Guarantees and Mutual Guarantees

Transcription

1 Guarantees and Mutual Guarantees BEST Report Report to the Commission by an Independent Expert Group January

2 CONTENTS EXECUTIVE SUMMARY INTRODUCTION Purpose and scope of the Expert Group Participants in the Expert Group POLICY CONTEXT Small- and medium-sized enterprises in Europe Access to credit for SMEs The role of guarantee schemes DEFINITION AND IMPORTANCE OF GUARANTEE SCHEMES Mutual Guarantee Societies and Guarantee Funds Importance of the guarantee industry The role of public authorities Distribution of guarantee schemes across the European Union MANAGEMENT PRACTICES OF GUARANTEE SOCIETIES The management philosophy of Guarantee Schemes The target market Guarantee Products Procedure for treating guarantee applications The decision-making process PERFORMANCE INDICATORS OF GUARANTEE SCHEMES Market Relevance Additionality Leverage Effectiveness Efficiency Default rate and Sustainability BEST PRACTICES Support to the establishment and development of Guarantee Schemes Special products and services for SME clients Approaches to the provision of funding for SMEs Best Practices in the guarantee business CONCLUSIONS AND IDEAS FOR CONSIDERATION Conclusions Ideas for consideration

3 ANNEX Slovene Enterprise Fund National Loan Guarantee Fund for SMEs - Romania INVEGA - Lithuania The Portuguese Mutual Guarantee Scheme SIAGI - France Hitelgarancia Rt. - Hungary BDPME/SOFARIS France SOCAMA France SOWALFIN Belgium KfW StartGeld Programme - Germany AWS Austria Vækstkaution - Denmark SFLG United Kingdom Bürgschaftsbanken - Germany The Italian Confidi Networks Sociedades De Garancia Reciproca Spain BBMKB The Netherlands The Guarantee and Development Bank of Czechia-Moravia - Czech Republic Kredex - Estonia Finnvera plc Finland ANNEX

4 EXECUTIVE SUMMARY The European Commission launched the project Expert Group BEST Practice in the field of Guarantees because guarantees are a traditional way of improving access to finance for small and medium-sized enterprises (SMEs). In the new financial environment (e.g. Basel II) the relevance of Guarantee Schemes and Guarantee Societies has been growing: they offer a mitigation of the risks associated with banks SME portfolios. The objective of the Expert Group was to increase understanding of the potential offered by guarantees as a mechanism for improving access to finance for SMEs. Access to bank loans can be particularly difficult for SMEs in cases where they have insufficient collateral or lack a sufficient track record and/or credit history. When SMEs, especially starting businesses, want to access external financial sources, banks are confronted with asymmetric information. The information asymmetry basically amounts to the fact that the borrowing company will know more about its ability and willingness to repay than the bank. As a consequence a significant number of viable and profitable investment projects may not be financed or may not obtain funding at reasonable costs. In those cases SMEs, even when proposing good investments, need certification in the form of collateral and/or third-party support to signal its creditworthiness. A possible solution to the above identified problem is the use of guarantee schemes. Indeed, guarantee schemes have a significant role to play in facilitating SMEs access to finance across the European Union. Guarantees provide an important leverage of the capital available for lending. Experience has shown in the past that in a downward phase of the economic cycle they were able to increase their contribution to banks lending activity. The experience of the participants of the Expert Group and of the European Mutual Guarantee Association (AECM), the presentations of the national schemes and the discussions within the group allowed an analysis of Guarantee Societies on the aspects of management philosophy, the target market, guarantee products, the procedure for treating guarantee applications, the decision-making process, risk sharing and complementary support mechanisms offered to SMEs. Guarantee Societies attribute the highest importance to their economic and social mission of SME support. At the same time, the experts unanimously agreed that Guarantee Schemes operating in their jurisdictions aim to support only sustainable projects. While most European Guarantee Societies are multi-sectoral, there are also examples of a focused approach. The target market of Guarantee Societies in terms of size is the micro and small businesses segment with limited financial needs (self employed, family companies, and partnerships). By nature, this target market includes companies that have difficulty in obtaining a loan and/or do not present evident features of creditworthiness. The range of products offered by Guarantee Societies depends on various factors which include the risk assessment procedure used by the Guarantee Society, the legal environment of the country, the term of the guarantee, the guarantee s extent of coverage and the associated costs. The Expert Group identified several indicators, which allow a good assessment of the performance of a guarantee scheme. These included a scheme s relevance to fill a market gap, its additionality in terms of providing additional finance, its leverage, effectiveness and efficiency. The overall purpose is to reach long-term sustainability and a default rate that is under control. Examination of current practices across the Member States suggests that opportunities exist for increasing the use of guarantees, building on the diversity of the schemes that currently exist to address particular needs. These opportunities may be developed within the design of the successor to the Multiannual Programme for SMEs (MAP), as delivered through the Guarantee Windows and managed by EIF on behalf of the European Commission. The Research Framework Programme could also provide an opportunity to enhance the use of guarantees. 4

5 The regulatory framework for guarantees at European and Member State level determines to a high degree the well-functioning of a Guarantee Scheme. Examples of that are the new Capital Adequacy Directive proposed with the emergence of a new rating culture and a clear application of State Aid rules. In the new financial environment, Basel II will qualify most Guarantee Societies as guarantors, if their guarantee product is in line with the regulatory requirement. This will allow banks to reduce regulatory equity on their loan portfolio. Furthermore, complementary advisory services improve the performance of guarantees and increase the chances of success, especially for start-ups. The findings of the Expert Group resulted in the following ideas for consideration: It is recommended that the guarantee instruments of the successor to the MAP be reinforced, to allow a flexible approach in the EU Member States and to take into account the specific needs of target groups as well as recent developments of SME financing. The successor to the MAP should, in addition to a broadly defined guarantee window for SMEs, keep a window for micro-businesses which allows the packaging of finance and mentoring. It could also provide new windows for innovation investments of SMEs, for the transfer of businesses and for the securitisation of SME loan portfolios of banks to encourage the banking community to maintain lending flows to SMEs. The EU Structural Funds could make their contribution to an increased future role of guarantees in the European Union by providing equity to guarantee schemes to cover part of their risks. Scientific research, technological development and innovation are at the heart of the knowledge-based economy and are one of the main pillars of the Lisbon process. The guarantee instrument could provide an appropriate support to help innovative SMEs finance their investments in research and innovation. Such an instrument might be shaped at European level to debt providers in order to support technological research and development projects implemented by SMEs. The development of SMEs - including innovative SMEs - could be encouraged through technical guarantees, for example, to facilitate their access to public tendering. Disseminating best practices and encouraging dialogue among guarantee institutions and with the European Commission are key to ensure a high professional standard of guarantee institutions in the European Union. A regular dialogue could particularly be beneficial for those Member States who have not yet introduced guarantee schemes or did it recently, but it could also provide a forum to discuss new developments in financial markets affecting the guarantee business. 5

6 1. INTRODUCTION Guarantees are part of European financial services landscape for SMEs. They are delivered through intermediation networks working towards the economic and social goal of encouraging access to finance for SMEs. While banks have been and indeed continue to be the principal source of external capital for small and medium-sized enterprises, guarantee schemes have a complementary role to play by making available guarantees to compensate for SMEs insufficient collateral. 1.1 Purpose and scope of the Expert Group The European Commission launched the project Expert Group on BEST Practice in the field of Guarantees to increase understanding of the potential offered by guarantees as a mechanism for improving access to finance. This project forms part of the series of projects adopted under the Multiannual Programme for enterprise and entrepreneurship, in particular small and medium-sized enterprises ( ). 1 Experts of the Member States, EEA Countries, Candidate Countries and representative bodies nominated by the Commission, such as the European Mutual Guarantee Association (AECM), participated in meetings from November 2003 to November The project was intended to encourage reflection on existing guarantee practices within the European Union, establish a typology, identify examples of good practices in this area and make recommendations. The aim of this report is to present a summary of discussions and best practices discussed by the Expert Group. Presentations by representatives of guarantee schemes and other bodies focused mainly on: Descriptions of the activities and the profiles of the guarantee organisations, including their status and purpose; Descriptions of the schemes; Pricing and financing matters. 1.2 Participants in the Expert Group All Member States, EEA Countries and Candidate Countries were invited to designate a qualified national expert on the subject. Additionally, experts from AECM, EIF (European Investment Fund), KfW (Kreditanstalt für Wiederaufbau), Fédération National des SOCAMA, SIAGI (Société Interprofessionnelle Artisanale de Garantie d Investissements Groupe Chambres de Métiers), Verband der Bürgschaftsbanken and Credit Guarantee Fund of Turkey were nominated by the European Commission. Thirty-one experts in the field of guarantees from Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovenia, Spain, Sweden, Turkey and United Kingdom attended four meetings (November 2003 June 2004). 2 In addition, two meetings were held in September and November 2004 to prepare the final report. These meetings were attended by a drafting group of experts from Austria, Belgium, Estonia, Finland, France, Germany, Lithuania and the United Kingdom, as well as AECM and Commission services. 1 Multiannual Programme for Entrepreneurs and Entrepreneurship, and in particular for small- and medium-sized enterprises (SMEs) See Annex 2: Participants of the expert group. 6

7 2. POLICY CONTEXT 2.1 Small- and medium-sized enterprises in Europe The European Union is committed to the long-term development of the use of guarantees and of guarantee societies and other organisations delivering them, since access to bank loans can be particularly difficult for small- and medium-sized enterprises (SMEs) in cases where they have insufficient collateral or lack a sufficient track record or credit history. They are often also more sensitive towards changes in the economic climate than larger companies. These obstacles can be overcome by guarantees given by public or private guarantee or mutual guarantee institutions. Guarantees typically provide cover to third party lenders in cases where the borrower defaults on repayments and, when the lender makes a claim on the borrower, the borrower is unable to meet its obligations from its assets. The abbreviation SME used throughout this report refers to the Community definition of micro, small and medium-sized Enterprises (SMEs) given in the Commission Recommendation of with the changes entering into force from 1 January 2005: SME thresholds: Enterprise category Headcount Turnover or Balance sheet total (unchanged) Medium sized <250 = 50 million (1996:40 million) = 43 million (1996: 27 million) Small <50 = 10 million (1996: 7 million) = 10 million (1996: 5 million) Micro <10 = 2 million = 2 million (1996: not defined) (1996: not defined) The Observatory report SMEs in Europe 2003 reveals that there are 19.3 million enterprises in the European Economic Area (EEA) and Switzerland, providing employment for 140 million people. Some 92 % of these enterprises are micro, 7 % are small, less than 1 % are medium-sized and only 0.2 % are large enterprises. Just over two thirds of all jobs are in SMEs, so almost one third of all jobs are provided by large enterprises. Within SMEs, the major share of employment is in micro enterprises employing less than 10 employees (56 %). 4 SME Large Total Number of enterprises ( 000) 19, ,310 Employment ( 000) 97,420 42, ,710 Employees per enterprise 5 1,052 7 The average European SME employs five people. Enterprises in Member States however differ significantly in scale. For example, the average number of occupied persons per enterprise varies between two in Greece and 12 in The Netherlands. About half of all enterprises in the EU have no employees at all, providing employment and income solely to the self employed. 3 Commission Recommendation 96/280/EC of 3 April 1996, (OJ L 107, ) replaced by Commission Recommendation of 6 May 2003, (OJ L 124, 20/5/03). 4 Source: Estimated by EIM Business & Policy Research; estimates based on Eurostat's Structural Business Statistics and Eurostat's SME Database. Also based on European Economy, Supplement A, May 2003 and OECD: Economic Outlook, No. 71, June

8 On 1 May 2004 the European Union welcomed 10 new Members States. In terms of employment, the EU-15 was almost five times as large as the New Member States and Candidate Countries together. The corresponding number of SMEs however was only three times larger. New Member States (2001) 5 Micro enterprises Number of enterprises ( 000) Occupied persons ( 000) Small enterprises Mediumsized enterprises Total Micro + SME 5, , Large Enterprises 10,210 4,970 5,350 20,530 10, Access to credit for SMEs According to surveys in the Member States of EU-15 between 18% and 35% of SMEs received a refusal when they applied for credit. According to anecdotal evidence these numbers are higher in the new Member States. The reasons for credit applications being rejected are diverse and are outlined in a study by the European Mutual Guarantee Association (AECM) study of : Factors relating to the structure of SMEs: The risk associated with the high dependence on one single person (or a small team); Unforeseeable risk factors (illness, family conflicts, etc.); Low level of capitalisation from manager-founders own funds 7 ; Lack of clarity of ownership of assets between assets privately owned and those owned by the business; Higher than average recourse to debt finance, which may jeopardise solvency and constrain availability of working capital; Insufficient collateral to offer to lenders; Incomplete or unclear financial statements information; Insufficient management capacity to clearly communicate the aims and objectives of the business; Business plans often based on opportunities or owner preferences rather than on the basis of strategic planning. Factors relating to sources of venture capital: Reluctance of the manager-founder to share control with an external partner; Insufficient management capacity to prepare information for and consider proposals from potential investors; Relatively high and fixed due diligence costs, making relatively small investments uneconomic; Limited exit options for the investor, especially if there is a difference of opinion between the investor and the manager-founder regarding exit. 5 Source: Estimated by EIM Business & Policy Research; based on Eurostat's Structural Business Statistics and Eurostat's SME Database; also based on European Economy, Supplement A, May 2003, and OECD: Economic Outlook, No. 71, June 2003, and information from ENSR partners 6 Guarantee Schemes members of the AECM, presentation and comparison by André Douette, September See the 6 th report of the European Observatory,

9 Factors relating to the external sources of loan capital: Banks may be more comfortable or consider it more lucrative dealing with larger business customers. Frequently however, by offering a range of services to SME customers the bank may consider that a worthwhile relationship with even the smallest enterprises could be established; Contradiction between the interests of small enterprises and banks, as illustrated by the Third Round Table of Bankers and SMEs 8, in particular, the contradiction between the need for personal contact on the part of the SME and the tendency towards the standardisation of the banks; Limited chance of recovery of assets for lenders in case of insolvency and little confidence in personal guarantees; Reluctance among bankers to invest medium to long term in SMEs. Regarding micro-credits, in particular, these difficulties are made worse by the: The high overheads of credit back office functions (data recording, drafting of the granting letter, etc.) in relation to achievable profit margins; Lack of a sufficient track record or credit history and/or experience; Weakness or even the absence of collateral offered by the SME. 2.3 The role of guarantee schemes In light of the difficulties of SMEs in accessing credit, access to finance requires support. The introduction of a guarantor can reduce the abovementioned difficulties. Companies providing guarantees play two roles: one vis-à-vis the SME and one vis-à-vis the financial counterparty: Firstly, in relation to the SME, guarantee institutions: Facilitate access to the external financial resources without diminishing the financial responsibilities of the borrower. This access to finance can prove a catalyst for the launching and expansion of a business; Issue guarantees on the basis of a sound and comprehensive analysis of quantitative and qualitative risks(experience, training, competence); Enrich the analysis of the risks with the knowledge obtained from their close proximity to the SMEs such as information about local competition, foreseeable developments in technology or marketing. As a consequence, entrepreneurship is stimulated and in this way guarantee schemes contribute to job creation, a suitable financial structure and attractive credit conditions; Provide support to the company is supported by giving advice and supervision in terms of financial management. Secondly, in their relationship with the financial counterparty, guarantee institutions: Build an individualised financial file on each company, applying simplified and standardised procedures; Externalise the risk of counterparty from the financial responsibility perimeter of the bank, against a generally very moderate premium; Frequently supplement the financial and quantitative analysis of the bankers with a more qualitative approach; Endeavour, within the limits of the safety provisions, to alleviate the regulatory banking capital to carry the risk of their SME credit portfolios

10 3. DEFINITION AND IMPORTANCE OF GUARANTEE SCHEMES 3.1 Mutual Guarantee Societies and Guarantee Funds A diversified landscape of institutions: tentative classification The presentations of the guarantee experts revealed a diverse landscape of institutions (see Annex 1). Just as banks are based on a large variety of structures, legal forms and organisational structures (public banks, private commercial banks, savings banks, co-operative networks, micro finance institutions etc.), guarantee schemes in the EU vary in practice due to the different economic and historical backgrounds and legal contexts that exist across the Member States. Behind these cultural and philosophical differences, there lies a common set of objectives: Most schemes have the sole purpose of providing loan guarantees. Others, in the category of development banks, use a plurality of tools vis-à-vis SMEs including mainly loans and guarantees. They can also target other market segments. Examples: Finnvera (Fi), CMZRB (Cz), SZRB (Sk), BDPME/Sofaris (Fr), KfW (De), Sowalfin (BE - Wallonia), Bank Gospodartswa Krajowego (Pl) The following definitions are proposed: Mutual societies are collective initiatives of a number of independent businesses or their representative organisations. They commit to granting a collective guarantee to credits issued to their members, who in turn take part directly or indirectly in the formation of the equity and the management of the scheme. The philosophy is based on the mutualisation of responsibility, decisionmaking by peers and operation within a market economy. Notwithstanding, Mutual Guarantee Societies can and do receive public support. Examples: Socama (Fr), Siagi (Fr), Confidi (It), the Sociedades de Garantia Reciproca (Es), the Portuguese system associating SPGM and SCM, Bürschaftsbanken (De), Bürgschaftsgesellschaften (A), Socamut Sociétés de Cautionnement Mutuel Onderlinge Borgstellingsmaatschappijen (Be), Teskomb (T), Kredi Garanti Fonu (T), Mutualité d aide aux artisans (Lu) Guarantee Funds are in general publicly driven: founded and owned by local, regional or national public authorities. They form a last resort cover for SME risks from a public protection perspective. Notwithstanding, they address the financing needs of private SMEs and are fully managed according to market rules. Examples: AWS (A), Invega (Lt), Rural Credit Guarantee Fund (Lt), KredEx (Ee), Hitelgarancia (Hu), AVHGA (Hu), NLCF for SMEs (Ro), SEF (So), Malta Enterprise (Ma), Vlaams Warborgfonds (Be Flemish Region). Guarantee programmes are activities exercised by, or in the name of, a Ministry as a support service dedicated to supporting SME policy. Sustained directly by the state budget and driven by state strategies, they are sometimes managed by a private sector partner. Examples: BBMKB (Nl), SFLG (UK), Ministry of Trade and of Industry (Cy) 10

11 3.1.2 Common features and tentative comprehensive definition of Guarantee Societies The following criteria give a coherent picture of guarantee systems presented in the report: European SME guarantee activity is based on a broad national consensus between authorities, SME lenders and borrowers. It is exercised by specialised entities or sometimes by Member State services; Guarantee systems are a part of the financial industry, subject to legal regulation and financial supervision which creates the conditions of mutual confidence with the lending partners; Public support provides equity and protection to guarantee systems in order to achieve higher leverage and efficiency; Guarantee systems provide improved access to credit by sharing the potential loss with the banker without releasing the borrower from their financial obligations; Guarantee systems work with a social philosophy without seeking profit for their members. The objective is not to maximise return but rather to create long-term sustainability; Guarantee systems work in full compliance with market rules and aim to support viable projects and sustainable SMEs. The decision making process differs from that of a commercial lender by giving more weight to qualitative and personal values of the projects; Specialist Mutual Guarantee Societies are established as a combination of private and/or public initiatives and tend to involve entrepreneurs in the shareholding, decision and management mechanisms; A special feature of the European structure is the existence of national counter-guarantees and of a platform of supra-national counter-guarantee organised and funded by the EU Commission and managed by the European Investment Fund. 11

12 3.2 Importance of the guarantee industry Guarantee systems are important players in the economy. Collectively, the systems have decades of experience in facilitating risk taking decision processes and improving access to credit. In figures, the resources of the member systems of the AECM at the end of 2002 were over 20 billion, which provide protection for about 32 billion of credits. Data on European Guarantee Schemes Country Own Funds ( 1,000) Outstanding Guarantees ( 1,000) Guarantees granted 2003 ( 1,000) Number of SMEs beneficiaries Guarantee Scheme A. W.S. Austria 57, , ,600 8,734 Bürgschaftsges. Austria 13,600 48,900 19, SCM / MOB Belgium 16,964 42,833 13,868 4,900 Sowalfin Belgium 50,697 80,961 40,746 1,657 CMZRB Czech Rep 122, ,340 87,170 2,000 Vaeksfonden Denmark 305, ,686 17, KredEx Estonia 6,118 17,150 10, Finnvera Finland 368, , ,100 4,751 Socama France 67,209 1,517, , ,737 Siagi France 43, , ,648 43,806 Sofaris France 327,556 5,810,224 1,991, ,000 Bürgschaftsbanken Germany 290,000 5,040, ,095 42,822 Hitelgarancia Hungary 79, , ,000 15,806 AVHGA Hungary 46, , ,810 16,295 Fedartfidi Italy 580,700 3,589,000 2,091, ,837 Federconfidi (2002) Italy 421,225 2,569,743 1,475,590 45,738 Fincredit Italy 169,921 1,723, ,005 32,916 Federasconfidi Italy 235,515 2,621,459 1,175, ,054 Federfidi (2002) Italy 67, , ,108 70,000 Fondo Interbancario Italy 341,796 7,298,224 1,518, ,194 Invega Lithuania 6,012 9,278 7, Rural Guar. Fund Lithuania 12,318 55,422 51, BBMKB Netherlands n.a. 1,269, ,000 18,817 SPGM / SCM Portugal 21, ,461 65, SZRB Slovak Rp 72,758 57,118 26,240 3,206 FGC Rural Romania 11,321 24,058 40,431 n.a. RLGF SMEs Romania 5,766 5,273 3,549 n.a. NCGF Romania 10,143 6,137 10, SGR / CESGAR Spain 337,861 2,829,271 1,255,719 69,010 Teskomb Turkey 57, , , ,000 Kredi Garanti Fonu Turkey 5,495 19,704 8,400 n.a. TOTAL 3,847,362 37,351,603 14,467,731 2,065,746 12

13 3.3 The role of public authorities Intervention by authorities can be in different forms and can take place at different levels, including regional, national and EU levels: Provision of a legal and prudential framework: the actions of guarantee schemes need to be based on confidence in their capital base. Consequently, the government has to set up rules regarding the capacity of their management, the extent of their commitments, liquidity and solvency. This legislation can either be in line with banking law or can be of a more specific nature; Support for the beneficiary SME: subsidising the guarantee premium can reduce costs as barrier to access to finance; Financial support to the guarantee scheme in: o Equity formation; o Increasing the risk funds (provision accounts); o Providing automatic counter guarantee of their losses; o Providing subsidies for recently established schemes; o Reducing some indirect taxation or income taxes. Financial support is also offered at the European level by: Contributions from PHARE or the Structural Funds; The MAP guarantee window managed by EIF on behalf of the European Commission. 3.4 Distribution of guarantee schemes across the European Union Guarantee schemes have a significant presence in the European Union. The following countries however have not yet established guarantee mechanisms: Bulgaria, Latvia, Sweden and Ireland; though projects have already begun in Latvia and Sweden. In the Third Multiannual Programme (MAP) for SMEs in the European Union ( ), the Commission promoted the creation and development of Mutual Guarantee Schemes. While the action may be seen as EU policy supporting loan guarantee schemes, the main objective was to facilitate access to finance for SMEs. In this context, the Commission has supported the establishment of the European Mutual Guarantee Association, acting as umbrella organisation for the Mutual Guarantee Societies (MGS) in a number of European countries. In the Fourth MAP, following the Lisbon European Council of 2000, special attention was paid to guarantee systems. As part of the objectives of improving the financial environment for business, the SME Guarantee Facility was established within the European Investment Fund aiming to support enhanced access to finance, including offering counter-guarantees to guarantee systems in Europe, such as the Mutual Guarantee Schemes 9. 9 In 2003 IDEA Consult presented the evaluation of the MGS action. The evaluation provides an assessment of the relevance and effectiveness of the activities supported by the MGS action, and suggestions on improvement. See further details in Evaluation of the Commission action to promote the development of Mutual Guarantee Schemes and their use by SMEs in the EU, No ENTR/01/059 Final Report, IDEA Consult, July

14 4. MANAGEMENT PRACTICES OF GUARANTEE SOCIETIES Comprehensive information was assembled by the Expert Group via questionnaires completed by the participants, the presentations of the national schemes in the Expert Group, through the debates generated by these presentations and the experience of the AECM as a specialised business association. This material allowed an analysis of the following aspects of Guarantee Societies: Management philosophy; Target market; Guarantee products; Procedure for treating guarantee applications; The decision-making process; Risk sharing; Complementary support mechanisms offered to SMEs. 4.1 The management philosophy of Guarantee Schemes The Expert Group concluded that Guarantee Societies attributed the highest importance to their economic and social mission of SME support. They tend to measure their results more in terms of market impact rather than in terms of financial performance. It is important to note however that there could be conflicting objectives for a Guarantee Society: on the one hand, they are financial institutions responsible for their profitability; on the other hand, they carry out a non-profit mission. The Expert Group members unanimously reported that Guarantee Schemes operating in their jurisdictions aim to support only sustainable projects, based on realistic business plans, run by managers with a sufficient profile of professional capacity. The Expert Group members also commented that The feasibility of projects is generally examined by both the financier and the guarantor; Applications are backed by a detailed financial proposal, financial statements, a business plan and details of the experience of key staff in the business. Members of the Expert Group highlighted that guarantee schemes in their country of operation do not distort competition and do not create abuses of a dominant position because: The typical beneficiary of a guarantee is a micro or small company that does not possess a significant market share; Guarantees tend to promote competition between large companies and SMEs. The former usually have access to a wider range of financing options and specialist financial consultancy. Guarantee Schemes thus help SMEs obtain affordable finance under market conditions; The system is open and non-discriminatory, as guarantees are accessible to all SMEs within the eligible sectors, without discrimination between applicants; The system is balanced, as in case of default, the beneficiary remains fully liable while the lender will bear a loss from 20 to 50% of the uncovered credit amount. Guarantee Schemes function within limited management autonomy. They may not take commitments beyond a number of limits. These are: Maximum value of total commitments that a Guarantee Scheme is allowed to take. Schemes with a banking qualification must respect a capital adequacy equal to at least 8% of the weighed assets (e.g. the Bürgschaftsbanken in Germany, CMZRB in Czech Republic, SGR Spanish or Portuguese SCMS) In public systems, it can be an administrative ceiling fixed by the Official Authorities (e.g. Sowalfin, the Lithuanian Rural Guarantee Fund). In Estonia, for example, the capital adequacy requirements may be set together with administrative ceilings; 14

15 In Italy, the partner banks used to set a multiplier of the risk funds to determine the maximum of acceptable commitments on behalf of a Confidi. Maximum guarantee that can be delivered to any single borrower, ensuring a good portfolio spread. Under banking regulation, strict rules of concentration of the risks between and within groups of borrowers exist, with associated reporting obligations; The ceiling can also be of an administrative or statutory nature; EU Competition Rules set a limit: a guarantee to a single beneficiary may not incorporate more than 100,000 of State Aid within 3 years. 10 Maximum extent of coverage that can be provided in percentage of the loan. As a rule, the percentage of cover does not exceed 80 % : Bürgschaftsbanken (on average less due to risk negotiation with bank), Hitelgarancia, Invega; Other systems go up to 70% (Romanian Funds, CMZRB) or 75% (Belgian SCM, KredEx, UK SFLG); Many Guarantee Societies apply a 50/50 risk sharing with the lender (Italian Confidis, Portuguese MGS, BBMKB); Lowest rates, down to 35 to 40% can still provide an incentive effect for the lender (Sowalfin, Sofaris, Siagi); The Spanish guarantee system is special: the guarantor takes the full credit risk but, in exchange, the guarantor exercises in full the risk management and is the only beneficiary of the collaterals offered by the borrower. The bank is only the funding provider. Maximum duration of a commitment. The administrative term of the guarantee usually runs from 5 years (KGF Turkey) to 15 years (AVHGA and Hitelgarancia Hungary, Bürgschaftsbanken). Usually the guarantee is adjusted to the duration of the loan; The usual average maturity of a guaranteed loan is 10 years (UK SFLG, Finnvera, Sowalfin). Equally, in general it is not possible to cover an already existing loan with a guarantee. 4.2 The target market The target market of guarantees is the SME sector. It is important to note that although the EU definition of an SME is gradually gaining ground, certain systems still use other classifications for guarantee support (UK SFLG). Most European Guarantee Societies are multi-sectoral. They diversify their portfolio in order to reduce risks. In France, the Socama have opened gradually from the craft sector to commerce and services. Italy, however, is an exception with the five major federations of Confidis each serving a distinct sphere of business: industry, the small-scale industry, the craft industry, trade, services and tourism. The agricultural sector is often served by specialised providers (Lithuania, Hungary, Romania, Italy, Belgium), or by separate programmes of a Guarantee Society (Slovakia). Agricultural Guarantee Societies however often extend the scope of their activities to include other development activities in rural areas. This is in line with recent European policies and contributes to the diversification of farming activities towards rural tourism or to the production of green consumption goods. 10 Commission notice on the de minimis rule for State Aid, (96/C 68/06), OJ C 68, ) 15

16 The Expert Group characterised the target market of Guarantee Societies as follows: In terms of size - it is the micro and small businesses segment with limited financial needs: self employed, family companies, partnerships. The commitment to this market is illustrated by the average guarantee provided: from system to system, between 25,000 and 200,000, amounts that are far under the Basel threshold of retail credits ( 1,000,000); By nature - this target market includes companies that have difficulty in obtaining a loan and/or do not present evident features of creditworthiness such as: o Start-ups or recently established businesses (trading for less than 3 years); o In the cases of business transfer and succession; o SMEs starting major development or expansion programmes (technological investments, market expansion, internationalisation); o SME businesses with temporary cash problems (e.g. because of seasonality, defaulting debtor and/or economic downturn); o SMEs that have already pledged their assets as collateral for previous borrowing and are thus unable to borrow further. 4.3 Guarantee Products The Expert Group agreed that the range of products offered by Guarantee Societies depends on various factors which include the risk assessment procedure used by the Guarantee Society, the legal environment of the country (e.g. length of bankruptcy procedures), the term of the guarantee, its extent of coverage and the associated costs. While the traditional approach is to present the guarantee as a generic product, some participants in the Expert Group pointed out that the guarantee can also be presented in various packages. The methodology involves adapting the characteristics of the guarantee product to different business situations. This offers the advantage that if the product is adapted to a particular business situation; it gains better visibility and attractiveness on the part of its potential users. A more sophisticated product may result if the guarantee is accompanied by additional features such as coaching or mentoring for beneficiary enterprises. Below are examples of the various products used by Guarantee Societies: Business start-ups products Sofaris manages a specific fund dedicated to companies in their early stage of development. The guarantee covers amounts up to 70% of the credit instead of 40% in a development operation. The performance is excellent: 1.3 billion covered and 2 billions underlying loans. The penetration rate is estimated at 65%; SBS from the U.K. presented the Phoenix Fund Guarantee, intended to facilitate the external funding of Financial Institutions of Community Development (CDFIs). The guarantee can cover up to 100% of the capital and of the interest due; German Bürgschaftsbanken launched the "Bürgschaft ohne Bank" system. The entrepreneur contacts the Guarantee Society; its credit file is completed and analysed with the assistance of experts of the Chamber of Craft/Commerce/Industry. A guarantee bond is provided to successful applications. The bank intervenes at a stage when the file is already completed and the coverage partially ensured. Some Guarantee Banks add an accompanying service which enables a follow-up of the starting business. The network of the German Bürgschaftbanken counts 42% of starting-up businesses in their portfolio; AWS manages the 'Nachfolge Bonus' (Successor Bonus) programme. It consists of a savings account with an extra bonus if this money is used as equity base at the establishment of the business. The bonus premium is financed by the Chamber of Commerce, Federal States and AWS. In addition AWS can also provide guarantees. 16

17 Micro credits guarantee: Micro credits are business loans up to 25,000 The Socama Express Loan does not require any pledge on the private assets of the entrepreneur. Decision criteria are simplified and the decision is made within three days; Confidi Sardegna is a Guarantee Society which is member of Fedartfidi. They have designed a micro-guarantee based on a flexible decision process in which simplified decision criteria are taken into account. It is distributed by the network of Artigiancassa and regional banks; KredEx is also setting up a mechanism of micro loan guarantee with a delegation to the bank in order to speed up the procedure; In Spain, Sociedades de Garantia Reciproca has a product that receives a counter-guarantee of 75%, allowing taking more risks. Some Spanish regions subsidise the interest rate to make the product more attractive; Socamut, a Sowalfin specialized subsidiary created with the support of ERDF, reinsures guaranteed credits granted by the Walloon Mutual Guarantee Societies with more favourable terms and a simplified process for micro-credits. Guarantee for growing companies Vaekstkaution Denmark gives support to companies with a high growth potential: the guarantee applies to the development of new products, concepts, production methods or markets. The decision-making process is of less than 5 days for loans from 10,000 to 670,000. The guarantee premium amounts to 3% for the years 1 and 2, then to 1.5% for the next years. Guarantee for business internationalisation AWS proposes a guarantee to the Austrian companies which pursue an objective of internationalisation. The premium rate is limited (0.5%/year) and the protection is high (80%). 42 projects were accepted in 2002, giving a guarantee outstanding of 24.2 millions. The default rate amounts to 1%. Innovation guarantees Sofaris manages the "Biotechnology" fund which is a combination of a loan and a venture capital guarantee. Sofaris has established contractual partnership with 16 Venture Capital companies and provides them with a 50% guarantee for 10 years (70% for the businesses of less than 3 years of age). Potential losses on private equity risks are caped. The Fund recorded 114 operations in 2002 and 105 in 2003; AWS runs a programme to encourage productive investments and high technologies. A guarantee of 80% is attached to loans of a maximum of 1 million. The premium ranges between 0.5% and 1.5% according to the risk. A profit sharing premium can also be applied. In 2002, 417 applications were treated representing million commitments. BBMKB gives special conditions for innovation: the protection rate of credit passes from 50 to 66%. The duration of the engagement passes to 12 years and a grace period of three years can be granted. Guarantee for working capital needs Hitelgarancia developed a guarantee linked with a credit card. In full security, cash can be drawn, and suppliers can be paid from a guaranteed account. Sofaris can cover commitments of good performance or other technical commitments that a business must assume in accordance with public markets, contractual or legal obligations. Likewise, 24 % of the Spanish SGR activity consists of technical guarantees. They insure the good achievement of a contract, meet legal obligations, pre-finance public subsidies and reinforce the financial position of the company vis-à-vis suppliers. 17

18 Business transfer guarantee Siagi is a Guarantee Society specialised in transfer and succession of micro businesses (67% of its activity). Bankers are interested in the professional expertise of Siagi and are satisfied with a guarantee protection negotiated at 35 to 45% of the final loss. 4.4 Procedure for treating guarantee applications Various participants presented the procedures for accessing the guarantee within the credit application process. Two methods are available. The most common procedure (Diagram 1) consists of applying first to the banker. It is the lender s decision to call for a complementary guarantee if it is not satisfied with the collaterals or not fully convinced by the elements of the file. The Guarantee Society is consulted by the banker and makes his decision independently. A commitment to provide the guarantee triggers the issuance of the loan. An alternative way (Diagram 2) is the consultation of the Guarantee Society in first instance by the SME. The file is completed and the coverage decision is made first. The banker is requested afterwards. This schedule is mostly applied in Italy and is the usual procedure in Spain. The German "Bürgschaft ohne Bank" mechanism was influenced by this practice. Diagram 1. (3) Guarantee Application LENDING BANK GUARANTEE SOCIETY (2) Deliberation (4) Deliberation (5) Granting the Guarantee (1) Application (6) Granting the Credit (7) Public aid (Counter-guarantee or Subsidisation of the premium) SME BORROWER PUBLIC AUTHORITY Diagram 2 (2) Granting the guarantee 3) Counter-guarantee BANK GUARANTEE SOCIETY PUBLIC AUTHORITY (1) Credit and Guarantee Application (4 ) Granting the Credit. SME BORROWER 18

19 4.5 The decision-making process A professional risk evaluation and a sound decision are key factors in the management of a Guarantee Society, as the institution must minimise the extent of the losses arising from the scheme. The goal of the Guarantee Society is, as far as is possible, to complement the assessment of the bank and to add value. For this reason, mutual guarantee systems insist on their market specificity and stress the importance of peer involvement in the lending decision. A financial analysis of the application is always carried out and each project is assessed according to the usual toolkit: indebtedness, working capital, liquidity, profitability and viability of the project. Complementing this is the appraisal of the capacity of the applicant to carry out his project considering qualitative factors such as his/ her qualifications, experience, skills and reputation among others. Guarantee Societies make independent decisions and have a Committee specifically for granting guarantees. Some Guarantee Societies however delegate decision-making to the lender. This is the working principle at BBMKB, a public service, which is dependent on the Ministry for Economic Affairs in the Netherlands. Annually, the government allocates a special budget to guarantee support. The total envelope is distributed amongst banks, which can provide themselves the guarantee to credits which require a complementary cover. BBMKB manages the amount, collects information and intervenes as a controlling and paying agency. This special technique, which is not an overall portfolio cover, functions very well. The system however requires special conditions: The bank itself must be at risk: a 50/50 loss sharing urges the bank to a great prudence; The eligible operations must be accurately defined and the guarantor must be allowed to withdraw the guarantee if the principles are not applied correctly; The financial system must be familiar with SME credit, mature and experienced. It will not work without a perfect know-how on behalf of the lender on SME matters; In certain countries, a partial and limited delegation is left to the lender. For instance, in France, the cultural proximity and the strong connection between the Socama and the Banques Populaires is the basis of a delegation from the former to the latter. The Socama s committees establish their framework of criteria and the banks must follow the guidelines. A permanent dialogue with the bank s expert, Monsieur Socama, is the instrument by which the confidence is established and strengthened. 4.6 Risk sharing The principle of risk sharing, and thus the distribution of any loss arising between the various participants, is a key element of the guarantee philosophy. If the Guarantee Society is called to pay, it substitutes the main borrower for the bank, but it lets the main debtor fully liable for his/her debt. The question of redemption by the entrepreneur is discussed between the Guarantee Society and the debtor. After debt collection on the pledged assets, some supplementary recoveries may be attained. The guarantee works on a principle of subsidiarity. A first possible recourse is directed to national public counter-guarantors. Either the counter-guarantee is multi-annual (Germany, Belgium), or its amount and operational working is fixed annually (Finland, Lithuania). The European Investment Fund (EIF) manages the European Commission s MAP guarantee programme. It is a contractual system of automatic and free of charge intervention. The condition to contract is that the protected portfolio should have an additional effect. 19

20 4.7 Complementary support mechanisms offered to SMEs The Expert Group debated the complementary advisory services that Guarantee Societies could provide to SMEs and the opportunity to develop them. It was recognised unanimously that advice offered increases the chances of success, especially for start-ups. It was also agreed in the discussions that: A Guarantee Society could either try to provide a direct coaching service or work in partnership with a specialized service provider; A Guarantee Society cannot provide the full range of services requested by an SME as many of these, such as staff management, commercial management and production management fall outside their competence; A quality service has a cost and the guarantee premium cannot absorb this charge. Either a complementary fee should be charged or the service should be supported by a subsidy; Coaching is not only useful for the SME but also for the Guarantee Society, which can likewise reduce its risks and losses. There was unanimous agreement within the Expert Group to consider the MAP micro credit guarantee window and the performance fee examples of best practice. 20

21 5. PERFORMANCE INDICATORS OF GUARANTEE SCHEMES This chapter reviews the theory and practice of guarantee schemes in Europe with the objective of identifying and providing an overview of the different criteria that can be used to assess their performance. The results draw on both the discussions and the practical experience of the Expert Group. As a basis to assess the performance of Guarantee Societies, the following criteria were proposed by AECM and discussed within the Expert Group: Relevance; Additionality; Multiplying Effect; Effectiveness; Efficiency. The default rate and sustainability were considered specially, as the result of policies of additionality, leverage and public support. 5.1 Market Relevance Relevance of Guarantee Societies This indicator refers to the capacity to fill market gaps. A market gap is a structural situation in which the market fails to efficiently provide or allocate the credit demanded by SMEs. Due to developments in the banking sector (e.g. Basel II) the role of Guarantee Societies has been growing. The relevance of Guarantee Societies for banks is to offer a mitigation of the risks associated with their SME portfolios. Basel II will qualify most Guarantee Societies as guarantors, provided that their guarantee product is in line with the regulatory requirement. This will allow banks to reduce regulatory equity on their loan portfolio. In countries that have a low banking intermediation rate, Guarantee Societies can provide a general incentive effect. Banks consider SMEs risky and a non-profitable business segment. Guarantee Societies contribute to a general learning process, helping SMEs and banks familiarise themselves with each other. In countries with more mature financial sectors, the market gap in the provision of SME finance is more specific and is located in special niche markets. In such circumstances, Guarantee Societies must operate more specialised strategies. In this regard, a Guarantee Society has several roles: First, the most significant role of a Guarantee Society is to compensate for an SME s lack of collateral to satisfy the lender s requirements. In the case of collaterals, banks are forced to assess the value of collateral according to a scenario of forced sale and to consider a time lag between the default and the payment in recovered money. Banks therefore could require coverage of as much as 200% or 300% of the credit amount; A second role of a Guarantee Society is to boost access to finance for companies that, even if enough collateral is available, have difficulties in establishing their creditworthiness. This is particularly difficult in the absence of any track record or of any relevant financial statements permitting a reasonable prediction of their future. This is a situation common to a large majority of business start-ups, fast growing companies and to all businesses facing financial difficulties; Guarantee Societies also play an important role in economic development. The actions of Guarantee Societies in disadvantaged regions or areas, or risky economic sectors should be 21

22 highlighted, as the financial sector tends to concentrate on regions and sectors that are considered more secure from a risk aspect; Finally, a key feature of the relevance of Guarantee Societies is their ability to continue to grant support to projects, even during a downward economic cycle. During the economic downturn, many financial intermediaries (e.g. venture capitalists) reduced their level of activity. In contrast, most Guarantee Societies actively increased their commitment How can the relevance of Guarantee Societies be better managed? The relevance of Guarantee Societies is dependant on several factors. First, the relevance of a Guarantee Society is higher if its establishment was the result of a broad consensus at the national level. Public-private partnerships are expected to take on an increasingly significant role. Second, the relevance of Guarantee Societies can be enhanced by improvements made to their operational process and marketing activities. A key relationship for Guarantee Societies is with banks. In this regard, clear contracts, simple procedures and quick payment of a default are vital elements as is good knowledge of the work of a Guarantee Society by bank credit staff. Good working relations between a bank and a guarantee society can help accelerate decisions. The other key relationship for a Guarantee Society is with SMEs. As with the bank, it is vital that the interlocutor has a sound understanding of a Guarantee Society and what it does. In order to develop this aspect, a Guarantee Society must be close to the market (ie. to SMEs). In developing these two crucial relationships, a Guarantee Society can help SMEs negotiate better credit terms. Examples Statistics collected from the activity of Guarantee Societies shows the anti-cyclical action of Guarantee Schemes. An average growth rate of 30% was reached in Portugal, despite the 9% drop in investments in 2003; Finnvera - Finland: 48% of the domestic support goes to the less-favored regions (annual report 2003); Sofaris - France has increased the rate of the guarantee from 50 to 70% on credits granted in EU Objective 2 areas and in other regions struck by the closures of companies. 5.2 Additionality Additionality of Guarantee Societies Additionality of a Guarantee Society is the capacity to provide additional finance that is finance which would not have been available from any other commercial source. From the perspective of a Guarantee Society, this is the case if access to finance is provided for a credit applicant that would otherwise be rejected by the financial system. This can be achieved by the Guarantee Society through reducing adverse selection, information asymmetry and/or compensating a situation of weakness so that the applicant can benefit from better credit terms than it would otherwise be able to obtain. In practice, the additionality of a Guarantee Society may take several forms: An increase in the volume of microcredits (< ) - a segment that is often neglected by lenders because of its time consuming approach and low profitability is a meaningful indicator; Longer-term loans or credits provided with more favourable conditions can indicate the success of additionality of a Guarantee Society (e.g. credits with an initial grace period, credits with no private assets to be pledged or credits for intangible investment); 22

23 A Guarantee Society may be able to help overcome temporary difficulties between banks and SMEs by harnessing its local knowledge; Decision by peers can be an added value to the bank s decision by giving more weight to personal skills or local elements. Information asymmetry can be reduced and more applications accepted; A company that has pledged its assets for previous loans is able to mobilise additional securities for new investment programmes; Some Guarantee Schemes are able to relieve entrepreneurs from the obligation to pledge private assets to cover a business credit How can the additionality of Guarantee Societies be improved? Although significant, a Guarantee Society should not focus exclusively on developing its additionality as there is a risk that it focuses exclusively on the margins of the market rather than the core, which entails certain risks. Consequently, a portfolio should be diversified over: Various sectors; Short and long term operations; Financial and technical guarantees; A variety of viable companies. It is important to note that if a policy decision is taken to increase the level of additionality it should be a step-by-step process over time and should be tailored to the national economic environment. Examples Bürgschaftsbanken - Germany: the portfolio of 5 billion is composed of 42% of start-ups and 98% of long-term commitments (maximum 15 years duration); Federconfidi - Italy: The December January 2004 survey compares the Confidi interest rate (4.14% for medium-term operation) with the average market rate (5.20%). 5.3 Leverage Leverage of Guarantee Societies The leverage of a Guarantee Society is the ratio of the outstanding guarantee commitments to the underlying own funds of the Guarantee Scheme. It is an important indicator of the successful operation of a Guarantee Society as it measures the impact of the endowment of equity of a scheme on the lending activity. While micro-credit institutions or a venture capital company are not able to disburse more than their funding, Guarantee Schemes can take commitments that culminate to several times their equity amount. Various rules limit the maximum size of a portfolio. The banking supervision fixes the leverage to a theoretical 12.5 times the equity. Internal policies of Guarantee Societies also impose a limit on the portfolio. The leverage is linked with the additionality policy: more risky businesses in a portfolio means a lower leverage. Written policies, risk sensitive management and the forming of adequate provisions are conditions to increase the leverage. No model has yet been developed to calculate the optimum level of the leverage. Basel 2 and the EU directive proposal on Capital Adequacy 11 are the new guidelines. The Expert Group considered that a reasonable level for a mature Guarantee Scheme with a well diversified portfolio could reach 6/7 times. 11 COM(2004)486, 14 July

24 Examples Equity Portfolio Leverage 12 Siagi France 44 Mio 670 Mio 15 x Fedartfidi 550 Mio 4,100 Mio 7.4 x Bürgschaftsbank Germany 290 Mio 1,760 Mio 6.2 x Another way to assess the success of a Guarantee Scheme is to look at its full multiplier ratio. The full multiplier analyses the relation between the total investment value achieved by guaranteed credits and the own funds of the Guarantee Scheme Leverage of investment The leverage of investment can be defined as the estimated volume of loans leveraged for each of funding spent on a guarantee. Leverage effect- Financial Intermediaries: The following table shows the leverage effect (gearing) achieved with the Community funds in terms of guaranteed amounts within the EIF Multiannual Programme. Table 1 Allocated budget (signed) ( ) Maximum EIF Guarantee Amount ( ) Leverage effect Loan guarantee window 83.3 Mio 1,738.0 Mio 20.9 Micro-credit window 33.0 Mio Mio 5.4 Equity guarantee window 4.2 Mio 35.1 Mio 8.3 Total Mio 1,952.1 Mio 15.6 Table 2 shows the leverage effect (gearing) achieved with the Community funds in terms of the estimated volume of loans within the EIF Multiannual Programme. Table 2 Allocated (signed) ( ) budget Estimated underlying loan volume supported ( ) Leverage effect Loan guarantee window 83.3 Mio 6,071.6 Mio 72.9 Micro-credit window 33.0 Mio Mio 8.5 Equity guarantee window 4.2 Mio 60.0 Mio 14.3 Total Mio 6,469.4 Mio Attention should be paid to the fact that the guarantee societies operate in very different situations. As such, the interpretation requires very careful attention. 24

25 5.4 Effectiveness Effectiveness of Guarantee Societies Effectiveness is the capacity of a Guarantee Scheme to enable better macro-economic performance relative to the means implemented, especially public resources. It can be measured by the number of guarantees granted in a year, the growth rate of the portfolio, the development of the network and the attraction of more banking partners How can the effectiveness of Guarantee Societies be improved? It was unanimously stated that effectiveness requires good capitalisation allowing: Sufficient extension and diversification of the portfolio; Confidence on behalf of the lenders; Professional activity, with a staff sufficient in number and skills; Reduction of sensitivity to losses; The addition of financial income to the guarantee fees. Collecting equity can be a challenge, because of the non-profit character of the scheme: mutual members pay a small equity share. Banks could become interested if their strategy is to obtain a market share, nevertheless state financial support is often necessary. EU financial tools could also give an appreciated complement to the equity base. By increasing the leverage of commitments more businesses can access the instrument. More accessibility is provided by a good visibility of the Guarantee Scheme and by the existence of a widespread network of branches. The question is central in a period of bank consolidation resulting often in reduction in the number of bank branches. Examples Portuguese guarantee schemes used EU funds to increase their equity; Retained earnings are the most important way to increase the own funds. A vast majority of schemes assign their earnings to increase their reserves. Between 2000 and 2003, the reserves of Hitelgarancia Hungary increased from HUF 9,735 million to HUF 14,845 million (approximately from 39 million to 59 million; using1 =HUF 250 exchange rate). 5.5 Efficiency Efficiency of Guarantee Societies Efficiency considers the productivity of a Guarantee Society and the quality of its management: it refers to elements of cost, organisation and process relative to the output and to the price of the service How can the efficiency of Guarantee Societies be improved? The price of the guarantee service is a very sensitive parameter. A fee amounting to 1% of the outstanding is usual. The highest fees amount to 3 to 4%. It is not only a financial value, but also a psychological concept and a competition element. Currently, in a period of low interest rates, a 1% fee appears to be too high. It can be stated that in general: A too high premium discourages businesses that could manage without a guarantee. Consequently the quality of the portfolio drops. Only businesses for which access to credit is not dependant on the price are interested in a guarantee; 25

26 A too low fee neither discriminates against risks and nor does it reward them; random portfolios could be built with a possible capital depletion; The efficiency of a Guarantee Scheme is to be assessed by means of the cost-income ratio. A paramount element is the productivity of the organization, the simplicity of the procedures, the automation of the accounting system, the follow-up of the commitments and the settlement of the losses; Efficiency is also measured by the speed of delivering the service. Procedures must be transparent and quick instead of a new obstacle in the processing of a loan application. The most labor intensive part should remain the decision making and the monitoring of problem guarantees. Good productivity requires a good collaboration with the lender by avoiding double work. Various systems can be implemented: A standard application file can be used by the guarantor and the bank; Limited delegation of power can be given to the bank, a system that is well functioning: o With a mature and experienced banking system; o With policies and practices in the bank, which are at the satisfaction of the guarantor; o With a proportion of risk sharing of at least 50 / 50; o Provided that the guarantor is allowed to apply a penalty to banks that do not behave in accordance with the rules. The follow-up of the guarantee can be partially delegated to the bank; In case of default, the recovery procedure can be made by the bank. In the future, efficiency will also depend on several developments that are challenging Guarantee Schemes: Many SMEs and Guarantee Schemes will be confronted with rating and scoring procedures. Guarantee Schemes should be strong enough to give a special weight to qualitative elements, balancing the bank s financial criteria; The monitoring of the portfolio will have to be accurate; Special attention has to be paid to the quality of management of Guarantee Schemes; the existence of policies, guidelines for procedures, internal control and sound principles of corporate governance; Disclosures must be clear and complete towards the market. Examples BBMKB - Netherlands- and Fondo Interbancario - Italy- allow the bank to commit in their names. Sofaris and Socama - France, Hitelgarancia and AVHGA - Hungary have the same procedure, but restricted to some thresholds in amount or to some kind of businesses. Several systems (SGR - Spain, Finnvera Finland, AVHGA and Hitelgarancia - Hungary) created an intranet to be on-line with partner banks. This reduces the decision time and improves the productivity. The average processing time of a guarantee application at Finnvera - Finland is 1.3 weeks. 61% of the files are treated within 2 weeks. 26

27 5.6 Default rate and Sustainability Sustainability of Guarantee Societies Sustainability and the extent of public support are vital for a Guarantee Society. This sustainability is dependent on a variety of factors such as the default rate, the cost-income ratio or the recoverability of losses. Experts considered that there is much confusion about the default rate. Below are two examples to demonstrate this. First, an important indicator is the survival rate (the percentage of guarantees granted in year x that are surviving in a year x + n). It though can hardly be used in international comparisons because of the different characteristics of the portfolios. Applied to homogeneous segments, it should however provide a way to forming risk provisions in the course of a guarantee life. Second, an annual calculation -instead of over a period of time- is more appropriate (the ratio of annual flows of defaults to the stock of guarantee outstanding). In such circumstances both the numerator and the denominator have to be clearly defined: Default: from the viewpoint of a guarantee society, it is the claim made by the bank to the guarantor. But borrowers could be in difficulty before the bank s decision to accelerate the loan and every bank has special policies vis-à-vis late payers; Confusion between provisioning a default and paying a default. Both are items of the Profit and Loss account but provisions can be formed before a default. There is a difference between the gross loss and the net loss, depending on the intervention of a counter-guarantor and monies recovered on the debtor s assets. Clarifications brought by the next Basel framework will be very useful in this respect. The forthcoming directive will harmonise the data at EU level and provide: A definition of a default and of a loss; A measure of risk parameters: probability of default (5 years average of annual rates), loss given default (difference between gross and net), exposure at default and the influence of the maturity; An obligation to pay losses in a timely manner (be it a provisional payment of the loss estimate), reducing the time lag between claim and payment; The obligation to provision for emerging risks. The concept of "loss coverage" is dominated by the concept of "long-term sustainability". 13 The default rate of a Guarantee Scheme is very much linked with the idea of loss sharing : both the lender and the guarantor have to share a loss. In a system that would relieve the bank from any risk, adverse selection would be possible with undesirable effects. The amount of guarantee premium is the income covering default risks. Some systems, mainly mutual, recommend a flat rate, equal to all, expressing the financial solidarity between partners. Other systems are in favour of a premium modulated according to riskiness. Each Guarantee Scheme has a strategy compliant with public support policies. Higher default rates are possible in systems that benefit from counter-guarantees and are acceptable if the system offers more additionality at the same time. A paramount question is that of the organisation of national court systems and recovery procedures. The Expert Group drew attention to the red tape, the cost and the difficulty to solve situations of bankruptcy, legal protection or debt collection. 13 AECM Vienna Seminar, May

28 5.6.2 How can the sustainability of Guarantee Societies be improved? A low rate of default in itself is not deemed as an indicator of good performance if the result is not considered in light of the additionality of the system, the existence of external assistance and long term sustainability. Various policies and approaches are possible that conduce to reasonable results. First, it appears desirable to build up a balanced portfolio with differentiated risks. Second, it is not advisable for a Guarantee Society to focus exclusively on weaker businesses or high risk segments. Third, welltrained staff help improve the quality of decision-making. Finally, the availability of sound financial information on SMEs (such as through the annual report) clearly enable better decision-making. 28

29 6. BEST Practices In the context of the report, BEST practices are the description of special products and/or procedures which meet their objectives regarding the targets, features and the implementation as planned and requested. The Expert Group had paid attention to the specific aspects of the presented guarantee schemes to find out illustrations of best practices that should be noteworthy and complementary under different viewpoints. 6.1 Support to the establishment and development of Guarantee Schemes In the following, examples of best practice of guarantee schemes are stated which focus on the support of SMEs and/or which offer benefits in the form of lower interest rates as well as more favourable terms and conditions for loans 14 : Slovene Enterprise Fund - Slovenia The creation of the Guarantee Scheme in Slovene Enterprise Fund SEF was established to promote micro, small and medium sized companies by offering favourable terms for loans. SEF offers benefits for SMEs in the form of affordable interest rates for loans, more favourable terms and conditions for granting loans, guarantees for investment loans raised with commercial banks in Slovenia and grants in combination with indirect loans or guarantees. SPGM - Portugal The formation of a full integrated guarantee network SPGM has concentrated on guarantees benefiting medium-sized SME. The Portuguese Guarantee Scheme forms a full integrated guarantee network. It is based on the following principles: First the guarantees are issued by autonomous Mutual Guarantee Societies (MGS) in which the beneficiary SME also holds a stake. Second a counter guarantee mechanism is granted through the Mutual Counter Guarantee Fund, managed by SPGM. INVEGA - Lithuania The First Instalment guarantee scheme The Lithuanian guarantee system includes the Lithuanian Rural Credit Guarantee Fund as well as Invega. Invega is a guarantee institution established at the end of 2001 by the Government of Lithuania with a view to promoting the economic development of small and medium enterprises (SME) in Lithuania, through the facilitation of their access to finance. 6.2 Special products and services for SME clients Within the framework of some guarantee schemes in EU countries special products have been developed in favour of the SME clients. Particular examples can be found in guarantee schemes in France, Belgium, Germany and Austria. SIAGI France SIAGNOSTIC, a risk monitoring system SIAGI developed SIAGNOSTIC, a new tool used in following up projects to prevent problems, to solve them, and as a result to reduce the probability of default. SIAGI provides guarantees to a large proportion of French banks dealing with very small firms and is monitoring the risks of the guarantee beneficiary. 14 AECM Study Paper Creating and developing a successful Guarantee Scheme 29

30 HITELGARANCIA Rt. - HUNGARY Procedure of issuing grants under special agreements with banks Hitelgarancia Rt. has developed a procedure of issuing guarantees under special agreements with banks. The institution had been looking for a method to undertake guarantees in bulk, yet in a prudent, risk sensitive, cost saving way for both the banks and the guarantor. Conditions of creditworthiness have been defined jointly for each specific product initiated by the partner bank. BDPME/SOFARIS- France The Equity Guarantee Scheme: fostering research and development in innovative SMEs SOFARIS is a specialized financial institution, fulfilling a permanent mission of public interest. The shareholders are the French State via BDPME (Bank for Development of SMEs 58.3%), banks and financial institutions. Its aim is to manage loan guarantee schemes funded by the French State, Caisse des Dépots et Consignation (CDC), the European Commission and French local authorities. SOFARIS, as a guarantee system, has developed specific schemes dedicated to innovation financing and private equity investments. SOCAMA France Guarantees for small companies with a lack of collateral The SOCAMA are mutual guarantee societies. They are private companies; the equity capital and the Guarantee fund are entirely provided by the 260,000 stakeholders. Their activity consists of granting a guarantee in favour of small companies, entrepreneurs that need to borrow money from the bank in order to fund a project, which have a lack of collateral but whose managers are considered as good and skilful professionals by the managing board of Mutual Guarantee Societies. SOWALFIN Belgium Guarantee scheme dedicated to cover business angels operations Sowalfin is dedicated to cover business angels operations. Since May 2004, SOWALFIN is allowed by the Government to guarantee investments made by business angels in the form of subordinated loans or capital increase. The scheme is intended to increase the number of Walloon SME s financed by business angels as well as the amounts invested. KfW Bankengruppe Germany KfW StartGeld Programme: Finance for entrepreneurs and small companies KfW launched in 1999 the StartGeld Programme to improve access to loan finance for entrepreneurs starting their business and small companies. StartGeld loans aim at providing long-term finance of a small scale to newly-created and established smaller companies, thus targeting a market segment in which access to long-term external capital is often difficult to obtain. Austria Wirtschaftsservice Ges.m.b.H Austria Guarantees for financial restructuring of SMEs AWS created 'Financial Restructuring Programme', a programme for SMEs dedicated to help in difficult financial situations. The support offered by this programme consists of guarantees for long term loans and equity capital with guarantee quotas between fifty and hundred percent. 6.3 Approaches to the provision of funding for SMEs Different approaches to the provision of funding for SMEs were developed in guarantee schemes in Denmark, United Kingdom, Germany, Italy, Spain and the Netherlands. Vaekstfonden Denmark Multi-functional Funding Approach: close collaboration between funding teams By combining the competencies and efforts from finance professionals in loan guarantee, equity and mezzanine finance teams, Vaekstfonden offers an integrated approach to the provision of funding for innovative SMEs and puts together a financial package that is adapted to the funding needs of each SME in its portfolio. 30

31 The United Kingdom Small Firms Loan Guarantee Government support to secure lending A partnership arrangement in which a Government guarantee backs eligible SME lending by banks and other institutions in cases where intermediaries would be prepared to lend except for the absence of appropriate collateral against which to secure the lending. Verband der Bürgschaftsbanken Germany Guarentee without a bank Bürgschaftsbanken developed a new approach for SMEs in order to facilitate their access to credit: guarantee without a bank as mostly start-ups often do not obtain bank financing for their projects because of lacking track record and the amounts involved are rather low. The Italian Confidi Networks Italy Confidi based on co-operation and mutuality The source of Confidi is an association of small entrepreneurs, based on co-operation and mutuality. The objective has been to overcome difficulties in access to external financing sources while preserving the economic and legal autonomy of each enterprise. It is an answer to the need of placing a further intermediary at the centre of the relationship between banks and SMEs. Mutual Guarantee Societies Spain A network of 21 regional companies associated into its union body, CESGAR The mission of the Spanish guarantee system is to help micro companies and SMEs to face financial difficulties. To reach that goal, the guarantee system of Spain has 22 Mutual Guarantee Societies called Sociedades de Garantía Recíproca (SGR) and a public counter-guarantee society called CERSA (Compañía Española de Reafianzamiento) which is supported by the State. BBMKB - Netherlands Decision making delegated to banks BBMKB applies a full partnership principle: decision making is delegated to banks. The Guarantee system consists of the allocation of guarantee envelopes to partner banks, out of a total annual budget decided by state. Banks supply the guarantee on their own credits without an individual decision made by the Fund. The Fund is the guardian of the rules and decides the principles for allowing the issuance of a guaranteed loan. The National Loan Guarantee Fund for SMEs Romania - Romania The Guarantee to support the development of SMEs The guarantee system in Romania comprises three independent funds, Romanian Loan Guarantee Fund for Private Entrepreneurs, Rural Credit Guarantee Fund and National Loan Guarantee Funds for SMEs. Through the guarantee schemes, the Government of Romania aims to stimulate the development of the private sector, to support the restructuring and privatisation of the economy, as well as the development of rural areas. 6.4 Best Practices in the guarantee business In the following, different examples of best practice in the field of doing business are stated. Within the frame of the long-term strategy of the schemes, the management approves a business plan for each individual year based on the available funds for SME support. The business plan determines the respective targets to be achieved in commercial transaction by specifying the volumes of the individual forms of support (loans, guarantees, and grants) provided under the existing programmes of SME assistance. The following best practice examples describe management tools which are implemented in the guarantee schemes of Czech Republic, Estonia and Finland. 31

32 The Guarantee and Development Bank of Czechia-Moravia Czech Republic Staff motivation as a means to create responsibility and to improve portfolio quality In order to stimulate the Bank staff s efforts in achieving the business targets, the management has adopted an internal system of financial motivation incentives. The experience gained up to now shows that implementing the system of financial incentives has helped to better utilise the capacity of branch employees and to improve the quality of bank s portfolio. Furthermore, encouraging staff to make more efforts to recover debts due from clients had a positive impact on moderating the volume of losses as well. Kredex Estonia Marketing action of a newly established Guarantee Scheme The aim of Kredex is to stimulate the creation of new jobs while maintaining the existing ones and increasing the likelihood of start-up businesses to survive. For a newly established guarantee scheme, marketing actions had been essential to promote KredEx s business loan guarantees. Finnvera Finland Internal rating For Finnvera, a special financing company that operates with weak collaterals, it seemed essential to be able to estimate the risk of the portfolio and to make some kind of forecasts of credit losses. The original rating system was developed in 1989 and since then all clients had been rated regularly. 32

33 7. CONCLUSIONS AND IDEAS FOR CONSIDERATION 7.1 Conclusions The BEST Expert Group reached the conclusion that guarantee and mutual guarantee schemes have a significant role to play in enabling SMEs across the European Union to access the finance they need to start up and grow. The following countries however have not yet established guarantee mechanisms: Bulgaria, Latvia, Sweden and Ireland, though projects have already begun in Latvia and Sweden. Guarantees provide important leverage of the capital available for lending and offer better value for money than one-off grants or subsidies. As experience has shown in the past, guarantee schemes were able to increase their contribution to banks lending activity even in a downward phase of the economic cycle. In the new financial environment (e.g. Basle II) the role of Guarantee Societies has been growing. The relevance of Guarantee Societies for banks is to offer a mitigation of the risks associated with their SME portfolios. Basel II will qualify most Guarantee Societies as guarantors provided that their guarantee product is in line with the regulatory requirement. This will allow banks to reduce regulatory equity on their loan portfolio. The experience of the participants of the Expert Group and of AECM, the presentations of the national schemes and the discussions within the group allowed an analysis of Guarantee Societies on the aspects of management philosophy, the target market, guarantee products, the procedure for treating guarantee applications, the decision-making process, risk sharing and complementary support mechanisms offered to SMEs. Guarantee Societies attribute the highest importance to their economic and social mission of SME support. At the same time, the experts unanimously agreed that Guarantee Schemes operating in their jurisdictions aim to support only sustainable projects. The target market of Guarantee Societies in terms of size is the micro and small businesses segment with limited financial needs (self employed, family companies, and partnerships). By nature, this target market includes companies that have difficulty in obtaining a loan and/or do not present evident features of creditworthiness. The range of products offered by Guarantee Societies depends on various factors which include the risk assessment procedure used by the Guarantee Society, the legal environment of the country, the term of the guarantee, its extent of coverage and the associated costs. While most European Guarantee Societies are multi-sectoral, there are also examples of a focused approach. Several indicators were identified, which allow a good assessment of the performance of a guarantee scheme. These included a scheme s relevance to fill a market gap, its additionality in terms of providing additional finance, its leverage, effectiveness and efficiency. The overall purpose is to reach long-term sustainability and a default rate that is under control. Examination of current practices across the Member States suggests that opportunities exist for increasing their use, building on the diversity of the schemes that currently exist to address particular needs. These opportunities may be developed within the design of the successor to the Multiannual Programme for SMEs (MAP), as delivered through the Guarantee Windows and managed by EIF on behalf of the European Commission. The Research Framework Programme could also provide an opportunity to enhance the use of guarantees. The regulatory framework for guarantees at European and Member State level determines to a high degree the well-functioning of a Guarantee Scheme. Examples of that are the next Capital Adequacy Directive proposed by the Commission with the emergence of a new rating culture and a clearer application of State Aid rules. 33

34 7.2 Ideas for consideration The ideas for consideration adopted by the BEST Expert Group on guarantees and mutual guarantees focus on three areas which could be highly relevant for better access to finance for SMEs in the European Union: the successor to the MAP; the EU Structural Funds; research, development and innovation. The BEST group also includes ideas for consideration on how to disseminate best practice examples and encourage the dialogue among the guarantee institutions community in the European Union. The findings of the Expert Group are the following: The current MAP, the most visible promotion scheme for SMEs in the European Union, provides very useful financial support for small and medium-sized enterprises. In particular, the SME Guarantee Facility with its specific windows which is operated by the European Investment Fund (EIF) has been widely recognised as an effective and efficient instrument with high added value for the SME community. It is therefore recommended that the guarantee instruments of the successor to the MAP be reinforced, to allow a flexible approach in the EU Member States and to take into account the specific needs of target groups as well as recent developments of SME financing. The successor to the MAP should, in addition to a broadly defined guarantee window for SMEs, keep a window for micro-businesses which allows the packaging of finance and mentoring. It could also provide new windows for innovation investments of SMEs, for the transfer of businesses and for the securitisation of SME loan portfolios of banks to encourage the banking community to maintain lending flows to SMEs. The EU Structural Funds could make their contribution to an increased future role of guarantees in the European Union by providing funding to guarantee schemes to cover part of their risks. Enhancing the capitalisation of guarantee societies would enable them to cover higher risks and/ or to extend their operation to target groups which otherwise would not receive a guarantee. Scientific research, technological development and innovation are at the heart of the knowledge-based economy and are one of the main pillars of the Lisbon process. A guarantee instrument could provide an appropriate support to help innovative SMEs finance their investments in research and innovation. Such an instrument might be shaped at European level to debt providers in order to support technological research and development projects implemented by SMEs. The development of innovative SMEs could also be encouraged through technical guarantees. Currently, public or private clients may implicitly prefer collaboration with larger enterprises even though SMEs often have a high(er) innovative potential. This reluctance towards contracting SMEs originates mainly from insufficient financial data available, the low perception of financial strength, unstable revenues and the duration of the project. A technical guarantee scheme would allow the client to entrust a key project to an innovative SME as the guarantee society would counter-guarantee payments made by banks to the client under contractual arrangements in case of bankruptcy of the SME or the failure of the project. Such a guarantee product could increase the number of SMEs participating in public or private procurement. Disseminating best practices and encouraging the dialogue among guarantee institutions and with the European Commission are key to ensure a high professional standard of guarantee institutions in the European Union. The BEST Expert Group, based on its own positive experience of fruitful exchanges of best practices and inspirations for future improvements, therefore proposes to organise regularly, such as once a year, meetings between the guarantee institution community and the European Commission for that purpose. Such a regular dialogue could particularly be beneficial for those Member States who have not yet introduced guarantee schemes or have recently done so. It could also provide a forum to discuss new developments in financial markets affecting the guarantee business. 34

35 ANNEX 1 Slovene Enterprise Fund General presentation The Slovene Enterprise Fund (SEF) is the national financial institution created to promote the establishment and development of micro, small and medium sized companies. SEF offers benefits to SMEs in the form of lower interest rates for loans, more favourable terms and conditions for granting loans (lower charges, longer maturity, and grace period), guarantees for investment loans raised with commercial banks in Slovenia as well as grants in combination with indirect loans or guarantees. The two most important products for the financial support of SMEs for the last five years have been indirect favourable investment loans /second floor loans/ and direct loans for new enterprises. Basic conditions for creating a new guarantee scheme According to the support of the Ministry of the Economy, the Slovene Enterprise Fund increased the current extent of high-risk financial instruments and assumed a part of the risk which was till then fully borne by enterprises and banks. To this end, in July 2004, the newly created national guarantee scheme started. The scheme is performed by SEF. The objective of starting a guarantee scheme was to convince the government that SEF has enough equity (SEF s equity amounted to 43.2 million) to create a guarantee potential. SEF is legally obliged to keep this amount of equity. In spite of good capitalisation SEF needed a provision fund to manage risky financial instruments for SMEs. The Slovene government granted financial sources for the creation of the provision fund in It was a basic condition for the start of the scheme. With the provision fund of 1.1 million SEF was able to launch 5.5 million of guarantee potential for investment loans of SMEs in The provision fund is earmarked for covering the potential losses of the guarantee scheme. Another key issue was to convince banks of a risk sharing with the SEF and that the SMEs sector is important for them as much as it is for the national economy. SEF has succeeded in involving ten important banks in the scheme. The promotional activities, working meetings to solve the concrete problems and to overcome the incipient difficulties of the new scheme are going on very intensively. The fact is that the success and the efficiency of the scheme are dependent on good cooperation between banks and SEF. The important issue in Slovene entrepreneurial environment was and still is to convince companies that money has its price and besides money also the quality of the projects, know how, a well qualified and connected team, strategic planning with an international relationship are important. Therefore also the cooperation with consultants for entrepreneurs in local entrepreneurial centres and consultants of regional Chambers of Craft and regional Chambers of Commerce and Industry is needed. Explanation of the scheme The most important aim of the scheme is to facilitate long-term credit financing for investment of small and medium sized competitive enterprises by reducing the credit and interest risk. Beneficiaries are start-ups and existing companies up to 100 employees; the guarantee rate is 50% of bank loan on the principal. The total amount of guarantee potential is 5.4 million in 2004, which presents 10.8 million of loan potential. The interest rate and the processing fee are lower than the market level because the banks are bound to charge the lowest interest rate and the lowest processing fee they have on offer. Guarantees are intended for investment loans (material, non-material investments). Guarantees are issued on the basis of an invitation for application for loans granted by ten banks in Slovenia. The company submits the application for obtaining the guarantee to the SEF after it receives the bank's decision on the granting of the loan. The guarantees included benefit from a counter-guarantee issued by the European Investment Fund under the European Community's Multiannual Programme for SMEs. 35

36 National Loan Guarantee Fund for SMEs - Romania The guarantee system in Romania was established at the initiative and with the support of the Romanian Government, after the year 1990, when Romania decided to turn from a centralized state-owned economy to a market economy. Through the guarantee schemes, the Government aimed to stimulate the development of the private sector in Romania, to support the restructuring and privatization of the economy, as well as the development of rural areas. Nowadays, the guarantee system in Romania comprises three independent guarantee funds: Romanian Loan Guarantee Fund for Private Entrepreneurs, Rural Credit Guarantee Fund and National Loan Guarantee Fund for SMEs (NLGFSME). Explanation The setting up of NLGFSME in the year 2002 was motivated by the importance given by the Romanian Government to the SMEs sector to increase GDP, exports, create new jobs as well as strengthen research and development. The development of SMEs is a priority of the economic and social policy of the Government. Difficult access to finance is one of the main problems with which SMEs are confronted. The Fund s own capital as of amounted to 10,073,000. Advantage The setting-up of a fund by the state dedicated entirely to SMEs is beneficial due to the fact that such a fund, although it proposes to support itself financially, does not have as its main objective the making of an accounting profit from the guarantee activity. It aims to support, through a guarantee policy adjusted to the needs and features of SMEs, the objectives and policies of the Government in the area of SMEs, in the perspective of Romania joining the European Union. Conditions for good working of the system Products are adapted to the requirements and specificities of SMEs. NLGFSME supports both the launching of new enterprises and the development of existing ones. For existing enterprises, guarantees cover up to 75% of the value of medium and long-term credits, but no more than 500,000, and up to 60% of the value of shortterm credits, but no more than 400,000. For start-ups, guarantees cover up to 80% of the value of medium and long term credits, and up to 70% of the value of short term credits, with the same value limits. Commissions are of 1.5% (for short-term credits) and of 2.5% yearly (for medium and long-term credits) of the outstanding guarantee. The average time for analysing and approving the guarantee file is nine days. For start-ups and micro enterprises there is a special product for micro credits up to 10,000. The guarantees are approved within three days based on data from the analysis document sent by the bank. Guarantees cover up to 80% of the value of medium and long-term credits, and up to 70% of the value of short-term credits. The guarantee commission is of 100. There is no minimum level for guarantees granted by the Fund. Cooperation with all banks that finance the SMEs sector. NLGFSME has concluded working conventions with 15 banks, the main banks that finance the SMEs sector. A network of 13 territorial offices that covers the whole territory of the country. Through this network the Fund intends to stand by entrepreneurs in order to offer them free assistance for accessing the Fund s guarantees. The territorial offices promote the Fund s products and co-operate with banks branches in the process of sending and analyzing guarantee requests. Involvement of SMEs representatives in the management of the Fund. There is a representative of SMEs associations on the Board of Directors in order to have a transparent selection process and to receive an input from SMEs for shaping the guarantee products. Prudential criteria in the management of the Fund s resources. The management of the Fund s resources is performed carefully, each decision being made in compliance with prudential norms. These include the Fund s maximum exposure on a single bank, the Fund s maximum exposure on a single debtor, minimum level of solvability, minimum level of liquidity, and treasury management. Meeting the established levels of prudential criteria is monthly checked by the Fund s Board of Directors. 36

37 INVEGA - Lithuania Description of the scheme Guarantees by INVEGA are granted from the guarantee limit, set annually by the Government of Lithuania. INVEGA guarantees are equal to sovereign guarantee, thus are quite effective way of risk mitigation and are positively treated by banks in terms of capital adequacy requirements. Due to the sovereign status all the banks treat this INVEGA s guarantee like the primary security, which replaces collaterals needed. INVEGA guarantees are granted under de minimis rule, i.e. state support to the SME, including the equivalent of the subsidy in terms of guarantee, can not exceed 100,000 over the three years. Guarantees are granted under the first instalment guarantee scheme, which means that INVEGA takes the first risk for non-repayment of the loan. After the debtor repays the bank the guaranteed part of the loan INVEGA s guarantee ends. INVEGA examines the business case and makes a decision on each loan given by the bank to the SME. INVEGA delegates to the bank the control of the disbursement/utilization of the loan. INVEGA generally grants up to 50 percent guarantees on bank loans to eligible SMEs. Banks usually do not require in addition to pledge any collateral to secure the guaranteed part of the loan. To minimise the loss risk, INVEGA requires the businessman to invest into the business project, for which the loan with INVEGA s guarantee is taken, not less than 20 percent of his own capital or assets. INVEGA s guarantee scheme is very attractive for entrepreneurs and banks, but more risky to INVEGA. The risk is shared with the State budget - 90 percent of the losses incurred by INVEGA s operation under the First Instalment Guarantee scheme are covered from the public funds. The maximum loan amount, which could be guaranteed by INVEGA is Litas 1 million ( 289,600) for investments, and Litas 500 thousand ( 145,000) for working capital. Particular importance is attached to the finance of micro companies. Under the new scheme INVEGA provides guarantees up to 80 percent in case of micro credits (up to 25,000) for investments. The INVEGA guarantee scheme is supported by the European Investments Fund s 50 percent counter-guarantee under SME Guarantee Facility's window "Loan Guarantees. This fact has made a big step forward strengthening the confidence with the banks. Since the beginning of the activity till the 1 October 2004 INVEGA has guaranteed 405 loans to SMEs of 26 million total portfolio. INVEGA has cooperation agreements with almost all commercial banks which have around 400 branches and customer service officers in all main cities and towns over the country. Advantages Currently, every partner knows what will happen in the case of default. Banks can apply for guarantee payment immediately after the default and receive up to 50 percent of the guarantee amount in advance. The rest of the guarantee amount will be paid to the banks after the realization of collaterals. No additional collaterals needed to cover the guaranteed part of the loan, thus lower administration expenses to the bank and credit cost to the borrower. Banks are satisfied that they can receive a good financial participation of INVEGA in case of default and thus are motivated to conduct a recovery action. The first instalment guarantee principle is good for efficient use of limited public resources allocated to facilitate SMEs access to finance, and to increase the number of potential beneficiaries. The design of the guarantees on micro credits was made to give a maximum of additionality to the system and the maximum of incentives for use on behalf of the banks. This scheme has created more favourable conditions for small and starting companies to get external financing for their business development. 37

38 The Portuguese Mutual Guarantee Scheme The national guarantee scheme is based on the following principles: 1. The guarantees are issued by autonomous Mutual Guarantee Societies (MGS) in which the beneficiary SME also holds a stake. The MGS are credit institutions, under central bank supervision, subject to the common law principles, and operate according to market criteria. The main shareholder categories are represented on the Board (1 independent chairman, 1 bank representative, 2 SMEs delegates and one person representing the national SMEs agencies). A minimum of 25% of their initial share capital (and 50% after three years of activity) should belong to SMEs and SME associations. The national leading banks and public entities such as IAPMEI and ITP (Tourism Agency) also hold stakes in all MGS. 2. A counter-guarantee mechanism is granted through the Mutual Counter Guarantee Fund, managed by SPGM. The counter guarantee is compulsory and works as second level guarantee of all MGS portfolios, being the part counter guaranteed defined by the Fund General Council, according to specific rules. IAPMEI and ITP have subscribed to the Fund capital. The Fund is also subject to central bank supervision and should respect most rules on financial risk and provisions. The Fund has started operating in early Between this date and the end of 2002, it has counter-guaranteed SPGM portfolio. From 2003 onwards it is fully concentrated on counter-guaranteeing the MGS portfolios. SPGM has concentrated on guarantees benefiting medium-sized SMEs. The risk appraisal process used to be better achieved within this kind of companies, once the availability of financial and market data was greater than for typically very small SMEs. This management option has allowed SPGM to test and build financial analysis and risk appraisal models, the same applying to the technical staff training. However, the consequent high average guarantee amount (and so counter-guarantee too) has been showing a reducing trend along time, particularly since MGS started operating on January the 1st These focus on the smaller and financially weaker SMEs. The evolution of the national guarantee portfolio exhibits interesting growth rates, concerning both the volume and number of operations. This is especially visible from 2002 onwards, once SPGM was already operating through three branches, which would become the head offices of the first three MGS (Oporto, Lisbon and Santarém). The activities of the existing MGS have been boosted by the support of the European Investment Fund (through an agreement established with the Mutual Counter Guarantee Fund) in what concerns certain kind of guarantees and beneficiary SMEs. The same applies to protocols of joint activity which have been signed with the major national banks, allowing SMEs to access medium and long-term finance in privileged conditions in respect of pricing and average decision time. By June 2003, the accumulated portfolio of issued guarantees has reached 223 million. The number of MGS is expected to increase soon with the setting up of one society fully dedicated to the rural world. This corporation will work from premises in the central city of Coimbra and will have national geographical coverage. Concerning other industries, covered by the existing three MGS, the growth strategy includes the opening of regional branches in specific locations around the Portuguese territory (including Azores and Madeira). This strategy has in mind a medium way between proximity with smaller SMEs and scale economies to achieve. In fact it is important for the SMEs to feel the MGS is nearby (because of its ability and comfort to deal with the SME risk), but on the other hand there are some scale economies which may be achieved when the Scheme works through branches instead of other MGS. This network of small local branches is expected to count 18 offices in 2 years and will work as the front-office of the Scheme. SPGM is now providing accounting, computer, legal and administrative services to all existing MGS. Its experience as the only Guarantee Society for approximately eight years has made it clear for the Scheme decision-makers that it would rather continue executing these kinds of tasks, allowing the MGS to concentrate on the guarantee operation scope. 38

39 SIAGI - France Characteristics of SIAGI: SIAGI was created as a Mutual Guarantee Company in 1966 by the Chambres de métiers, public institutions in charge of the interests of craftsmanship and small firms of up to 15 employees. SIAGI provides guarantees to a large proportion of French banks dealing with very small firms. It employs 90 people through a Head office located in Paris and a network of 28 branches. In 2003, there were 6,000 loan guarantees, of which 2/3 financed company transfers and 440 million of loans were guaranteed. As of 31 December 2003 SIAGI had 45,000 guaranteed companies in its portfolio i.e. 1,985 million of outstanding credit liabilities guaranteed. For a dozen years SIAGI has concentrated its activities on specific guarantees dedicated to financing company transfers, not only from the banks but from vendors (since 01/2004 SIAGI has experimented with guarantees to vendors) or suppliers of raw materials (SIAGI has an agreement with a leading French miller). 60 SIAGI local experts examine each request on a case-by-case basis. These experts meet with each new entrepreneur. The guarantee percentage is adapted to each project, percentages range from 20% to 60%, average percentage of a guarantee being 34%. Each project is different; SIAGI uses a hiring approach vis-à-vis the new entrepreneur. Since 2001 SIAGI has been experimenting with the substitution of collateral (CARE 2001) to protect the entrepreneur s personal and family property. Since 2000 SIAGI has provided services: selection at the entry point and SIAGNOSTIC, a new tool used in following up projects to prevent problems, to solve them, and as a result to reduce the probability of default. What are the key success factors of relevant risk prevention? Identify simple events that can become dramatic; Have the entrepreneur anticipate and detect anomalies; Offer a call-centre backup with experts on line; Quick and confident actions; Follow up. How does it work? Subscription: When an entrepreneur is about to borrow money from a bank in order to finance a project, the bank recommends subscribing to SIAGNOSTIC. SIAGI makes the offer including conditions of access, barometer (i.e. types of events to watch over) and cost. The payment of SIAGNOSTIC subscription is included in the payment for the guarantee; Conditions and Cost: 200 (excl. taxes) paid flat by the enterprises; Period of availability: the life of the loan; Unlimited access to on line services, but only one audit. Method of Operation in case of need: 1. The entrepreneur calls the online expert (and is called back within 6 hours); 2. Discussion, useful information provided to the entrepreneur; 3. Advice from the experts; 4. If necessary a local audit is ordered. Results: 3000 subscribers from 01/01/2000 to 31/12/2003; Annual rhythm: 1000 subscribers; «Market share»: 33% of well-targeted entrepreneurs; Reduces up to 40% the probability of default. 39

40 Hitelgarancia Rt. - Hungary (Creditguarantee Co.) Agrár-Vállalkozási Hitelgarancia Alapítvány - HUNGARY (Rural Credit Guarantee Foundation) Hitelgarancia Rt. was established in 1992 by the Hungarian State and financial institutions as a well-capitalized company in order to support the access of domestic small- and medium sized enterprises as well as organisations established to implement Employee Share Option Programs (known as MRPs) to loans and bank guarantees by means of granting them unconditional payment guarantees (sureties). Rural Credit Guarantee Foundation was established under a PHARE programme in Founding members included the Ministry of Agriculture and five financial institutions. The main goal of the Foundation is to increase the creditworthiness of rural enterprises to promote their financial viability and to improve their access to lending through credit guarantees. The guarantee schemes make it possible to obtain loans / bank guarantees for those viable undertakings which are not in a position to present acceptable covers for getting a credit and, consequently, the bank - without the strengthening or supplementation of the cover available - would consider the lending too risky. The loan applicant - apart from the unconditional payment guarantee granted / undertaken by the guarantee institution - shall also offer other collaterals acceptable for the bank. In respect of the cover requested the banks take decisions within their own scope of authority. Decisions concerning the necessity of guarantees are taken by lending banks or savings co-operatives, and the applications for obtaining guarantees are presented by these institutions. Who can apply for unconditional payment guarantee? Businesses and private entrepreneurs qualifying as small- and medium sized enterprises in accordance with Act XXXIV of 2004 on small- and medium sized enterprises and development support offered to SMEs as well as organisations established in accordance with Act XLIV of 1992 on Employee Share Option Programs. The guarantees can be applied for loans or bank guarantees with tenors of up to 15 years. The extent of the guarantee can reach maximum 80% of the requested loan or bank guarantee. Guarantees provided are backed with a 70% public counter-guarantee. The total value of outstanding guarantees of one client cannot exceed HUF 600 million (approximately 2.4 million) in case of Hitelgarancia, HUF 600 million for integrators and HUF 150 million for other clients in case of the Foundation. Hitelgarancia Rt. considers the procedure of issuing guarantees under special agreements with banks to be a highly successful practice. The institution had been looking for a method to undertake guarantees in bulk, yet in a prudent, risk sensitive, cost saving way for both the banks and the guarantor. Conditions of creditworthiness have been defined jointly for each specific product initiated by the partner bank. The agreements regulate the Eligibility criteria; Acceptable loan purposes; Types of collaterals and the proportion of cover required; Minimum and maximum sum of the individual loans; Tenor; Fixed percentage of the guarantee issued in case all the above criteria are met. On the basis of these agreements the financial institutions can develop uniform software to handle the product and the decision making in both the credit and the guarantee assessment takes much less time. The conditions of one of the well functioning agreements are the following: Clients: SMEs, as defined by law; Max. tenor 10 years; Working capital finance, investment and development loans, bank guarantees; Max. amount per client: o Loan: HUF 50 million ( 200 thousand); o Bank guarantee: HUF 80 million ( 320 thousand); o Loan + bank guarantee together: HUF 100 million ( 400 thousand); Guarantee rate: 80 per cent. The number of contracts signed during the approximately one and a half year lifetime of this agreement is roughly 1,800 and the aggregate guarantee portfolio exceeds 124 million. 40

41 BDPME/SOFARIS France SOFARIS, created in 1982 by the French government, is a specialized financial institution, fulfilling a permanent mission of public interest. The shareholders are the French State via BDPME (Bank for Development of SMEs 58.3%), banks and financial institutions (41.7%). Its aim is to manage loan guarantee schemes funded by the French State, Caisse des Dépots et Consignation (CDC), the European Commission and French local authorities. BDPME has 40 local branches, including overseas France. Fifty thousand guarantees are granted annually, representing an amount of financing of around 4,400 million. This represents a part of around 20% of the loans granted by banks to SMEs in France, including 65% of SMEs in early stage. SOFARIS, as a guarantee system, has an increasing coverage in innovation financing, via several schemes: Medium and long-term loan for innovative SMEs: when a SME is declared «innovative enterprise» by ANVAR (National Institute for Research and Development), Sofaris increases the share of risk guaranteed (60 % instead of 40% of investment amount). Furthermore, the Sofaris guarantee of loans is often used, by some banks, as substitute collateral in the financing of intangible investments; Financing of Biotechnology: it combines loans and equity guarantee schemes. At the end of 2003, 16 loan guarantees have been granted for 17 million of financing and 23 VCFs have been authorised; Guarantee of venture capital fund: the fund «Développement technologique pour les FCPI / FCPR», counter-guaranteed by EIF has granted 285 guarantees in 2003; Counter-guarantee of banking guarantee: in addition, Sofaris is currently investigating a guarantee scheme aimed at encouraging large corporations to entrust key projects to innovative SMEs. The principle would be that Sofaris counter-guarantees a bank which pays to the client a contractual amount in case of SME bankruptcy. The counter-guarantee granted by Sofaris should help SMEs find banking guarantees in order to act as a more trustworthy provider. Focus on the equity guarantee scheme Sofaris signs an annual framework agreement with VCFs after analysing the management team, the investment targets (focus on innovation), and past performances. Each VCF benefits from an annual portfolio «insurance» and is guaranteed up to a maximum investment amount, with investment decisions totally free (all eligible investments are guaranteed until maximum investment amount is reached). The eligible investments are financing in shares, convertible bonds or subordinated loans, in young (less than 7 years old) unlisted SMEs located in France. The guarantee covers 50 % of the investment for 10 years and can be raised to 70 % for less than 3 year-old enterprises. The fee is split between an annual percentage on the investment amount and a small share in capital gains made by the VCFs. In terms of payment amount, a stop-loss ceiling is determined based on the portfolio composition. The guarantee comes into play when the SME is declared bankrupt or in case of divestment with a loss when the SME has lost more than 50% of its equity since the investment date. The advantages of this mechanism are, for the Government and European Commission, a perfectly controlled final risk thanks to the stop-loss technique and an important leverage on public money (when VCFs achieve a positive IRR, the leverage increases dramatically). The advantages for VCFs are simplified formalities, quick decisions and a smoother J curve. This is particularly useful when trying to bring in institutional investors which are especially averse to highly volatile returns. Furthermore, the guarantee mechanism increases the amount of cash available during the first years after investment phase, thus allowing for second round financing or new investments. 41

42 SOCAMA France The SOCAMA are mutual guarantee societies (MGS). They are private companies. The equity capital and the Guarantee fund are entirely provided by the 260,000 stakeholders. There is no state aid in the mechanism of the guarantee at any level (national or regional). Their activity consists of granting a guarantee in favour of small companies, entrepreneurs that need to borrow money from the bank in order to fund a project, which have a lack of collateral but whose managers are considered as good and skilful professionals by the managing board of MGSs. SOCAMA, are both regional and multi-professional schemes. The decision of granting a guarantee is taken round the corner, as close as possible to the small companies. The 42 SOCAMAs cover the whole national territory. The regional network is completed by more than 100 credit committees at the local level (départements). SOCAMA grant their guarantee to the clients of Banques Populaires only. The credits are medium-term and long-term. The average maturity is 6 years. When SOCAMA give a positive appraisal, according to the status, the borrower has to: Participate in the capital of the SOCAMA for about 0.1% of the amount of the guarantee; Pay a deposit in the guarantee fund for 1% to 1.50% of the amount of the guarantee; Pay the annual fees to the SOCAMA (about 0.50% included in the credit rate). Those two first items are reimbursed at the end of the total repayment of the loan. In case the SOCAMA has to pay for a great number of defaults, then, the losses may affect partly the reimbursement of the deposit. The professional and independent appraisal given by the SOCAMA credit committee completes the financial appraisal given by the bank. What the SOCAMA look for is to appraise the human factor, which is the most decisive point to assess. SOCAMA have developed fruitful collaboration with the Chambers of Craftsmen, Commerce Professional Unions. Members of the local credit committee belong to those organisations. They bring to the Committee their experience, the accurate knowledge of the local economic situation, the professional cursus of the borrower. This constitutes the real added value on which both Bank and SOCAMA can base the decision of granting a loan and a guarantee. The expected added value is exactly the opposite of a credit scoring contribution. Activity During the last 5 years, the SOCAMA have, yearly, granted their guarantee to 25,000 entrepreneurs for more than 550 million. At the end of 2003, the amount of outstanding loans is 1.5 billion. SOCAMA is the first network in France for the guarantee of loans to the small enterprises. 42

43 SOWALFIN Belgium Since its start mid-2002, the SOWALFIN has guaranteed directly or indirectly (through MGAs) medium and long-term bank loans financing the creation, the development and the transmission of Walloon SMEs. Since May this year, the SOWALFIN has also been permitted by the Government to guarantee investments made by business angels in the form of subordinated loans or capital increase. The scheme is intended to increase the number of Walloon SMEs financed by business angels as well as the amounts invested. The budget available for the scheme represents 13,000,000. Regarding the leverage of the Guarantee and the willingness to achieve 40 interventions a year during 5 years, it should contribute to the creation of 1,800 new jobs in the Walloon Region. The scope of the Guarantee The Guarantee is partial, meaning that it covers max. 50% of the investments realized by the business angel during the years 1 to 3, 40% during year 4 and 30% during year 5. The Guarantee is also suppletive, meaning that it might only be called in case of bankruptcy or liquidation of the enterprise. The business angel is supposed to produce a proof showing that he will not receive any potential dividend resulting from the bankruptcy or the liquidation. The duration of the Guarantee Five years. The size of the underlying eligible investments taken into account for the Guarantee Min. 25,000 - max. 150,000 in cash. The cost of the Guarantee Annual fee payable during 5 years: at least 2% of the guaranteed funds. Eligible enterprises taken into consideration for the Guarantee SMEs or VSEs (European definition) - financially sound - located in the Walloon Region. Sectorial restrictions Most of the activity sectors are eligible for the Guarantee, except i.e. health, banking and insurance, real estate, agriculture and fishing. Procedure The demand needs to be introduced by the intermediary of a BA s network before the equity investment or the grant of the subordinated loan. The network and the business angel are supposed to have previously signed a convention with the SOWALFIN. Files are submitted twice a month to an Investment Committee, which implies a prompt decision-making process and no red-tape for the enterprise. 43

44 KfW StartGeld Programme - Germany The reasoning for launching the scheme The StartGeld loan programme was launched in 1999 to improve access to loan finance for entrepreneurs starting their business and smaller companies with up to 100 employees. StartGeld loans can be used to finance investments and working capital related to starting a business as well as taking over and expanding an existing smaller company. Loans which bear a market-rate interest rate are granted of up to 50,000 for each project, with a maturity of up to 10 years and a grace period of up to 2 years. StartGeld loans therefore aim at providing long-term finance of a small scale to newly created and established smaller companies, thus targeting a market segment in which access to long-term external capital is often difficult to obtain. Programme approach and advantages StartGeld loans are market-rate commercial loans. The pricing also includes a risk premium which is incorporated in the borrower s interest rate. StartGeld loans, like any other commercial loan, have to be secured by collateral provided by the entrepreneur or the SME. However, the provision of sufficient collateral is often the key bottleneck for new enterprises and smaller companies preventing them from obtaining commercial loan finance. For this reason, the StartGeld loan scheme combines loan financing with a risk sharing element in order to allow lending to enterprises with promising business plans even if the available collateral is not entirely sufficient. This approach allows access to loan finance for a group of entrepreneurs and smaller enterprises which otherwise would not be able to raise smaller amount of external capital despite having a sound business concept. Achievements The introduction of the StartGeld loan programme was made possible through a balanced risk mitigation arrangement of all financing parties involved in running the scheme. The risk sharing partners are the European Investment Fund (EIF), KfW and the respective local on-lending bank. KfW provides StartGeld loans via onlending banks to the enterprise offering a partial exemption from liability of 80% for the on-lending bank. In case of default, the on-lending bank therefore has to assume only 20% of the total loss. KfW and EIF equally share the remaining 80% of liability for any losses, up to certain ceiling (cap rate of the guarantee). The loss-sharing between EIF and KfW for the StartGeld loan scheme was arranged under the SME Guarantee Facility of the Multi-annual Programme for Entrepreneurship and Enterprises, particularly SMEs (MAP), Since launching the StartGeld loan scheme in 1999 until August 2004, loans amounting to a total of million have been granted to around 28,400 entrepreneurs and smaller enterprises, with an average loan amount of 31,800. The StartGeld programme is complemented by KfW s Micro-credit scheme launched in October 2002 covering the very small or micro businesses in need for small-scale initial investments. This additional Micro-credit scheme targets primarily first-time entrepreneurs (including qualified jobless persons), business start-ups and very small companies with less than 10 employees. The Micro-credit scheme provides market-rate loans of up to 25,000 with a maturity of up to 5 years and a grace period of 6 months. Loans are granted for investments and working capital. The Micro-credit scheme is supported by a similar guarantee arrangement between EIF, KfW and on-lending banks under the MAP of the European Commission, under which EIF assumes an even larger risk portion due to the higher risk profile of the target group. 44

45 AWS Austria Help for small and medium-sized enterprises (SMEs) in difficult financial situations is currently a matter of serious discussion in the European context See for example http//:europe.eu.int/comm./enterprise/entrepreneurship/support_ measures/failure_bankruptcy/index.htm The Austria Wirtschaftsservice Ges.m.b.H (AWS) ( runs a programme for SMEs, introduced by former BÜRGES Förderungsbank in the year The support offered by this 'Financial Restructuring Programme consists of guarantees for long-term loans and equity capital with guarantee quotas between fifty and hundred percent. The aims of the programme are to secure the enterprise at least for the medium-term and to conserve existing jobs. Conditions for the raising of new funds via guarantees include the active participation of entrepreneur(s) together with important creditors and banks. Companies with acute insolvency cannot be supported. The missing equity capital should be replaced through the processes of consultation and financial engineering for example by creating new conditions for terms, interest, waivers, new funds, securities, etc. A financial clearance of minimum three years is planned through these measures. In this way guarantees up to 1.0 million ( 0.75 for working capital) with duration of ten years (up to twenty years maximum) can be provided. With the new funds the structure of creditors can be cleared, and the funds can also be used for new concepts and consultancy and even for new investments. The conditions for guarantee provisions are between 1.25 and 2.0 percent p.a. and even higher in respect of European Competition Regulations. A handling fee of 0.5 percent is also charged with the application. For this programme, as for all other SME programmes of the AWS, an attractive interest rate is received by Austrian banks at the moment (10/2004) percent p.a.. For projects in the tourism branch, which are within the responsibility of AWS, a similar programme is carried out by the Österreichische Hotel- und Tourismusbank ( It should be considered that the programme is new and so far very small, with approximately 10 to 15 guarantees issued per annum, and about seventy percent of the projects must already be declined in the application process. Reasons for declining applications are often that the state of insolvency is already reached or that the contribution of entrepreneur(s) is not substantial. After a period of more than four years the total losses have been less than one percent of the total commitments p.a., although in the model plan losses up to four percent p.a. were calculated. Up until the end of 2003 forty eight guarantees with total commitments of 11.4 millions for new credit lines of 18.0 millions were issued. Most projects involved manufacturing and service companies. The programme is still in the test period, which will end by 2006, but the experience has so far been very positive. 45

46 Vækstkaution - Denmark The government-backed Danish investment fund, Vaekstfonden, offers a unique integrated approach to the provision of funding for innovative SMEs. By selectively combining its three different funding teams equity and subordinated debt investments, fund-of-funds, and loan guarantees and through its extensive network of private investors and banks, Vækstfonden is able to put together a financial package that is specially adapted to the funding needs of each SME in its portfolio. Explanation When a company applies for a Loan Guarantee (Vækstkaution), a Loan Guarantee Manager determines whether it is relevant to involve managers from other teams to better assess opportunities and risks regarding the company s business model. Advantages Greater credit assessment capability as each Loan Guarantee manager can tap into a deep pool of resources and skills across the entire organization; Vækstfonden is able to meet virtually any funding need that an innovative SME experiences as it progresses from proof-of-concept to the shipment of fully-fledged products. Conditions for good working of the system Throughout the portfolio life of a company, as Vaekstfonden moves from equity participation through fund-of-funds to loan guarantees, investment managers work with the company, building and acquiring knowledge about its strengths and weaknesses; Vaekstfonden s investment managers rely on built-in knowledge-sharing mechanisms, which ensure that someone handling a later-stage financing such as a loan guarantee can access the cumulative knowledge of all colleagues who have previously worked with the same company. Vaekstfonden s portfolio management IT system makes accessing information on a company s funding history easier, too; The layout of Vaekstfonden s office space further underpins interaction based on its open-space offices, where each team has a designated work area yet also has an unobstructed view of the other teams; For the entrepreneur, the organizational set-up at Vaekstfonden means that if a business plan is submitted to an equity investment manager, who after considering the plan determines that the riskreward proposition better matches a bank financing propped up by a loan guarantee, the plan is handed over to a colleague in the loan guarantees team. An assessment of the proposal is then made and, in case this is favourable, a funding package containing a loan guarantee is proposed to the entrepreneur; Branding Vækstfonden is made easier and more effective due to the internal circulation of investment proposals, since it matters less if an SME comes through the wrong door as long as it ends up in the hands of the right team with the financing tool best suited for it; Close cooperation throughout the organization also is required for Vaekstfonden s top management to monitor overall risk exposure. In particular, management is very mindful of the portfolio implications of acquiring exposure to individual SMEs through a variety of financial instruments; Since 2000, when the loan guarantees were introduced, Vaekstfonden has helped fund close to 1,500 companies, making it by far the most active provider of finance for innovative, growth-oriented Danish companies. 46

47 SFLG United Kingdom The guarantee system currently provides an open-ended commitment from Government, through the Department of Trade and Industry (DTI), to guarantee eligible loans made by the participating lenders. Lenders make the loans from their own capital and have the option of delegated authority to directly apply the guarantee to eligible loans valued at up to 30,000. All loans over 30,000 are subject to eligibility checks and individual issuing of the guarantee by officials of the Small Business Service (SBS), part of the DTI that is responsible for all SME activities. Risk is shared between DTI and the lender on a 75:25 ratio. Process An enterprise approaches their bank or one of a number of other approved business loan providers for a loan. The lender appraises the business plan and concludes that it is a viable proposition. However, because the enterprise does not possess the necessary collateral against which to secure the borrowing the lender is unwilling to proceed. At this point SFLG can be considered. Subject to the enterprise meeting a number of eligibility criteria the lender will be entitled to use the guarantee. The most important criteria are: Not more than to 200 employees (limit applies across group if business is connected); Turnover not exceeding 3m, or 5m for manufacturing; Maximum loan 100,000 for businesses trading for up to two years, otherwise 250,000; Purpose of loan certain restrictions apply, to ensure additionality; Business sector certain restrictions apply, but most sectors are eligible. Volumes Almost 4bn of lending to almost 90,000 businesses guaranteed over the 23-year life of the scheme. In 2003/04 almost 6,000 loans with a total value of over 400m were guaranteed. Direct operation of the scheme is the responsibility of a team of 16 staff. Conditions for an effective guarantee system A mature banking system. Before offering a loan, lenders have to satisfy themselves that they would have offered conventional finance but for lack of security. They should establish that all available assets have been used to facilitate conventional loans. In this way the amount of state-guaranteed credit cannot exceed the difference between the enterprise s available security and the security a bank would normally require; In the case of a default the borrower is fully liable. The lender carries a proportion of the risk, which should ensure that the lender has applied their normal commercial criteria when assessing the loan application. It also gives the lender a more direct interest in pursuing recovery on their own behalf and that of the Government in the event of a default; The borrower pays a premium of 2% of the outstanding balance of the loan each year, which contributes towards the operating costs of the scheme; The lenders understand the Government s eligibility criteria. If in the event of a default they cannot demonstrate that the rules have been followed then they are wholly liable for the loss. Future developments An independent review of SFLG was commissioned in December 2003 and reported in October It suggested that there was still a requirement for such a mechanism but proposed a greater delegation of decisionmaking responsibility to the lenders, restricting eligibility to businesses under five years old and other eligibility simplifications. These changes will be introduced during

48 Bürgschaftsbanken - Germany History/structure The credit guarantee organizations in Germany, as they are today, began in the 1950's. On the initiative of trade organizations, savings and loan associations, cooperative banks and the Federal Dept. of Economics the concept of a state-related finance help for small- and medium-sized companies was called into existence. Founders and shareholders of Bürgschaftsbank are the chambers of commerce and crafts, associations of various business sectors as well as banks and some insurance companies. Self-help means that no dividends are paid out; surplus funds are retained and allotted to reserves. Guarantee banks operate under the regulations of the German banking law and are supervised by the German banking authority. In addition to the help the founders and shareholders provide, the government assists with partial counter-guarantees. Today there are 22 federal guarantee schemes in the different states. Objectives/Scope of activities Guarantees are given for capital investments for start-ups and established SMEs for the financing of assets and/or working capital. Beneficiaries are entrepreneurs according to the EU-SME-definition. How to get a guarantee (first way) Prerequisite for a guarantee of a Bürgschaftsbank is the application from a firm together with a statement from its bank asserting their readiness to take over the share of the risk the guarantee does not cover. The Bürgschaftsbank share of the credit risk varies between 50 % and 80 %. The longest term runs 23 years; the average term of the guarantee is up to 10 years. The upper limit extends up to 1.0 million. A flat fee of 1.0 % of guarantee amount and a yearly commission of approx. 0.8 % of loan amount are charged. New approach to get a guarantee: guarantee without a bank (second way) Most start-ups often do not obtain bank financing for their projects as they do not have a proven track record and the amounts involved are rather low. To facilitate access to credit this new approach has been developed. In contrary to the first way, the entrepreneur directly contacts the guarantee bank, which evaluates its business plan. If the guarantee bank is convinced of the success of the project, it approves the application and issues a certificate with its readiness to guarantee a loan. With this assurance the entrepreneur selects a bank of its own choice, which grants him the necessary loan, based on the guarantee bank s certificate (valid for 3 months). The amount to be granted reaches from 50,000 to 300,000. Banks complain about screening and monitoring costs. This way of obtaining a guarantee results in less transaction costs for the SME s bank and leads to a greater willingness to grant the credit. Approval process The ultimate criteria for approval of a guarantee application are the financial viability of the project. The creditofficers collect and evaluate information such as balance sheets, business-plans, cash-flow-projections, comments of the chamber of commerce or crafts, the appropriate business or trade association as well as data of the specific business sectors - for example the competitive situation. For applications of persons planning to become self-employed the professional qualification is particularly carefully reviewed as well as his expertise on business and financial affairs. A detailed report and rating of the firm, prepared by the credit officer, will be discussed in a committee consisting of representatives from trade and industry, the banks and representatives from the ministries for economics and finance. Figures Guarantee schemes support in a very efficient way the creation of new businesses and jobs; every year more than 2,500 start-ups are stimulated. Furthermore they contribute to improving access to finance for SMEs. In total more than 5,000 entrepreneurs are beneficiaries of the German guarantee system. 48

49 The Italian Confidi Networks Mutual guarantees are very active: relying on the partnership with more than 941,000 micro and small and medium enterprises, they have an outstanding guarantee of 11.3 billion as at , based on responsible own funds amounting to 1.4 billion. The Confidi have not only granted 6.3 billion guarantees to SMEs, but they have also increasingly conducted consulting activities and delivered financial services to their affiliates. Reasons of success First of all, it should be noted that CONFIDI are born from the association of small entrepreneurs, based on co-operation and mutuality, in order to overcome huge difficulties to access external financing sources while preserving the economical and legal autonomy of each enterprise. They are not based upon a business-policy attitude adopted by public authorities; The voluntary aspect of this SME aggregation usually implies the existence of a promoter, role which was played by their entrepreneurial associations. The CONFIDI are born as a natural answer to the need of placing a further intermediary at the centre of the relationship between banks and SMEs; They have focused their activities on getting additionality for their members: Obtaining additional credits compared to the amounts for which they were normally available; Obtaining interest rates in line with prime rate as well as more transparent additional terms; Focusing the credit analysis on corporate profitability capacity, rather than on the mere assessment of collateral value. Confidis form a nationwide network composed of 600 entities. This way, there is close vicinity between the schemes and the local applicants. There is a perfect knowledge of the field elements. Their sectorial base (Handicraft, Commerce, Industry, and Agriculture) allows them as well to have an in-depth knowledge of the characteristics of the values that are determinant for the good management of a business. The decision-making and administrative bodies of the CONFIDI are based on affiliate enterprises, which play a fundamental role. These enterprises have a central assessment role as they directly or indirectly manage their organisation and technical committees. Their relationship with on-lending banks is governed by special agreements and is based upon a monetary deposit, called risk fund that represent the importance of the guarantee capacity and the negotiating power of CONFIDI. Moreover, they provide information about enterprises and make preliminary investigations, saving time and cost for the lender. In exchange the bank reduces the interest rate, provides an easier access to credit and commits the same conditions for the duration of the financing. In conclusion, we have 2 results: which can be illustrated from the Craft CONFIDI: First of all, the default rate, which is very low, exactly 1.6% guaranteed by Confidi, compared with an 8.5% default rate for the industry as a whole, according to an estimate by several banks; Secondly, on a total amount of loans granted to the craft sector (about 24% of the total enterprises) 49,870 million euro, approximately 9,100 million (18%) has been channelled by Confidi active in this sector. 49

50 Sociedades De Garancia Reciproca Spain The mission of the Spanish guarantee system is to help the micro and SMEs facing financial difficulties in a country where 90% of the business network is formed by small and medium enterprises. To reach that goal, the guarantee system of Spain has 22 Mutual Guarantee Societies called Sociedades de Garantía Recíproca (SGR) and a public counterguarantee society called CERSA (Compañía Española de Reafianzamiento) which is supported by the State. A network of 20 regional companies and two specific sectors have been associated into its union body, CESGAR (Confederación Española de Sociedades de Garantía Recíproca) and it covers the whole country. The SGR were created in 1979, after Spain had initiated an economic policy of openness. The Spanish system is the result of a long legislative process from 1979 to The January 1994 law resulted in a very complete system with: Tax advantages (constitution of tax free provisions); Premium grants by the Autonomous Regions for certain programmes (women entrepreneurs, innovation etc.); A public counter-guarantee run by CERSA since 1994: 30 to 75% of the losses (33% on average at the end of 2003) are assumed by CERSA, according to the political sensitivity of the programmes (higher for innovation or young entrepreneurs); Certain counter-guarantees are given by the Autonomous Regions. The SGR (companies) have a particular legal form that meets the legal definition of the SGR: It is a mutual system with SME members (almost 74,000 SME members and beneficiaries, 55% of the equity) and Protector members (Autonomous Regions and other public powers: 29% of the capital finance companies: 12% of the capital and SME bodies, Chambers of Commerce: 4% of the capital); The SGR are considered financial entities by the Law 1/94 and that is the reason why they are under control and supervision of the Bank of Spain. The shareholders are divided into SMEs (57%), Regional Administration (27%), Credit Entities (11%) and others (5%). The SGR addresses all SME sectors: industry: 33% - services: 33% - commerce: 16% - construction: 15%. Unlike other Guarantee Societies, the SME contacts the SGR directly to obtain 100% guarantees on their credit needs. In some cases they give their own collateral to the SGR. They receive financial advice in order to obtain optimal funding. The Spanish system is enjoying strong growth: + 16% in The present outstanding commitments are approximately 3,200 million. CESGAR is also in charge of the formation process of the MGS workers and organizes every year a training plan in order to improve the knowledge and formation of the workers and also the relations between all his members. Nowadays CESGAR is leading a project with an international consultancy company for all the SGR to face the new capital Accord, known as Basel II, in order to better control the risk and to adapt to the new rating culture. 50