The Services of Korea Credit Guarantee Fund · 16 Korea Credit Guarantee Fund Types of Credit Guarantee Services Tax pay Tax and duty National tax Transaction liabilities Transaction

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The Services of Korea Credit Guarantee Fund

The Services of Korea Credit Guarantee Fund

Park, Yong-pyungChin, Yong-juKorea Credit Guarantee Fund

Korea Credit Guarantee FundKorea Credit Guarantee Fund2

Table of Contents

I. SMEs in the Korean EconomyII. Overview of KCGF III. Credit Guarantee ServicesIV. Effects of Credit Guarantee

on the National Economy V. Plans for Further Development of the SystemVI. Conclusion


I. SMEs in the Korean Economy

Importance of SMEs

Challenges in SME financing

Credit guarantee system in Korea


Importance of SMEs

Number of Companies

SMEs 99.8% LEs 0.2%

Number of Employees

SMEs 87% LEs 13%

SMEs 42% LEs 58%

Total Exports Total Production

SMEs 51% LEs 49%


Credit quality gap

Insufficient collateral to get formal financing

Higher cost of transaction and information

collection

Low credit assessment ability of financial

institutions

Limited access to formal financing

Challenges in SME Financing


Reguarantee

Credit Investigation

Credit Guarantee System in Korea

Creditor

Municipality

KFCGF

Government

ApplicationCredit

Guarantee

Contribution

Contribution

Contribution

Loan

Debtor

ContributionSupervision

Financial

InstitutionsSME

Guarantor

KCGF

KOTECLocal CGFs

Contribution


II. Overview of KCGF

KCGF in brief

Source of funding

Leverage ratio

Organization

Supervising authorities

Services


KCGF in brief

Public institution providing comprehensive support to SMEs

Established in 1976 by the KCGF Act

Capital fund of USD 3 billion

Outstanding credit guarantee over USD 32.1 billion (2004)

84 branch offices and 2,200 employees


Contribution fromGovernment Contribution fromfinancial institutions Guarantee fee, etc.

Contribution from Government: Subject to yearly budget

Contribution from Financial Institutions: 0.2% of designated type of loans

Guarantee fee, Interest, etc.

Source of funding


Leverage Ratio

The total amount of credit guarantees that KCGF can provide as stipulated by the KCGF Act : 20 times the total amount of the capital funds

The leverage ratio as of the end of 2004 : 10.5

10.59.7

7.89.0

9.3

6

8

10

12

2000 2001 2002 2003 2004

Leverage ratio =Outstanding credit guarantee

Capital fund


Organization

10 Debt Collection Departments

Board of Executive Directors

Chairman & President

Executive Vice President

Executive Directors (5)

Board of Policy

Auditor

Auditing & Examination Office

Head Office

7 Debt Collection Teams

4 Business group

84 Branches10 Rep. Offices

6 Regional HQs

2 Debt Collection HQs


Supervising Authorities

The Board of Audit and Inspection

The National Assembly

ContributionBudget

AllocationMinistry of Finance

and Economy

Small and Medium Business Administration

Ministry of Planning and Budget

Audit

KCGFSupervision

Budget request

Inspection


Services

Credit Guarantee Services

Credit Insurance Services

Infrastructure Credit Guarantee Services

Management Consulting Service

Comprehensive Support System for SMEs


III. Credit Guarantee Services

FrameworkTypes of credit guarantee Operating procedures EligibilityConsultation & Application Credit investigationCredit evaluation

Issuing letter of credit guaranteeCoverage ratioCredit Guarantee FeeGuarantee ceiling Collateral & guarantorPerformance


Framework

Credit guarantee for the repayment of loans extended to the enterprise or transaction liabilities assumed by the enterprise

Loan


Issue Credit Guarantee

Contribution Supervision

Contribution

Apply for Credit Guarantee

KCGF

Government

Financial Institution

Enterprise


Types of Credit Guarantee Services

National tax Tax and duty Tax payTransaction liabilitiesTransaction liabilitiesDeposit for bids Performance Notes payables, etc. Commercial bills Credit

Transact-ions

Corporate bondsCorporate bondsDirect Secured loans Secured loans Bills of exchange Acceptance of trade bills LeasesLeases

Loans, commercial bill discounts, etc.

Loans from non-banking financial institutions

Payment guaranteesPayment guarantee of banks Loans, overdraft, etc. Bank loans Indirect

Financing

Related Liabilities Type


Types of Credit Guarantee Services

Guarantees for a pool of corporate bonds / loans Combining mechanisms of ABS and credit guaranteeFacilitated corporate financing in a short period of time

Special Credit Guarantee : P-CBO / CLO Guarantee

KCGF

Subordinated CBOs

Credit line

Bonds

Proceeds

Bonds Senior CBOs

Credit guarantee

Enterprise

Bank

Investor SPCOriginatorProceeds Proceeds


Preview Application

2nd Step


3rd Step

Credit Evaluation

4th Step

1st Step

Approval & Issuance of

Letter of Credit Guarantee

5th Step

Operating Procedure


Eligibility

General Principle

Any individual or legal persons who operate business for profit are eligible for credit guarantee services.

Though large enterprises (LEs) may apply for credit guarantee services, SMEs receive more favorable treatment.


Eligibility

Eligible Industry Sector

Positive List System

Negative ListSystem

No Restriction

1976 1995 1998 2005


Consultation & Application

Direct Application

Loan Application

Guarantee Application

Loan Application

Guarantee Agreement

Indirect Application

Financial Institution Enterprise KCGF

Financial InstitutionKCGFEnterprise


ApplicationRequired Documents

Enterprise-related documents - Business registration certificate - Corporation registration certificate - Business plan - Financial statements, etc.

Financial transaction-related documents - Transaction statements from banks - Tax payment certificate, etc.

Representative-related documents - Resident registration certificate - Real estate registration certificate, etc.



On-site Investigation

Financial StatusFinancial Status

FacilityFacility PersonnelPersonnel

Product demand Technology

Raw-material supply External factors Prospects ofIndustry

Internal factors

Preliminary Document ReviewAnalyze submitted documentsUnderstand company’s status and operationCheck forged documents


Credit Evaluation

KRW 50 Million

KRW 300 Million

Speedy Method

Simplified Method

Standard Method

Standard Criteria Over KRW 300 mil. Comprehensive Method

Simplified CriteriaKRW 50 mil. ~ 300 mil.Standard Method

Small sum check list KRW 50 mil. or less Simplified Method

Evaluation ItemGuarantee Amount


Issuing Letter of Credit Guarantee

Electronic credit guarantee certificate

Encrypt

Letter of credit guarantee Letter of credit guarantee

Issue Submit

Transmit

KCGF Enterprise Financial Institution

KCGFFinancial InstitutionEncrypt Transmit


Coverage Ratio

70% ~ 85% depending on the type of guaranteed liability, financial institution (creditor institution) and credit rating of the borrower.For reference, 70% is the most widely used coverage ratio around the world. Below 50% was adopted in a few countries but failed.

85%All other liabilitiesRoll-Over

IssuedNewly 80%Discount of Commercial Bills

70~85%80%Trade Financing

90%90%

Other Lending Institutions

Contributing Banks

Types of Guaranteed Liabilities


Credit Guarantee Fee

0.5 ~2.0% per annum depending on the credit rating of the enterprise - Additional 0.5% for large enterprises - Fixed fee applies to certain types of guarantees

DCCCCCC-CCC+ ~CCCB-Credit rating

1.11.00.90.80.60.5Fee rate

2.0

BB-~B+

2.01.51.41.31.2Fee rate

BAAA AA~A- BBB+ ~BBB- BB+ ~BBCredit rating

(For SMEs)


Guarantee CeilingNormal ceiling on aggregated credit guarantee amount for a single company : KRW 3 billion (USD3 mil.)

Maximum aggregated credit guarantee amount for a single company, when designated credit guarantees are extended, which are deemed essential for the national economy

: KRW 10 billion (USD10 mil.)

Normal KRW 3 billion

SpecialKRW 10 billion


Collateral & Guarantor

Collateral: KCGF does not acquire any collateral when extending credit guarantee. The cases when KCGF take collateral are extremely limited.

Guarantor: KCGF limits personal guarantors to those closely related to the company and have a keen interest in it. KCGF tries to minimize the number of guarantors.


Performance

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1999 2000 2001 2002 2003 20040

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Outstanding guaranteeGuarantee provided

In million USD


V. Effects of Credit Guarantee on the National Economy

Production inducement & added value inducement

effect

Tax revenue inducement & job creation effect

GDP & credit guarantee growth rate

The most effective government policy tool for SMEs

Improving SMEs attitude toward credit


Production Inducement & Added Value Inducement Effect

1,478 1,4301,630

1,924

765 704832

963

0

500

1,000

1,500

2,000

2,500

2001 2002 2003 2004

in million USD

Production Inducement Added Value Inducement


Tax Revenue Inducement & Job Creation Effect

215

170160

202

95,392

83,005 80,824

89,936

50

100

150

200

250

2001 2002 2003 2004

in million USD

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

100,000persons

Tax Revenue Inducement Job Creation


GDP & Credit Guarantee Growth Rate

-20

0

20

40

60

80

100

1996 1997 1998 1999 2000 2001 2002 2003 2004


Survey conducted by KIET and KCGF

Evaluated on a 5 point scale

3.181.772.83Information Assistance2.961.80 2.82Consulting

3.222.90 2.93Tax Reduction & Exemption

3.744.113.04Government’s Loan4.084.493.33Credit Guarantee 200019981992Policies

The Most Effective Government Policy Tool for SMEsc


Positive effect on management

Improved understanding on credit

Enhancing transparency in management

Recognizing the importance of credit

Agree 90%

Agree 95%

Agree 86% Cut illegal tax reports

Improving SME’s Attitude toward Credit


Ⅵ. Plans for Further Development of the System

• A Different View on Guarantee• Adverse Effects of Credit Guarantee• Action Plans for Renovation of the

Credit Guarantee System


A Different View on Credit Guarantee

“The evolution of the government's ratings will be determined by developments in the DPRK and by the success of the government in reducing distortions in its own economy arising from labor inflexibility as well as government activity in allocating credit and guarantees.”

Takahira Ogawa, Director, Standard & Poors


Adverse Effects of Credit Guarantee

• Excessive GuaranteeProvision

Impeding Development of Financial Industry

• Guarantee forMarginal Companies

Impeding Restructuring of SMEs

• Increase in Losses on Guarantee Operations

Increasing Burdens on Government Budget


Action Plans for Renovation of Credit Guarantee

1. Promote effectiveness of guarantee

2. Enhancing the roles of Private Financial Institutions

3. Proper Allocation of burdens of Credit Guarantee

□ Adoption of Market-friendly CreditGuarantee


2004 2005 2006 2007 2008 2009

3031

29

27

28

26

Reduction in Credit Guarantee Provision

□ Target Annual Reduction of Guarantee

à 1, 000 billions KRW (U$ 1 billion)

Guarantee outstanding(in billion U$)


※ Plans for Increasing Portion of Innovative SMEs

10.0%7.2%5.8%3.5%1.3%Innovative Start-ups

50.0%46.0%42.0%38.0%34.0%Innovative SMEs

20092008200720062005Year

Selective and Focused Support

□ Efficient Utilization of Guarantee Resources

Large-amount Users

Long-term Users

Discourage from using GuaranteesPenalty


Decrease AverageCoverage Ratio 85%

2005 2007

80%

Expand CoverageRatio Differentiation 70%-100% 50%-100%

Enhancing the Roles of Private Financial Institutions

□ Decrease Average Coverage Ratio

□ Expand Coverage Ratio Spread


50%30%20%Present

30%40%30%After Renovation

SMEs Financial Institutions Government

Allocating the Burdens of Guarantee Operations among Beneficiaries


2007200620052004Year

1.51%1.23%1.12%1.07%Guarantee Fee Ratio(Average)

※ Average Guarantee Fees Increase

□ Plans for Increasing Average Guarantee Fees



Raising Financial Institutions’ Contribution


0.3% 0.4%

2005 2006


Ⅶ. Conclusion

“When I ask you to take an aspirin,

Please don’t take the whole bottle.”

Havey PenickLittle Red Book, 1992

A Lesson from A Golf Teacher

48

Thank youKorea Credit Guarantee Fund

Tel : +822 710 4114

Website : www.kcgf.co.kr

E-mail : [email protected]

http://www.kcgf.co.kr

mailto:[email protected]