6. Session 3 Shinozaki ADB PPT

ADB-OECD Workshop on Enhancing

Financial Accessibility for SMEs

2013/3/6 Session 3

1

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 author’s 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

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2013/3/6 Session 3

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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

3

Public Nature

- promoting the MSME sector as a social mission

Institution’s Guarantee

- standardized operation

Repetition & Continuity

- mostly not a single transaction

Not Gratuitous

- guarantee fee

Supplementary

- existence of credit to be guaranteed as a precondition

General Characteristics

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2013/3/6 Session 3

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Expected Roles of Credit Guarantee

5

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

6

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)



2013/3/6 Session 3

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7

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

G P

IndiaCredit Guarantee Fund Trust for Micro and

Small Enterprises (CGTMSE)2000 ✓ 2

12 (2012.03.31)

n/a,Ministry of Micro, Small and

Medium Enterprises

Indonesia PT. Asuransi Kredit Indonesia (Askrindo) 1971 ✓ 19389

(2012.04.09)371

Perusahaan Umum Jaminan Kredit

Indonesia (Jamkrindo)1981 ✓ 17

359 (2011.12.31)

520

PT. Penjamin Kredit Pengusaha Indonesia

(PKPI)1995 ✓ -

7 (2011.07.01)

0.7

PT. Jamkrida Jatim [East Java] 2010 ✓* - 7 5

PT. Jamkrida Bali [Bali] 2011 ✓* - n/a, n/a,

Japan Japan Finance Corporation (JFC) 2008 ✓ 1527,461 (2012)

22,093Financial Services Agency (FSA);

and

National Federation of Credit Guarantee

Corporations (NFCGC)1951

(CGCs: 1937-1961)✓ CGCs:188

6,145 (2012.03.31)

n/a,Ministry of Economy, Trade and

Industry (METI)

Korea Korea Credit Guarantee Fund (KODIT) 1976 ✓ 992,139

(2011.12.31)5,693 Financial Services Commission;

Korea Federation of Credit Guarantee

Foundations (KOREG)2000

(CGFs : 1996-2003)✓ CGFs:110

1,301 (2011.12.31)

n/a,Ministry of Strategy and Finance;

and

Korea Technology Finance Corporation

(KOTEC)1989 ✓ 53

1,072 (2012.01.04)

n/a,Small and Medium Business

Administration

MalaysiaCredit Guarantee Corporation Malaysia

Berhad (CGCMB)1972 ✓ 16

482 (2011.12.31)

814 Central Bank of Malaysia

NepalDeposit and Credit Guarantee

Corporation (DCGC)1974 ✓ 2

25 (2011.12.31)

14 Ministry of Finance

Papua New

Guinea (PNG)

Small Business Development Corporation

(SBDC)1990 ✓ n/a, n/a, n/a, Department of Trade and Industry

Philippines Small Business Corporation (SBC)2001

(SBGFC: 1991)✓ 13

143 (2012.02.02)

44 Central Bank of the Philippines

Sri LankaCentral Bank of Sri Lanka (CBSL) (no specia l i zed insti tutionfor CG)

1950 (CG s tarted: 1967)

✓ -43

(2012.03.12)5 -

Taipei,ChinaSmall and Medium Enterprise Credit

Guarantee Fund of Taiwan (Taiwan SMEG)1974 ✓ 3

335 (2011.12.31)

1.5 Ministry of Economic Affairs

Thailand Thai Credit Guarantee Corporation (TCG) 1991 ✓ 9161

(2011.12.31)382 Ministry of Finance

Corporate

Type

Financial Services Authority (OJK)

[2013.01 -]

Country Institution EstablishedBranch

Office(s)Employee

Net Asset (US$ mi l .)

Regulator(s)


8

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: [Business Operations] CG=credit guarantee; CI=credit insurance; “-” = non-existence or zero;

n/a,= no information available

CG CI

India CGTMSE ✓ Micro/SmallIncrease max.

amountn/a, 62.5-85 n/a, Approx. 1.00 67

Indonesia Askrindo ✓ ✓ ✓Surety bond, customs bond, trade

credit insurance, etc.MSME n/a, n/a, 70-80 10x net worth 1.20-1.50 36

Jamkrindo ✓ ✓ Consulting services MSME n/a, n/a, 70-80 10x net worth 2.28 36

PKPI ✓ MSME n/a, n/a, 75 - 1.50 36

Jamkrida Jatim ✓ Micro/Small n/a, n/a, n/a, n/a, n/a, n/a,

Jamkrida Bali ✓ Micro/Small n/a, n/a, n/a, n/a, n/a, n/a,

Japan JFC ✓ MSME - - - -

NFCGC (CGCs) ✓ MSME 80 35-60x (av. 52.4) 0.90 63

Korea KODIT ✓ ✓ ✓Infra credit guarantee, consulting

services, etc.All businesses 50-85 20x capital funds 1.21 24

KOREG (CGFs) ✓ ✓ Consulting services, etc. MSME New productsNew products & increase coverage ratio

85-100 15x capital funds 1.10 12

KOTEC ✓ ✓

Technology appraisal & valuation,

technology certificate, equity

finance, M&A, technology

transfer, business support, etc.

Tech-SME

Special measures

under govt.

emergency

program

Increase

guarantee scale85 20x net asset 1.26 59

Malaysia CGCMB ✓ ✓

Dilrct lending, securitization,

equity financing, credit bureau

services, & consulting services

MSMEManagement

support servicen/a, 30-90 6x reserve 3.65 42

Nepal DCGC ✓ ✓Guarantee for savings & fixed

deposits

SME/

Priority sectorn/a, n/a, 75 - 1.00 n/a,

PNG SBDC ✓ ✓Business training program,

consulting services, etc.Start-up n/a, n/a, 80 n/a, n/a, n/a,

Philippines SBC ✓ ✓

Dilrct lending, MSME note,

preferred shares, capacity

building programs for SMEs and

financial institutions, etc.

MSME n/a, n/a, 70-80 3x n/a, 12

Sri Lanka CBSL ✓ ✓ (Activities as a central bank)Profitable

businessesn/a,

New Products

(tsunami)50-80

0.39 (contingent

liability/capital funds)1.00 12

Taipei,China Taiwan SMEG ✓ ✓ Consulting services, etc. SME/Start-up New productsExtend product period

for employment60-95 20x net worth 0.50-0.55 8-9

Thailand TCG ✓ ✓ Consulting services, etc. SMENew products & exempt

guarantee fees

New Products

(flood)n/a, 10x equity 1.75 5-7

New products &

alter conditions

New products

(earthquake)

New products, increase guarantee

scale & coverage ratio

Coverage

Ratio (%)

Max. Leverage

Ratio (%)

Guarantee

Terms (month, av.)

Business Operations Guarantee

Fee (%, av.)Others

Response to

disasters, etc.Country Institution Target Clients

Response to

Economic Crisis



2013/3/6 Session 3

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Credit Guarantee and SMEs’ Access

9

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

1.0

5.3

1.90.0

36.7

7.4

26.7

1.7

8.9

0.1

10.9

1.5

0

5

10

15

20

25

30

35

40

0

1

2

3

4

5

6

7

8

CG

TMSE

(IN

D)*

Ask

rin

do

(IN

O)*

Jam

krin

do

(IN

O)

PK

PI (

INO

)

JFC

/NFC

GC

(JP

N)

KO

DIT

(K

OR

)

KO

REG

[C

GFs

] (K

OR

)

KO

TEC

(K

OR

)

CG

CM

B (

MA

L)

DC

GC

(N

EP)*

SBC

(P

HI)

CB

SL (

SRI)

Taiw

an S

MEG

(TA

P)

TCG

(TH

A)

SBA

(U

SA)

CfE

L (U

KG

)

Bu

rgsc

haf

tsb

anke

n (

GER

)

OSE

O g

aran

tie

re

gio

ns

(FR

A)

CO

NFI

DI (

ITA

)

Outstanding Guaranteed Liabilities (% of GDP) [left]

SMEs' Access to Guarantee (% of total SMEs) [right]

Net Profit & Loss of CG Institutions

10

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

0.0 0.5 1.0 1.5 2.0 2.5 3.0

JFC (JPN)

Taiwan SMEG (TAP)

SBC (PHI)

NFCGC (JPN)

KODIT (KOR)

CGCMB (MAL)

KOTEC (KOR)

KOREG [CGFs] (KOR)

CBSL (SRI)

Askrindo (INO)

CGTMSE (IND)

TCG (THA)

DCGC (NEP)

Jamkrindo (INO)



2013/3/6 Session 3

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II. Potential Negative Effects

For Financial Institutions

For SMEs

For Government

11

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.

For Financial Institutions

12



2013/3/6 Session 3

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For SMEs

13

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.

Management’s 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.

For Government

14

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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III. Key Challenges and the Way Forward

Key Challenges

The Way Forward

ADB Projects Related to SME Finance

15

Key Challenges

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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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The Way Forward

17

Credit Guarantee

System

Balance

Infrastructure

Literacy

Innovation

The Way Forward

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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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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]

THA: Small Industry Credit Guarantee Fund (TA0676): USD190,500 [1985 approval]

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]

ADB Projects Related to SME Finance

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IV. Conclusion

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2013/3/6 Session 3

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Conclusion

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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.

Conclusion

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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 & risk-based management by CG institutions.

Promoting CG literacy for all stakeholders is a necessary component of developing the CG industry.



2013/3/6 Session 3

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Thank you for your attention.

For further questions:

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Office of Regional Economic Integration

Asian Development Bank

Email: [email protected]

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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 nations—48 from the region—who 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 ADB’s focal point for regional infrastructure and financial sector development and developing partnerships with regional forums and international institutions.

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Documents

6. Session 3 Shinozaki ADB PPT