SETTING-UP THE CONDITIONS TO ESTABLISH A CREDIT GUARANTEE SCHEME FOR AGRIBUSINESS SMEs IN UKRAINE

Transcription

1 EASTERN EUROPE AND SOUTH CAUCASUS INITIATIVE SETTING-UP THE CONDITIONS TO ESTABLISH A CREDIT GUARANTEE SCHEME FOR AGRIBUSINESS SMEs IN UKRAINE Phase I Third Task Force meeting Task Force on a Credit Guarantee Scheme Kyiv, 10 th February, 2015 OECD

2 Key decisions of this Task Force meeting FOR APPROVAL 1- Key directions 1. Initial approval of primary characteristics I. Basic objectives and eligibility criteria II. Coverage rate III. Guarantee fees IV. Credit Guarantee Scheme type 2. Validate bank screening methodology 3. Approve proposal to limit tendering process to 2 or 3 banks 4. Approve funding mobilisation approach & nomination of CGS IG representative to coordinate 2 Project management 1. Approve creation of CGS Implementation Group 2. Approve the project next steps and timeline 2

3 Agenda 1. Brief overview of the Project 2. Presentation of pre-feasibility study findings (2.1) Presentation of results of pre-feasibility study (2.2) Primary characteristics for the scheme Objectives & eligibility criteria Coverage rate Service fees Credit Guarantee Scheme type (2.3) Bank selection methodology for the scheme Current banking system context for a CGS in Ukraine Introduction of bank partner screening methodology 3. Introduction of next phase: feasibility study & secondary characteristics 4. Next steps and timeline 3

4 The Credit Guarantee Scheme project emerged as a key recommendation of the SCS project, and is geared towards increasing access to finance for agri-smes in Ukraine (1) Brief project overview Aim 1: to increase access to finance for agribusiness SMEs Aim 2: to set up a scheme which is anchored to the local context & which is duplicable 4

5 The project is in the diagnostic phase, & the pre-feasibility study has been completed (1) Brief project overview Phase I 1. Pre-feasibility study Introduction to CGS & case studies Best practices & lessons learnt Primary characteristic recommendations Presentation of partner-bank screening methodology Identification of potential partner banks 2. Feasibility study Recommendations on secondary characteristics Governance & management Registration form Type of guarantee Leverage rate Risk management approach Loan duration Bank interest rate reduction Counter-guarantee 5

6 FUNDING TARGET R a t i o n a l e Key directions for a credit guarantee scheme have already been approved (1) Brief project overview Farms ha < 100 ha: Too small for significant productivity improvements > 2000ha: High average funding requirements, threat to sustainability Share Targeted SMEs represent 26% of agribusiness SMEs in Ukraine Piloted in 4 Ukrainian regions High agricultural productivity Low bank loan rates to agriculture Low state support to agriculture Funding gap Estimated credit of UAH 15bn required International donorfunded scheme Limited public funding Technical complexity of CGS Demonstration effect Source IFIs & bilateral donors 6

7 Agenda 1. Brief overview of the Project 2. Presentation of pre-feasibility study findings (2.1) Presentation of results of pre-feasibility study (2.2) Primary characteristics for the scheme Objectives & eligibility criteria Coverage rate Service fees Credit Guarantee Scheme type (2.3) Bank selection methodology for the scheme Current banking system context for a CGS in Ukraine Introduction of bank partner screening methodology 3. Introduction of next phase: feasibility study & secondary characteristics 4. Next steps and timeline 7

8 Based on the findings of the pre-feasibility study, several key recommendations have been made on the CGS s primary characteristics & the selection of partner banks (2.1) Pre-feasibility study findings: results P R I M A R Y C H A R A C T E R I S T I C S Objectives & eligibility criteria Coverage rate Service fees Type of CGS Recommendation Scheme should achieve the objectives of financial & economic additionality & sustainability whilst targeting agri-smes with ha of land in Cherkassy, Poltava, Vinnytsia & Kharkiv. Scheme should provide 50-60% coverage rate on average Scheme should charge service fees of around 2%, potentially upfront & annual Scheme should be an internationally-funded public/private model Suggested further analysis More detailed eligibility criteria required Are there specific financing needs by segment, which can be targeted whilst ensuring sustainability? Should coverage rate be variable? Is 50-60% acceptable to all banks which are active in agribusiness SME lending? Are both upfront & annual fees required? How would such a scheme be registered under Ukrainian legislation? Funds located in or outside Ukraine? Is the legal & regulatory framework compatible with features of the scheme? B A N K S E L E C T I O N M E T H O D O L O G Y Pre-screening Limited tender Banks screened based on eligibility, relevance & quality 2-3 banks out of 3-5 to initially participate in the scheme Tendering process best practices Criteria for due diligence process 8

9 The methodology for developing these recommendations is based on countryspecific conditions in Ukraine as well as OECD best practice (2.1) Pre-feasibility study findings: results P R I M A R Y OBJECTIVES & ELIGIBILITY COVERAGE RATE TYPES OF FEES TYPE OF CGS Define aims & target group Define % of risk shared with lender Define % of loan amount charged as service fee Define broad organisational structure for guarantee issue Pre-feasibility study Pre-feasibility study Pre-feasibility study Pre-feasibility study Questionnaire Questionnaire Questionnaire B A N K S E L E C T I O N M E T H O D O L O G Y ELIGIBILITY RELEVANCE QUALITY Define which banks have sufficient capacity, interest & experience to participate Pre-feasibility study Questionnaire Define which banks can currently commit to active participation Pre-feasibility study Questionnaire Encourage self-selection & ensure that partner banks can meet the defined objectives of the CGS Feasibility study Due diligence process 9

10 These recommendations have been developed alongside an analysis of inherent & external project risks, in order to mitigate against them (2.1) Pre-feasibility study findings: results Risks Mitigation Measures Inherent 1. Technical complexity of CGS 2. Level of funding 3. Scheme buy-in from banks 4. Moral hazard 5. Lending technical capacity 1. CGS oversight working group; high-level political representative (high-level champion) 2. Donor mobilisation strategy 3. Attractiveness of risk-sharing; dialogue with banks 4. Careful scheme design; in-built evaluation mechanisms; oversight; capacity building 5. Bank screening; technical assistance (if funds) External 1. Limited banking sector liquidity 2. Hryvnya depreciation 3. Legal & regulatory environment 1. Limited tendering process 2. Analysis to determine localisation & specificity of funds 3. In-depth legal assessment 10

11 Agenda 1. Brief overview of the Project 2. Presentation of pre-feasibility study findings (2.1) Presentation of results of pre-feasibility study (2.2) Primary characteristics for the scheme Objectives & eligibility criteria Coverage rate Service fees Credit Guarantee Scheme type (2.3) Bank selection methodology for the scheme Current banking system context for a CGS in Ukraine Introduction of bank partner screening methodology 3. Introduction of next phase: feasibility study & secondary characteristics 4. Next steps and timeline 11

12 In-line with OECD best practice, initial primary characteristics of the scheme have been defined to achieve the core objectives of a CGS additionality & sustainability (2.2) Pre-feasibility study findings: primary characteristics Objectives of a CGS Description Method Financial additionality Economic additionality Sustainability Increased access to finance for agri- SMEs (outreach & loan volume) Improved production techniques and higher farm productivity The scheme covers its own costs (operating & otherwise), as it pursues the objectives of its mission More appropriate risk assessment and client outreach is conducted by banks The targeted group accesses more appropriate/cheaper financing for working capital & investment The CGS operates in-line with prudent risk management & best practice ELIGIBILITY COVERAGE RATE TYPES OF FEES TYPE OF CGS Credit Guarantee Schemes are usually targeted at SMEs (export-oriented, high-growth or rural). Best practice targets a segment of borrowers to ensure additionality, but is not overly-restrictive Coverage rates should reflect the tradeoff between attractiveness & moral hazard, i.e. sufficiently share credit risk whilst ensuring that banks still undertake adequate screening & monitoring processes. Several best-practice schemes link coverage rates to risk exposure, e.g. Chile provides 80% coverage for small borrowers & 50% coverage for medium borrowers Fees should be high enough to cover administrative costs, whilst being low enough to ensure that the scheme is used. Best practice usually links fees to risk exposure Most Credit Guarantee Schemes in OECD countries are public models. However since public schemes usually require annual budgetary appropriations, donor-funded models are often adopted in developing & emerging economies to secure funding 12

13 The Ukrainian CGS will be targeted at a segment of agribusiness SMEs that are perceived to have high potential & sustainable financing costs Objectives & eligibility (2.2) Pre-feasibility study findings: primary characteristics Mission statement: The Ukrainian Agribusiness Guarantee Scheme is an independent credit guarantee instrument that aims to support agricultural SMEs in rural areas and is working under the regulation of the National Bank of Ukraine. Its long term aim is to create a liquid credit market for bankable agribusiness SME projects that promote productivity growth in the sector. - approved at CGS Task Force meeting 1, June 2014 FOR DISCUSSION Objectives & eligibility Description The aim is generally to increase loan access by lowering collateral requirements &/or interest rates for underfinanced firms Policy advice OECD: targeted at export-oriented, high-growth or rural SMEs. UKR: agribusiness SMEs with ha of land, located in Cherkassy, Poltava, Kharkiv & Vinnytsia Eligibility criteria will further be defined with the results of the questionnaire, in-line with the 3 CGS objectives: financial additionality; economic additionality; & sustainability 13

14 A coverage rate of 50-60% is initially suggested for the CGS, due to national & sectoral market conditions Coverage rate (2.2) Pre-feasibility study findings: primary characteristics Description Policy advice FOR DISCUSSION Coverage The rate should be high enough to encourage lender participation yet low enough to limit moral hazard OECD max. risk share of 80%, usually 50-60% for agriculture UKR: 50% risk coverage, if acceptable to banks Coverage rates for agricultural CGS in the OECD HUN EST MEX (FEGA) MEX (FIRA) NLD Max Min HUN = AVHGA; EST = Rural Development Foundation; NLD = Rabobank Sustainable Development Fund 14

15 Risk-adjusted upfront & annual fees of around 2% are initially recommended for the CGS; to be further defined in the feasibility study Service fees (2.2) Pre-feasibility study findings: primary characteristics Description Policy advice FOR DISCUSSION Fees Fees should be high enough to cover administrative costs yet low enough to ensure adequate lender & borrower participation OECD: fees are generally around 1-2% of the loan value, & are risk-adjusted UKR: guarantee fee of around 2%, paid by the bank Guarantee fees for agricultural CGS in the OECD HUN EST MEX (FEGA) NLD Max Av Min Risk-adjusted fees usually based on: Coverage ratio Borrower risk Loan amount Composition of fund portfolio To be further investigated in feasibility study HUN = AVHGA; EST = Rural Development Foundation; NLD = Rabobank Sustainable Development Fund 15

16 An internationally-funded & publically/privately-governed scheme is recommended as the most appropriate model type for Ukraine, based on the following assessment CGS type (2.2) Pre-feasibility study findings: primary characteristics PROS CONS FOR APPROVAL PUBLIC PRIVATE 1. Ongoing Ukrainian government support after establishment 2. Regulation exists for organisational form 3. Full accountability with NBU 1. Strong demonstration effect, if successful 2. Possible under existing regulatory environment 3. Highest level of operational efficiency 4. Can be easily sold/expanded, if viable 1. No exit strategy possible funds managed by Ukrainian government institution(s) 2. Annual budgetary commitment required for continuation 3. Limited replicability 1. High price of capital, if investment is even possible 2. Commercial pressure (re ROI, etc.) will quickly shift CGS focus away from development goals 3. Requires sufficient capital & credibility PUBLIC/PRIVATE 1. Positive aspects from both public & private models, if sufficient support from both sides 2. Highest likelihood of long-term sustainability 1. Risk of failure due to limited PPP experience & low experience with CGS 2. Private operator needs to be selected. Needs to develop a strong selection methodology INTERNATIONAL DONOR 1. Allows for combination of mixed CGS funding (grant & commercial) with much-needed technical assistance & international know-how 2. Offers broad range of opportunities for future development (depending of IFIs & donors) 1. Chance of reduced ownership, if no private partner 2. Largely driven by policy goals, which may reduce commercial viability 16

17 Potential typology for a CGS: Private/public (international) model 17

18 Potential typology for a CGS: Private/public (local) model 18

19 Agenda 1. Brief overview of the Project 2. Presentation of pre-feasibility study findings (2.1) Presentation of results of pre-feasibility study (2.2) Primary characteristics for the scheme Objectives & eligibility criteria Coverage rate Service fees Credit Guarantee Scheme type (2.3) Bank selection methodology for the scheme Current banking system context for a CGS in Ukraine Introduction of bank partner screening methodology 3. Introduction of next phase: feasibility study & secondary characteristics 4. Next steps and timeline 19

20 A methodology for selecting partner banks has been developed, in order to limit the scheme s risk exposure (2.3) Pre-feasibility study findings: bank selection methodology Eligibility check Initial screening 17/43 Check based on positive (e.g. history of sustainable agricultural lending, presence in pilot regions) and negative criteria (e.g. transparency & stability) Relevance check Pre-selection 7-10 Based on quantitative questionnaires and qualitative interviews Quality check Limited tender 3-5 Initial group of CGS partner banks 20

21 CGS lowers risk Agribusiness SMEs are facing important constraints in accessing credit due to the high conservatism of Ukrainian banks (2.3) Pre-feasibility study findings: bank selection methodology CGS can increase credit to agribusiness SMEs by incentivising banks to increase lending Agricultural SMEs are perceived as risky High collateral requirements High interest rates Lower collateral requirements Lower interest rates Banks are conservative Cap on interest rate: no loan offer, even at a high interest rate Loans provided to creditworthy SMEs In Dec 14-Jan 15 the NBU & the OECD distributed a questionnaire to 17 banks in Ukraine This questionnaire will allow us to fine-tune various elements of the scheme Eligibility criteria Lending volume to agricultural SMEs Purpose of loans provided to agricultural SMEs Service fees / coverage rate Interest rates charged on loans to agricultural SMEs NPL rates of loans to agricultural SMEs Risk assessment processes Denominations of loans offered to agricultural SMEs Duration of loans to agricultural SMEs 21

22 The Ukrainian banking system is currently facing highly challenging conditions (2.3) Pre-feasibility study findings: bank selection methodology Deposit outflows were extremely high in 2014 And loan quality deteriorated Banks in Ukraine are strongly negatively affected by recent developments, such as: the strong depreciation of the hryvnya in combination with an emerging black market for foreign currency, the significant outflow of deposits from the banking system Deposit outflow from banks in Ukraine in 2014 Funds of individuals in UAH in USD in EUR in UAH in USD in EUR -21,4% -38,4% -36,1% -2,4% -26,4% -13,8% Source: Forbes.ua Source: Forbes ua Funds of legal entities % Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 NPLs to total gross loans Source: NBU ROE Furthermore, massive restructurings are currently taking place, which are expected to result later in 2015 in very high NPL levels for the banking sector 22

23 These conditions, combined with the structural nature of the banking system, have created high credit risk & liquidity constraints across the banking sector as a whole (2.3) Pre-feasibility study findings: bank selection methodology To be successful in the current context, the CGS needs to carefully select partners banks Massive deposit outflows trigger higher competition among banks which are offering high deposit rates Banks tend to be conservative Few banks active on lending market Currency depreciation Current context Outcome High costs of capital Banks mainly finance existing customers Increased administrative pressure on banks from NBU Implications for CGS Difficulty to find investors Risk exposure must be under control Sound bank selection process required High rate of NPLs in banking sector Potentially high recapitalisation needs 1 Prospects for investors remain uncertain Further consolidation likely 1 Confirmed by NBU stress test of largest 40 banks 23

24 In order to counter these risks, the CGS must control its risk exposure by screening & limiting the number of partner banks (2.3) Pre-feasibility study findings: bank selection methodology Multi-stage selection process to identify solid partners for a CGS 1. Country conditions Capacity, interest & experience to engage in agricultural SME lending is limited Response in methodology Bank selection process starts with initial screening of around 40 banks that are known for interest in SME &/or agricultural finance Conducted jointly with NBU 2. Due to uncertainty over the country s economic prospects, a limited no. of eligible banks may be able / willing to mobilise funding A relevance check will assess current capacities & short-term strategy of pre-selected banks, as well as interest in using a CGS 3. Country risks in Ukraine are high. Guarantee risk exposure must be low Final quality checks will allow for the final selection of the most suitable partner banks & also serve as basis for the application of a risk-based pricing model 24

25 A bank selection methodology has been developed & applied to commercial banks in Ukraine, in collaboration with the NBU, in order to identify eligible partner banks (2.3) Pre-feasibility study findings: bank selection methodology FOR APPROVAL 1 Eligibility check 43/ Positive criteria Strategy Includes a focus on SME finance Activities Already engages in agricultural finance Products Already has specific products for agricultural SMEs Presence Has a presence in the selected pilot regions Relevance Relevant agricultural portfolio size Quality Has developed quality indicators for agricultural lending Standing with NBU Has good standing with NBU & good market reputation Recent portfolio developments Promising trends in terms of growth, etc. Negative criteria Negative criteria Concerns regarding integrity, transparency & stability Foreign state-ownership 25

26 The second stage of the process will be to ensure that eligible banks are relevant for the scheme, given the current financial environment in Ukraine (2.3) Pre-feasibility study findings: bank selection methodology FOR APPROVAL 2 Relevance check 17/10 Assessment of interest in agricultural SME lending and participation in CGS, via: 1. Qualitative interviews with bank management 2. Quantitative data gathering (through OECD/NBU questionnaire) Progress 1. Interviews were conducted with 10 pre-selected banks in Nov 14, to get an overview of key issues & potential banking partners 2. Questionnaire distributed to around 17 banks in December It requests key indicators over time (e.g. loan volumes) Next steps 1. Upon approval of bank selection methodology, remaining interviews will be undertaken to discuss medium-term strategic plans & attitudes towards a CGS 2. Questionnaire results will be analysed in February 2015, in order to determine lending market characteristics for agri- SMEs by pre-screened banks 26

27 Once eligible partners have been chosen, the scheme will be opened to 3-5 partner banks via a limited tendering process. Following this, final membership may be initially limited to 2-3 banks, given the current financial situation in Ukraine (2.3) Pre-feasibility study findings: bank selection methodology 3 Quality check 3-5 FOR APPROVAL Tendering process 1. Limited tender only open to eligible & relevant banks 2. Transparent 3. Demanding Technical support to be provided by NBU or international experts Annual review and tender renewal 1. Selection of add. partner banks 2. Monitoring / quality checks 3. Knowledge sharing 4. Review of pricing Due diligence process Assessment of bank: 1. Policies 2. Procedures 3. Processes 4. Concrete lending results 5. Future targets The quality assessment will also provide information for the application of a riskbased pricing model. 27

28 In conclusion, the OECD suggests approval of the following primary characteristics for a Credit Guarantee Scheme in Ukraine (2.1) Pre-feasibility study findings: results Objectives & eligibility criteria Coverage rate Service fees Type of CGS P R I M A R Y C H A R A C T E R I S T I C S Recommendation Scheme should achieve the objectives of financial & economic additionality & sustainability whilst targeting agri-smes with ha of land in Cherkassy, Poltava, Vinnytsia & Kharkiv. Scheme should provide 50-60% coverage rate on average Scheme should charge service fees of around 2%, potentially upfront & annual Scheme should be an internationally-funded public/private model B A N K S E L E C T I O N M E T H O D O L O G Y REMINDER Suggested further analysis FOR APPROVAL More detailed eligibility criteria required Are there specific financing needs by segment, which can be targeted whilst ensuring sustainability? Should coverage rate be variable? Is 50-60% acceptable to all banks which are active in agribusiness SME lending? Are both upfront & annual fees required? How would such a scheme be registered under Ukrainian legislation? Funds located in or outside Ukraine? Is the legal & regulatory framework compatible with features of the scheme? Pre-screening Limited tender Banks screened based on eligibility, relevance & quality 2-3 banks out of 3-5 to initially participate in the scheme Tendering process best practices Criteria for due diligence process 28

29 Agenda 1. Brief overview of the Project 2. Presentation of pre-feasibility study findings (2.1) Presentation of results of pre-feasibility study (2.2) Primary characteristics for the scheme Objectives & eligibility criteria Coverage rate Service fees Credit Guarantee Scheme type (2.3) Bank selection methodology for the scheme Current banking system context for a CGS in Ukraine Introduction of bank partner screening methodology 3. Introduction of next phase: feasibility study & secondary characteristics 4. Next steps and timeline 29

30 During the next phase of the project we will make recommendations on secondary characteristics for the scheme (3) Introduction of next phase: feasibility study P R I M A R Y S E C O N D A R Y GOVERNANCE MANAGEMENT REGISTRATION FUNDING RISK MANAGEMENT TYPE OF GUARANTEE Define strategic governance of the scheme & ownership Define operational management structures Define legal & regulatory framework Define funding source & fund location Define procedures for overseeing & mitigating risks Define how guarantees are extended Feasibility study Feasibility study Legal consultation Questionnaire Questionnaire Questionnaire Feasibility study Feasibility study Feasibility study Feasibility study 30

31 Agenda 1. Brief overview of the Project 2. Presentation of pre-feasibility study findings (2.1) Presentation of results of pre-feasibility study (2.2) Primary characteristics for the scheme Objectives & eligibility criteria Coverage rate Service fees Credit Guarantee Scheme type (2.3) Bank selection methodology for the scheme Current banking system context for a CGS in Ukraine Introduction of bank partner screening methodology 3. Introduction of next phase: feasibility study & secondary characteristics 4. Next steps and timeline 31

32 The OECD recommends the establishment of a CGS implementation group (4) Next steps & timeline FOR APPROVAL Governmental CGS Implementation Group Composition Tasks Timeframe Based on expertise & seniority, 1 member from MoF NBU MoE MoA Suggest strategic direction Engage with donors (one focal point) Engage with team managing the scheme Discussions on selection of members during: February 2015 To be established by: Early March 2015 with support from OECD 32

33 There is a need to approach potential donors, to determine interest & availability of funding, in collaboration with a representative from the MoF or MoE (4) Next steps & timeline Min Max Administrative costs should be covered by guarantee fees; but start-up capital should initially come from international donors UKR legislation Financing gap Requisite start-up capital for financial services in Ukraine: 3m The OECD (2012) estimated the financing gap in pilot regions at 15bn. At a leverage rate of 5x, 3bn required Suggested list of potential multilateral donors Suggested list of potential bilateral donors EBRD Sweden IFC Germany World Bank UK EIB / EIF France EU US The OECD recommends that these discussions are led with the MoF/MoE representative from the CGS implementation group 33

34 Timeline until next Task Force meeting (4) Next steps & timeline Timeline February March April Q Key activities February 10: 3 rd Task Force meeting in Kyiv February 8-11: Kyiv Meetings with potential donors & IFIs March: Second stage of bank screening process to select 10 viable partner banks March 2: Fact-finding mission to pilot regions April: CGS Oversight Working Group in place Week of 8 th June: 4 th Task Force meeting in Kyiv February: Analysis of questionnaire results Outputs March 30: Distribution of questionnaire findings to Task Force members April 30: Feasibility study and action plan June 30: Technical report Design & Implementation of Key Features Feasibility analysis Technical analysis 34

35 Key decisions of this Task Force meeting 1- Key directions FOR APPROVAL 1. Initial approval of primary characteristics I. Basic objectives and eligibility criteria II. Coverage rate III. Guarantee fees IV. Credit Guarantee Scheme type 2. Validate bank screening methodology 3. Approve proposal to limit tendering process to 2 or 3 banks 4. Approve funding mobilisation approach & nomination of CGS IG representative to coordinate 2 Project management 1. Approve creation of CGS Implementation Group 2. Approve the project next steps and timeline TF Proposals to be submitted to the OECD-Ukraine Co-ordination Council 35

36 Contact details ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Antonio Somma Head of Programme OECD Eurasia Competitiveness Programme Tel: antonio.somma@oecd.org Audrey Vergnes Project Coordinator OECD Eurasia Competitiveness Programme Tel: audrey.vergnes@oecd.org Gabriela Miranda Project Manager Ukraine OECD Eurasia Competitiveness Programme Tel: gabriela.miranda@oecd.org Annie Norfolk Beadle Policy Analyst OECD Eurasia Competitiveness Programme Tel: annie.norfolkbeadle@oecd.org 36