11

SME Policy Financing in SME Policy Financing in KoreaKorea

August 6, 2010August 6, 2010

Moon-Hwan KIM SMBA, KOREA

22

Ⅰ. SME Financing Status

SME Financing PoliciesⅡ.

Direction of SME Financing Support & Development

Ⅲ.

33ⅠⅠ. SME financing . SME financing StatusStatus

Borrowing from banks takes lion's share

1. General Introduction

Share of direct financing like stocks, corporate debentures, etc: 2% in 2009

Bank borrowing

2007 2008 2009

370.0

6.4

422.4

6.7

443.5

9.0

2010.03

446.8

4.7Direct financing

Total 376.4 429.1

452.5 451.5

2006

303.3

4.0

307.3

2009

2008

Bank capital

62.1

71.5

(98.7)

(1.3)

(98.3)

(1.7)

(98.4)

(1.6)

(98.0)

(2.0)

(99.0

(1.0)

Policy capital

30.8

21.8

3.1

3.9

0.3

0.2

0.8

0.1

2.8

1.8

0.1

0.5

Stock Private debt

< SME Financing in Sources >

< Breakdown of External Capital Sources (By

Amount)>

※ Source: Korea federation of small and medium business (Kbiz)

Non-Bank finance

institute

Corporate

debenture

O’seas borrowin

g

44

2. SME Financing by Sector

1) Borrowing From Banks

Outstanding SME loans : 448.2 trillion won, accounting for 46.6%

Since the 1998 foreign exchange crisis, bank lending to SMEs has increased steadily, affected by shrunken lending to big

< Status of Bank Lending to SMEs (unit: trillion won),%>

Total won-currency loans

2007 2008 2009

792.1

428.6

903.8

515.2

942.3

533.9

2010.05

961.3

545.6Corporate loans

SMEs 370.0(46.7)

422.4(46.7)

433.5(46.0) 448.2(46.6)

Household loans 363.5 388.6

408.6 415.7

of aggregate won-currency lending

conglomerates and stiffer regulations for household lending

55

Sailent Points of Bank Lending to SMEs

Blue chip-oriented lending practices continue Lending based on mortgage or certificate of guarantee

⇒ Financing bottlenecks stiffle promising SMEs with weak financing structurebut holding competitive technology and growth potential

as well as micro-enterprises

’08.12 ’09.06 ’09.10 ’09.12 ’10.05

Banks lending Interest rates for SMEs

6.91

6.75

5.43 5.67 5.45 5.24

5.565.895.895.56

Loan based on

certificate of credit

guarantee

23.1

Demand for savings & deposits

6.5

High Lending interest

rate

22.7 5.2 6.6 9.2

Borrowing ceiling

evaluation based on

sales turnover9.5

Difficult to borrow at right time

Stiffer Loan

screening Procedure

s

Credit lending

difficulty

< Bottleneck in Financing via Finance Institutes (%) >

※ Source: Kbiz

Demand for

Excessive real estate mortgage

15.9

66

2) Capital Financing in Direct Finance Market SMEs, due to lower credit rating, face bottlenecks in

access to SMEs’ capital from direct finance market: 1.7 trillion

won,

Angel investment is recovering slightly but remains at

2006 2007 2008 2009 2010.6

7,333

9,9177,247

8,671

4,148

971897

492 346

Venture capital

Angel capital

2006 2007 2008 2009 2010.6

20.72.9 34.2

5.4

29.8

3.1 53.9 1.721.5

5.3

346

direct finance market

accounting for 8% of large conglomerates

stagnation level

77

3) Capital From Policy Financing

Characteristics of SME Financing SMEs-- Backbone of the national economy

SMEs

Large EnterprisesNos of Companies Employees Manufacturing Production Exports

0.1%

99.9% 53.7%

46.3%

67.6%

32.4%88.5%11.5%

Mortgage-based lending practices and private finance institutes’

Role of Policy Finance Support for Biz start-up & areas of market failure

- Compensating for shrunken lending, stemming from business fluctuation

Pioneering in fostering of excellent tech & green facing next-gen. growth industries that are facing bottlenecks in access to finance markets

avoidance of assistance lead to market failure

including global financial crisis

88

3) Capital Financing via Policy Finance

Policy finance : policy capital, credit guarantee, on-lending,

Policy financing scale: significantly expanded during global

Policy capital(loans)

Credit guarantee assistance

2007 2008 2009

2.8

44.7

3.2

50.3

5.9

75.3

2010

3.1

66.1

Aggregate-limit lending

6.4 8.1 10.0 8.5

On-lending - - 0.2 2.1

Policy financing Implementation (trillion won)

aggregate ceiling lending, etc.

2009 economic crisis

99

ⅡⅡ. SME Financing Policies. SME Financing Policies

1. History of Development of SME Policy Financing

1) '60s~'70s Large enterprise and heavy & chemical industry-oriented growth

Established finance and support institutes to

Introduced mandatory minimum

SMEs became targets for policy wise protection

Industrial Bank of Korea ('61), Korea Credit Guarantee Fund (June '76),

* Increased the bank loan ratio of provincial banks for SMEs: ‘06 7.7%

‘72

‘06

‘75

12.9%

56.7% 43.7%Provincial Banks

Commercial Banks

Loan Ratio to SMEs

and export drive policies went into full swing

implement SME policy financing

Small and medium Business Corporation (Dec. '78)

lending ratio system for SMEs (April '65)

30% → 40% ('72)

1010

2) '80 ~ Foreign Exchange Crisis

While experiencing a high growth period, structural imbalance

Compared with the '70s, bank loan ratios for SMEs increased

Centering on provincial banks and special banks, household loans

occurred between heavy & chemical industries and light industries and also between large enterprises and SMEs

Awareness of SME functions and roles changed

Major Policies

Newly established a mandatory provision in the

Increased bank loan ratio for SMEs

Expanded structural improvement funds through

30%→35%

Commercial Banks 40%→55

%Provincial Banks

25%Domestic Branches of Foreign Banks

started to be increased

quantitatively but actual ratios turned out to be similar.

restructuring of SMEs

Constitution regarding protection and cultivation of SMEs

1111

3) After Foreign Exchange Crisis

Breakaway from bank loans rose with large enterprises' efforts to

(Early 2000s) Risk-avoidance tendency prevailed, and household

Banks strengthened loan marketing for households and blue-chip SMEs. Loans to SMEs rose continuously.

(After 2005) With the start of the policy restricting household

strengthen their financial soundness in the wake of bankruptcy risk

loans, SME loan ratio rapidly surged

loan ratio began to outpace corporate loan ratio

(Unit: trillion won)

Banks' SME Loan Ratios

’05 년 ’06 년 ’07 년 ’08 년

422.2371.7

303.3258.0

’09 년

443.5

during the foreign exchange crisis.

1212

SME Financing Support Scheme

2. Key Elements of Current SME Financing Support Systems

Policy Fund

On-lending

Category Micro-businesses

Start-up/Small enterprises

4.5%

Supportive Interest Rates

Bank Fund

-

6 ~ 8%

3.7~5.0%

7.1~7.3%

4.3~8.4%

Medium-sized enterprises

4.1~5.4%

5.5~6.3%

4.9~6.5%

High Risk (Financial Expenditure: High)High Risk (Financial Expenditure: High) SME Financing Support Scheme

SME Financing Support Scheme

Start-up & Promotion Fund (SBC)

Fund of Funds

(1.2 tril. won)

Policy Fund

(3.1 tril. won)

Fund of Funds

(1.2 tril. won)

Credit Guarantee

(67.1 tril. won)

On-lending (KOFC)

Aggregate Credit Ceiling System(BOK)

Interbank Export Loan

(2.1 tril. won)

State-controlled

Banks (178 tril. won)

Private Banks

(257.5 tril. won)

Aggregate Credit Ceiling Loan

(8.5 tril. won)

Mandatory SME Loan Ratio (45~80%)

Investment

Loans

Proxy Loan

Direct Loan

Investment

Guarantees

1313

1) Support for Policy Fund Loans

Business implementation agency: SBC

Content of the business: Supply long-term, low-interest fundsto SMEs avoided by private banks due to weak credit

and collateral despite having technological and business viability

Revamped corporate evaluation to focus on technological and businessviability, including future marketability and growth potential,

rather than on financial status, while strengthening complementary functions regarding market-failure areas

Supply long-term (3~8 years) funds at low interest rate compared with

* Policy fund interest for 2nd quarter of '10: 4.03~4.40%

Areas of support: Initial period of start-up, long-term facility investment,.

banking institutions

micro-businesses, etc

1414

‘06

43.8%(1.0 tril. won)

46.4%(2.2 tril. won)

‘09

Direct Loan

‘06

56.2%(1.3 tril. won) 53.6%

(2.6 tril. won))

‘09

Proxy Loan

Support methods by lending type Direct Loan: SBC processes all the procedures, receipt of

applications for

Proxy Loan: SBC implements primary loan examination and banks carry

fund - loan examinations - post management.

out final loan examination - loan - post management functions.

Support Results by Lending Type

Operation scale (100 million won)

Support Budget

Outstanding Lending

2007 2008 2009

31,315

126,558

31,530

129,326

58,555

161,316

2010

31,355

164,946 (as of end June)

1515

Appraisal of operating performance

Support the fund in the long-term with low interest rates for the areas,

Supply funding to SMEs rapidly and minimize damage when shocks

including start-up enterprises and facility investment, where private banking institutions find it difficult to carry out their roles, and contribute to SMEs' stable capital management and reduction of financing expenses

occur due to non-economic factors, such as natural disasters and sharp international raw material price hikes,

Jobs creation : 39,300 persons ('09 results) → 44,500 persons (plan for '10) - Average employment growth per enterprise: 3.21 persons ('09 results)

- Job creation effect per 100 million won: 0.77 persons ('09 results)

→ 3.64 persons (plan for '10)

→ 0.88 person (‘10 target)

1616

2) Credit Guarantee Support

Business implementation agency: Korea Credit Guarantee Fund

Content of the business: Support credit guarantees for SMEs that areexperiencing difficulties in obtaining loans from private

banks due to a lack of collaterals

Operate the system with differentiation of target enterprises for

Non-technology-oriented SMEs

Intensive

Support

`KODIT KOTEC KFRCGF

Technology-oriented SMEs

Region-friendly micro businesses

- Start-up firms- Export firms- Green growth firms

- Venture firms- INNO-BIZ firms- Green growth firms

- Small firms- Self-managed micro firms- Unregistered micro

(KODIT), Korea Technology Finance Corporation (KOTEC), Korea Federation of Regional Credit Guarantee Funds (KFRCGF)

intensive support after specialization of business areas by guarantee agency

businesses

1717

Guarantee Support Scale (trillion won)

Basic Structure of Guarantee Support

KOTEC

KFRCGF

2007 2008 2009

11.2

4.6

12.6

6.0

17.1

11.2

2010.6

17.5

12.6

Guarantee-applying enterprise

Guaranteeing Agencies

④ Provide

loans

② C

olle

ct d

ata,

cond

uct cr

edit

inqu

iry,

exa

min

e

guar

ante

e① A

pply

for

cons

ultin

g on

guar

ante

e

③ Issue guarantee certificate Banking

Institutions, etc.

2006

11.2

4.0

Total 44.4 49.0 67.6 71.143.7

KODIT 28.5 30.4 39.2 41.028.5

1818

Appraisal of credit guarantee operating performance

Strengthen the public benefits of financing functionsby supporting technological and business viability-oriented innovative enterprises having future growth potential despite their more or less weak collateral and low credit ratings.

Government

Strengthen financial health and support SMEs smoonthly inaccordance with a downward adjustment of the risk weight (10%→0%) in Basel II.

Banks

Enhance accessibility to bank financing and obtain smooth supplyof business funds in a timely manner by compensating

for weak collateral and credit rating areas through guarantees

SMEs

SMEs were able to overcome the recent economic crisis at an early date with expanded policy financing through guarantees, etc.

Credit guarantee facilitates loans to SMEs to reduce SME market failures and contributes to the development of the national economy.

1919

3) On-lending Support

Overview of on-lending

On-lending operating

Korea Policy Banking Corporation (KPBC) suggests guidelines regardingtarget SMEs for support and supplies on-lending funds to

financing companies.

Financing companies examine applicant SMEs and decide whether to

KPBC supports reinforcement of credit and liquidation to ease the riskburden of financing companies.

No. of Cases

Support Status

(100 mil. won)

2009 2010

263

2,305

-

21,000

provide loans or not and the loan interest rates

status

2020

4) Central Bank's Systematic Support

BOK increased its aggregate credit ceilings significantly to overcome

Based on the results of loans handled by banking institutions, the

4-1) Aggregate Credit Ceiling System

Bank of Korea (BOK) supports funds to 17 banks after determining aggregate credit ceilings.

’94.3 ’97.2 ’98.3 ’01.1 ’01.10 ’02.10 ’07.1 ’07.7 ’08.11 ’09.3 ’10.7

Trends of Aggregate Credit Ceilings (trillion won)

8.8

3.65.6 9.6

11.69.6

8.06.5

9.010.0 8.5

BOK establishes aggregate credit ceilings by quarter and allocates funds tobanking institutions according to the results of their lending

to SMEs.

the economic crisis (6.5 → 10.0 trillion won)

2121

Effects

Loan interest rates lower than market interest rates have beenapplied to achieve policy goals, including expansion of

SME lending and balanced regional development.

Accelerate banking institutions' selective financial support for SMEs Actively handle loan products relevant to aggregate credit ceilings Reduce SMEs' expenses for supply of funds with application of

Limitation

’94.3 ’01.9 ’04.11 ’06.6 ’07.7 ’08.8 ’08.12 ’09.2

5.0

2.52.0

2.53.0 3.5

1.751.25

preferential interest rates

Effectiveness of interest benefit is less in low-interest eras like the present.

2222

Medium-term loan ratio of domestic banks ('09): 67.6%

Encourages banks to support more than a specific ratio of the

4-2) Mandatory Minimum SME Loan Ratio System

increased amount of loans from the won-currency finance fund to SMEs (May '65 ~ BOK)

Commercial Banks: Over 45%, Provincial Banks: Over 60%, Domestic

Those banks that do not observe these ratios will receive disadvantages

* Cut the equivalent to 50% of the amount, which was not achieved, from aggregate credit ceilings.

Branches of Foreign Banks: Over 35%

from BOK at the time of allocating aggregate credit ceilings

2323

5) Other Support

This a system in which SMEs insure sales bonds acquired from

5-1) Support for Insurance on SME Sales Bonds

purchasing enterprises and receive insurance fund at the time of purchasing companies' default obligations.

’08 년 ’09 년

3.9

5.3

Results of Sales Bond Insurance

’10 년 (6 월말 )

5.4(±5%)

Government

Credit Guarantee Fund (Insurer)

Purchasing

Enterprise

Insurance

Contractor

(seller of goods)

Enforcement

of

Subrogation

Right

Implementation or Default of Obligation

Paym

ent of

Insu

ranc

e

Mon

ey

Insu

ranc

e

Subs

crip

tion

Business Supervision (SMBA)((SME) Equity Investment

Supply of Goods or Service (occurrence of sales bonds)

2424

99.3% of issuing enterprises' credit ratings: Lower than BB

Support about 2.75 trillion won in funds for 1,053 SMEs that far

5-2) Support for Issuance of SME Corporate Bonds

difficulties in issuing non-guaranteed corporate bonds in the financial market with their own credit ('00~'09: 21 times).

'09 Results: Supported 152 billion won to 64 SMEs (purchased

* Results of ABS (Asset Backed Securities) Issuance by Year (100 million won): 720 ('00)

< Credit Rating Distribution of Enterprises That Issued Corporate Bonds and ABS > (Unit:

%)

subordinated bonds: 40 billion won)

→ 4,172 ('05) → 1,564 ('08)

(speculative rating)

Enterprises That Issued Corporate Bonds

Enterprises That Issued ABS

A Rating or higher BBB BB B

2525ⅢⅢ. . Direction of SME Financing Support & Direction of SME Financing Support & DevelopmentDevelopment

In connection with expanded policy financing, maintain optimum level of liquidity supply designed to support growth and

Provide proper finance support system, helping micro-enterprises

Strengthen technological viability-oriented appraisal system, providingfinancing access to those enterprises that possess

excellent tech &

Smoothe SMEs' capital raising in direct finance market, and

development of future growth-promising enterprises;

stand on their foot.

business success potential but lacks finance and collateral capacity;

2626

Thank you