs for SMEs and financial institutions, etc. Profitable (Activities as a central bank) businesses Special measures under govt. Increase emergency guarantee scale program Management support service n/a, n/a, n/a, n/a, n/a,

increase coverage ratio

KOTEC

85

20x net asset

1.26

59

Malaysia Nepal PNG

CGCMB DCGC SBDC

30-90 75 80

6x reserve n/a,

3.65 1.00 n/a,

42 n/a, n/a,

Philippines

SBC

n/a,

n/a, New Products (tsunami)

Extend product period for employment

70-80

3x 0.39 (contingent liability/capital funds) 20x net worth 10x equity

n/a,

12

Sri Lanka

CBSL

n/a,

50-80 60-95 n/a,

1.00 0.50-0.55 1.75

12 8-9 5-7

Taipei,China Taiwan SMEG Thailand TCG

Consulting services, etc. Consulting services, etc.

25th

SME/Start-up New products SME

New products & exempt guarantee fees

New Products (flood)

Sources: ACSIC (2012), The Anniversary Publication of ACSIC The 25-year History of ACSIC, various annual reports and websites of guarantee institutions in respective countries. Notes: [Business Operations] CG=credit guarantee; CI=credit insurance; - = non-existence or zero; n/a,= no information available

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Credit Guarantee and SMEs Access

8

36.7

40
Outstanding Guaranteed Liabilities (% of GDP) [left] SMEs' Access to Guarantee (% of total SMEs) [right]

7 6 5 4 3
2

35 30 25 20 15

26.7

8.9 5.3 7.4 1.9

Askrindo (INO)* Jamkrindo (INO)

10.9
10 5

1.0
0
CGTMSE (IND)*

0.0
PKPI (INO)
JFC/NFCGC (JPN) KOREG [CGFs] (KOR) KODIT (KOR)

1.7
CGCMB (MAL) DCGC (NEP)* KOTEC (KOR)

0.1
SBC (PHI) CBSL (SRI) Taiwan SMEG (TAP)

1.5
0
CfEL (UKG) Burgschaftsbanken (GER) SBA (USA) OSEO garantie regions (FRA)
TCG (THA)

Source: ACSIC (2012), The 25th Anniversary Publication of ACSIC The 25-year History of ACSIC

CONFIDI (ITA)

Net Profit & Loss of CG Institutions

Jamkrindo (INO)

DCGC (NEP)
TCG (THA)

CGTMSE (IND)
Askrindo (INO)

CBSL (SRI) KOREG [CGFs] (KOR) KOTEC (KOR) CGCMB (MAL) KODIT (KOR) NFCGC (JPN) SBC (PHI) Taiwan SMEG (TAP) JFC (JPN) 0.0 0.5 1.0 1.5 2.0 2.5 3.0

Source: ACSIC (2012), The 25th Anniversary Publication of ACSIC The 25-year History of ACSIC Note: Net profit & loss = (Recovery + Fee income)/Payment under guarantee

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

II. Potential Negative Effects

For Financial Institutions For SMEs For Government

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For Financial Institutions

Impact of the risk weighting system under Basel I/II/III
Banks incentive to increase guaranteed SME loans but to reduce unsecured SME loans to strengthen their CAR may not improve poor access to finance for SMEs..

Adverse selection
While credit guarantee facilitates SMEs to access financial institutions, it may also tempt malicious SME borrowers. (e.g. intentional bankruptcy)

Moral hazard
Credit guarantee (esp. full-cover) may discourage financial institutions from monitoring SME borrowers, which may encourage SMEs to use funds inconsistently with loan objectives.

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

For SMEs
A life-prolonging measure for SMEs that should be excluded from business
Guaranteed loans may not rescue SMEs having excessive debt.

Credit guarantee without collateral may discourage SME borrowers from improving management.
Managements assets untapped in case of default, disincentive to pursuing business efficiency, not improving business performance, and increased risk of bankruptcy..

Disproportionate distribution of CG benefits

Centralized CG system will not reach out to local SMEs well.

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For Government
Increased risk of bloating national budgets
Credit guarantee institutions mostly sponsored or fully owned by the government in many countries Unsustainable business unless public fund is injected

Public credit guarantee may make credit market inefficient.

Financial institutions may relax credit screening process, which will increase adverse selection & moral hazard risks for them. Suppression of private businesses as a potential risk

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

III. Key Challenges and the Way Forward

Key Challenges The Way Forward ADB Projects Related to SME Finance

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Key Challenges
Business sustainability
Cost efficiency & profitability Diversified & demand-driven business approach Self-funding (shift from public-dependent to market-based)

Risk-conscious arrangements
Develop re-guarantee system (credit insurance) Develop risk-sharing schemes (partial credit guarantee) Strengthen second credit screening by guarantee institutions

Decentralization
Promote regional credit guarantee schemes with a proper regulatory & supervisory framework

Infrastructure
Establish a credit risk database or credit bureau Credit database supports proper pricing and risk-based management by guarantee institutions.
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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

The Way Forward

Balance

Innovation

Credit Guarantee System

Infrastructure

Literacy

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The Way Forward

Balance
Balancing govt. intervention with a viable credit guarantee business Legal framework to encourage competition (e.g. licensing to regional CG
institutions)

Innovation
Diversified, demand-driven, and risk-based products & services
e.g. credit insurance, trade credit guarantee/insurance, thematic products (e.g. guarantees for energy efficiency, anti-pollution, business restructuring, crisis & disaster), and securitized loan guarantee

Infrastructure
Data infrastructure (SME credit risk database or credit bureau) Supporting professionals (re-guarantor, servicer, etc.) Regulatory & supervisory framework (collaboration btw central & local govts)

Literacy
Networking, information sharing, and peer learning among CG institutions Capacity building for CG institutions (e.g. 2nd credit screening skill)
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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

ADB Projects Related to SME Finance

Sovereign projects (examples):
PRC: Development of Small and Medium-sized Enterprise Credit Guarantee Companies (TA4350): USD550,000 [2004 approval] PAK: Credit Guarantee Scheme for Small Scale Industries (TA1033):
USD150,000 [1988 approval]
[1985 approval]

THA: Small Industry Credit Guarantee Fund (TA0676): USD190,500

Non-sovereign projects (examples):

PHI: Credit Information Bureau (7218): USD18.4 million [2005 approval] PAK: SME Sector Development Program: SME Guarantee Facility Component (7190/3709): USD65 million [2003 approval] SRI: Small and Medium Enterprise Assistance (7137/1522): USD55
million [1997 approval]

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IV. Conclusion

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Conclusion
Although not a universal solution, credit guarantee is expected to fill the gap in SME finance and enhance SME access to finance mostly in line with national SME policies. Meanwhile, credit guarantee opens a debate on its effect, e.g., increased adverse selection & moral hazard risks for financial institutions. Due to its public nature, the government is mostly a main sponsor of CG institutions in Asia, where business sustainability is a key challenge in the CG industry. To create the sound CG system and the vibrant SME base at the national level, it is crucial to well balance government intervention with private-led credit guarantee business.

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Conclusion
Innovation & technology are key to developing demand-driven & risk-based CG products. Building SME data infrastructure is critically important for the national CG system, which will support proper pricing & riskbased management by CG institutions. Promoting CG literacy for all stakeholders is a necessary component of developing the CG industry.

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Thank you for your attention.

For further questions: Shigehiro Shinozaki Financial Sector Specialist (SME Finance) Office of Regional Economic Integration Asian Development Bank Email: sshinozaki@adb.org

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Annex
About ADB:
The Asian Development Bank (ADB) is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 67 member nations48 from the regionwho have committed $167.1 billion in loans to the vision of a region free of poverty. With headquarters in Manila, ADB has 30 offices around the world with 2,833 staff from 59 members as of 31 December 2010. ( As of end 2010)

About OREI:
OREI traces its roots to the Regional Economic Monitoring Unit (REMU)established in the aftermath of the 1997/98 Asian financial crisis. It was upgraded and renamed OREI in April 2005, as ADB expanded its role in promoting regional cooperation and integration (RCI) throughout Asia and the Pacific. OREI assists its developing member countries in pursuing open regionalism that serves as a building block to global integration. OREI works toward building a regionally integrated and globally connected Asia and the Pacific by Promoting regional economic policy dialogue in Asia and the Pacific and providing policy advice; Supporting capacity building and institutional strengthening to help ADB member countries integrate both within the region and with the rest of the world; Conducting research and serving as a knowledge and information center on RCI; and Acting as ADBs focal point for regional infrastructure and financial sector development and developing partnerships with regional forums and international institutions. 24

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