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SMALL BUSINESS SMALL BUSINESS CORPORATION CORPORATION

SMALL BUSINESS SMALL BUSINESS CORPORATION CORPORATION

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Page 1: SMALL BUSINESS SMALL BUSINESS CORPORATION CORPORATION

SMALL BUSINESS SMALL BUSINESS CORPORATIONCORPORATION

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APEC ECONOMY PRESENTATIONS ON CREDIT GUARANTEE PROGRAM

CREDIT GUARANTEE PROGRAMS IN THE PHILIPPINES

By

HECTOR M. OLMEDILLOVice President – Credit Guarantees

Small Business Guarantee and Finance CorporationMakati City, Philippines

Workshop on Small and Medium Enterprise Credit Guarantee Systemsin the Asia-Pacific Region

October 26 to 28, 2005Shanghai, P.R. China

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CREDIT GUARANTEE PROGRAMS IN THE PHILIPPINES

First of all, we would like to thank the organizers and hosts of this Workshop on Small and Medium Enterprise Credit Guarantee Systems in the Asia-Pacific Region for giving us the opportunity to share with the rest of the APEC community represented here the credit guarantee programs in the Philippines.

Perhaps you have heard that at one time or another, the Philippines was referred to as the “sick man” of Asia. It was no surprise, therefore, that during those times when the Philippine economy was at its lowest level, small and medium enterprises or SMEs could hardly be seen in the Philippine landscape. For how can you possibly do business in a country with interest rates of as high as forty-five percent (45%) annually; where inflation rate was more often than not double digit; where capital flight instead of foreign investment infusion was the order of the day, and where political instability added to the chaos of the times?

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When Corazon C. Aquino assumed the presidency in 1986 and brought back democracy to Philippine shores, our economy was in total disarray. Its gross national product was flat but serious attempts were already being envisioned to assist the SMEs which would eventually be the backbone of a revitalized Philippine economy.

When Fidel V. Ramos was elected President in 1992, the “sick man” of Asia suddenly began to move along although unsteadily and with difficulty. Economic reforms in the field of liberalized financial system made it easy for foreign investments to come in and resulted in the formation and proliferation of numerous SMEs. It looked like the “sick man” of Asia was out of the confinement stage and finally on the road to full recovery.

In mid-1998, a popular movie action star turned politician, Joseph E. Estrada was elected President by a landslide succeeding Fidel V. Ramos who completed his single six (6)-year term of office. It was during Mr. Estrada’s term, particularly from August 2000 when a Presidential directive was issued to the effect that no government guarantees would be issued on loans to private enterprises. Government guarantees issued were limited to projects provided under the Build-Operate-Transfer Law.

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The restriction on guarantee issuance was finally lifted a year later or in August 2001; months after incumbent Philippine President Gloria M. Arroyo took over the reins of government. Under President Arroyo’s term, SMEs are at the forefront. The Philippine SMEs, numbering more than 800,000, provide seventy percent (70%) more or less of the labor force and contribute thirty-two percent (32%) of the gross national product.

Undoubtedly, the credit guarantee programs in the Philippines assume a pivotal role in promoting the SMEs’ growth and development.

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In an attempt to provide Philippine SMEs access to formal credit, the government has made use of credit guarantee schemes. The government believes that credit guarantee programs can address several barriers to loan access by SMEs. These barriers include:

• The high transaction cost of small loans• The perception of high degree of risk in lending to SMEs• The lack of traditional collateral as often required by financial

institutions

Thus, three (3) government financial institutions are operating to cater to the financing needs of Philippine business enterprises particularly on credit guarantees namely:

• Small Business Guarantee and Finance Corporation (SBCorp)• Quedan Rural Credit and Guarantee Corporation (Quedancor)• Trade and Investment Development Corporation (Tidcorp)

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FEATURES OF THE CREDIT GUARANTEE PROGRAMS

Small Business Guarantee and Finance Corporation (SBCorp)

SBCorp is a government financial institution attached to the Department of Trade and Industry and mandated to provide financing and credit guarantees to the country's SMEs. It was created in January 1991 by virtue of Republic Act No. 6977 or the Magna Carta for Small Enterprises and later amended by Republic Act No. 8289 in May 1997.

In November 2001, through Executive Order No. 28, The Guarantee Fund for Small and Medium Enterprises (GFSME) and SBGFC were consolidated leading to the new SBCorp.

SBCorp’s credit guarantee program operates on a basis of risk sharing with sixty-five (65) accredited financial institutions (AFIs) composed of commercial, development, rural and thrift banks. It guarantees loans of SMEs with the AFIs against risk of non-payment by the borrowers.

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Quedan Rural Credit and Guarantee Corporation (Quedancor)

Quedancor is mandated to accelerate the flow of investments and credit resources into the countryside so as to trigger the vigorous growth and development of rural productivity, employment and enterprises togenerate more livelihood and income opportunities. It is attached to the Department of Agriculture.

Quedancor, in support of the government’s effort to address these problems and in coordination with other participating agencies, came up with various programs on agri-fishery and other related activities to sustain and intensify agricultural production specifically on grains commodities, fisheries/aquaculture, livestock and poultry, high value commercial crops, agri-forestry projects and other livelihood projects. It introduced an innovative credit mechanism that is collateral-free and would give better access to farmers as a means to improve agricultural production, increase yield and augment farm level income.

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Trade and Investment Development Corporation (Tidcorp)

The Trade and Investment Development Corporation (Tidcorp) is a government financial institution attached to the Department of Finance. It was established on January 31, 1977 as the Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee) by virtue of Presidential Decree No. 1080. It was later renamed to its present name and granted expanded functions by Republic Act No. 8494 on February 12, 1998. In acknowledgement of its critical role in providing a wide range of financial services, the corporation was officially designated as the Philippine Export-Import Credit Agency or Philexim through Executive Order No. 85 dated March 18, 2002.

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

1. Primary Function - To provide financing and credit guarantees to SMEs

- To accelerate the flow of investments and credit resources into the countryside

- To provide loans, guarantees, credit insurance and technical assistance services to small, medium and large exporters

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

2. Types ofGuaranteePrograms

- SME-GEMS for projects which are or will be engaged in manufacturing, services and trade activities, whether for domestic or export market, except trading of purely cigarettes/liquor, vice-generating business activities, and housing

- Retail Guarantee Program (RGP) is aimed to accelerate an effective and efficient credit delivery to agri-fishery sector through an individual credit guarantee mechanism. It is envisioned to entice lending entities (LEs) to extend credit to farmers and fisherfolks who are engaged or will engage in agriculture and fishery projects with or without collateral or deficient in collateral

- Pre-Shipment Export Finance Guarantee Program (PEFG) provides guarantee on loans to enable creditworthy SMEs lacking in collateral to obtain pre-shipment credit facilities for working capital from any of the participating financial institutions (PFIs)

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

3. Types ofGuaranteePrograms

- SME-GRAIN for projects in agribusiness except direct farm level production, livestock, poultry, fishing and aquaculture. Eligible projects are those which are one step forward from the above-mentioned production activities

- Wholesale Guarantee Program (WGP) is envisioned to institutionalize a system of guaranteeing the portfolio of LEs that will enable small farmers, fisherfolks, SMEs and their organizations engaged or will engage in agriculture and fishery projects with no collateral or deficient in collateral to have better access to credit

- Term Loan Guarantee Program (TLGP). Tidcorp issues guarantees on medium to long-term loans extended by PFIs to medium and large scale exporters, and to small scale exporter accounts under the existing Pre-shipment Export Finance Guarantee (PEFG) and/or Post-shipment Export Risk Guarantee (PERG)

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

4. Loan Purpose - Acquisition of AssetsMaximum term of seven (7) years inclusive of two (2) years grace period on principal payments

- Permanent Working CapitalMaximum term of five (5) years inclusive of one (1) grace period on principal payments

Modes of payment for term loan are monthly, quarterly or semi-annually

- Working capital and fixed assets requirements of all agri-fishery related projects

- Pre-shipment and post-shipment working capital request of exporters

- Importation of raw materials; for overhead expenses

- For indirect exporters working capital request

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

4. Loan Purpose - Temporary Working Capital/Transactional FinancingBy way of credit line facility with a term of one (1) year.Drawdowns payable upon maturity of Promissory Notes/Evidence of Indebtedness

- Debt Retirement/Refinancing

- Financial Lease/Lease Purchase

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

5. EligibleBorrowers

- SMEs with asset size before the loan, exclusive of the value of land where project is situated

Small Scale – P1.5 Million to P15.0 MillionMedium Scale – More than P15 Million to P100 Million

- Individual/sole proprietorship, partnership, corporation, cooperative, organization or association

- All agri-fishery related projects of micro SMEs

- SMEs and large scale companies

For PEFG Users: - Direct or indirect

exporters- Majority-owned

Filipino enterprisesFor TLGP Users:- Direct or indirect

exporters whether sole proprietorship, partnership or corporation with at least 51% of subscribed capital owned by Filipinos

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

6. Loan Amount - P100,000.00 to P20.0 Million

- Loanable amount shall not exceed P150,000.00 per borrower for WGP and more than P150,000.00 per borrower under RGP

- Up to P50.0 Million

7. Guarantee Cover

- 60% to 85% of outstanding loan balance

- Up to 85% of the LE’sloan exposure plus accrued interest up to maturity date or demand for fullpayment whichever comes first

- Up to 90% of outstanding loan balance

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

8. Bank Rate ofInterest

- Not to exceed 30% per annum inclusive of all fees and charges

- Discretionary on the LE which must be lower than prevailing commercial rates

- Bank’s discretion

9. Guarantee Fee - 2% per annum of the guaranteed portion based on outstanding loan balance

- 3% per annum of the outstanding principal of the loan

- Minimum of P500.00 or up to 2% per annum of guaranteed portion

10. Processing Fee - Non-refundable processing fee equivalent to 1/10 of 1% of the loan amount or P1,000whichever is higher

- 3% per transaction - 1/4% to 1% of the guaranteed portionfor PEFG

- 1/8% on theguaranteed portion or P1,000 whichever is higher for TLGP

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

11. Collateral - Project assets to be financed by guaranteed loan should form part of collateral

- Joint and several surety of principal stockholders/partners/officers and non-individual borrowers should be obtained

- Credit Life Insurance cover or Mortgage Redemption Insurance on individual borrower or owner/managing partner/CEO/COO or principal stockholder(s) of corporate borrowers

- Deed of Assignment on farm produce or agricultural crops

- Chattel Mortgage on machinery/equipment directly related to the project

- Two (2) co-makers of known financial capability

- Assignment of government bonds/securities, blue chips commercial/ Quedancor shares of stock or bank deposits/placements

- Assignment of proceeds of Export/Domestic LC, confirmed PO or export bills

- Personal guarantee(s) of principal(s) with conformity of spouse, if legally married

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

11. Collateral - The borrower shall insure the project assets offered as collateral against loss and destruction or damage caused by fire and other calamities during the term of the loan at least up to the extent of the collateral loan value

- Assignment of Purchase Orders or Sales Contracts

- Hold-out on deposits equivalent to 15% of approved loan

- Joint and several signatures

- Other acceptable securities

- Property Insurance coverage on all insurable assets to be mortgaged

12. Term of Loan - Credit line – up to 1 year

- Term loan – up to 7 years

- Discretionary on the LE but in no case shall exceed the period cycle or payback period

For PEFG:-180 days to 1 yearFor TLGP:- One (1) to five (5)

years

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

13. Mode ofPayment

- Monthly, quarterly or semi-annually

- Monthly, quarterly or semi-annually or other mode of payment which may be deemed appropriate depending on the type of loan, commodity and/or cash flow as recommended/approved by the LE and concurred by Quedancor

- Monthly, quarterly or semi-annually

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

14. Other EligibilityCriteria

- Its latest in-house financial statements must comply with a current ratio of at least 1.20:1.00 and debt-to-equity ratio of at most 80:20 before the loan

- Must have generated positive income for the immediate past year based on BIR-filed financial statements

For WGP:- Must be a bonafide

resident of a farming or fishing area for at least one (1) year as certified to by a barangay official

- Must have a viable project

- Must have sufficient experience/knowledge of the project

- Must have no existing past due loan with other lending entities

- Annual domestic sales equivalent to at least five times (5x) the value of export LC to be financed

- Successfully completed two (2) LC transactions totaling 150% of the export loan for ETFG loan

- Two (2) years exporting experience with at least 50% of total revenues derived

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Features of theCredit Guarantee Program

SBCorp Quedancor Tidcorp

14. Other EligibilityCriteria

- Must have a firm, determined and reliable market and proven managerial capability

- The borrower must have the production capacity to carry out orders

For RGP- Must be duly

accredited with Quedancor

- Must not have an outstanding past due loan with the LE

from export sales for RELG loan

- Operating profitably for at least six (6) months

- No derogatory credit experience

- Debt-to-equity ratio of not more than 5.00:1.00 after financing

- Minimum unimpaired capital of P250,000

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What Worked and the Key Success Factors

• Financial institutions claim that with the credit guarantee programs available, there was an increase in the number of small scale borrowers who are the ones excluded by these financial institutions due to perceived loan recovery risk resulting from the lack of acceptable loan collateral and credit track record.

• Loans are backed up by government guarantee, a security weighted at par with hard loan collateral.

• SME exporters, farmers and fisherfolks, often identified as the priority sectors of the government, are the big beneficiaries of the credit guarantee programs.

• The continuing commitment of the government through various SME development agenda and plans is another key factor that can be attributed to increasing number of financial institutions utilizing credit guarantees.

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What Worked and the Key Success Factors

• An open, competitive banking environment where majority of independent financial institutions are interested in expanding their client base, establishing niche markets or protecting market position.

• A monetary and regulatory environment that is conducive to lending to SMEs, in particular with sufficient liquidity and stable interest rates that allow appropriate risk/return pricing.

• A dynamic and expanding business sector within which viable opportunities are available for new entrants including SMEs.

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What did not Work and the Lessons Learned

• Premiums or guarantee fees paid covered only a small portion of the cost of operating the credit guarantee programs.

A benefit-cost framework was made comparing the social and private benefits of the programs with their costs. The framework compared the outreach with the cost of the programs. Outreach refers to the number of new borrowers who obtained loans due to the credit guarantee cover. Sustainability refers to whether or not the programs can continue to exist without additional subsidies from taxpayers. These programs are heavily subsidy-dependent and their implementation would mean continuing substantial subsidies since their operating expenses far exceed premiums or guarantee fee receipts.

• Time consuming procedures in the programs contributed to a high transaction cost of borrowing.

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What did not Work and the Lessons Learned

• Covering one hundred percent (100%) credit guarantee on the enterprises’ loans led to moral hazard which tended to throw caution and prudence out to the wind for financial institutions since at the back of their minds, the loans are fully backed up by government guarantees anyway. So, who cared if the loans eventually turned sour? Ultimately this led to increased non-performing loans.

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Applicability for the Economies in the Asia-Pacific Region

• Critical to the success of any market-focused credit guarantee system is a climate where other government or donor initiatives do not crowd out market-driven initiatives, in particular through provision of competing subsidized credit or other below-market financial products and services.

• Support from a competent agency such as the Department of Finance and the Central Bank or any other financial institutions supervisory authority that takes an imaginative, positive and well-informed interest in the SME sector and its financing problems and works to enhance the enabling environment for SMEs.

• A credit bureau that provides effective and efficient access to credit information on SME borrowers is important for financial institutions to increase their ability to assess risk in this sector with the least degree of subjectivity.

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In closing, we believe that the credit guarantee programs in thePhilippines primarily operates in a relationship of trust and confidence among the parties involved in the system – the guarantor, the financial institutions and the borrowers. We believe that trust and confidence derives not only from our ability to pay calls on guarantee but from a vision that we share with our clientele – a world class, globally competitive Philippine SME sector. Behind this vision is our philosophy of service – that the best way to help SMEs is not to take their losses but to do business with them in a manner that would benefit us both. This has been the primary focus of the Philippine credit guarantee institutions through the years.

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MaramingSalamat

(Thank you)