MSMEs and Government Support in Korea Credit Guarantee System in KODIT Performance Implications to Asia and the Pacific
Number of Enterprises SMEs (99%) L Total : 3,545,000 SMEs: 3,542,000 Number of Employees SMEs (88%) L (12%) Total : 15,963,000 SMEs: 14,028,000 Exports SMEs (33%) LEs (67%) Total : 553 billion USD SMEs: 183 billion USD Definition of SMEs in Korea Business sector Total Asset Sales Manufacturing (clothes, pulp, furniture, leather, etc.) Mining, agriculture, construction, gas supply manufacturing, whole sale & retail (food production, automobile, etc.) Publication, broadcast, transportation, Manufacturing (beverage, healthcare, etc.) Science service, leisure, art, etc. Real estate service, education, etc. USD 455 million USD 136 million USD 91 million USD 73 million USD 55 million USD 36 million 4
Characteristics 1 Insufficient collateral 2 High risk of default 3 High transaction cost 4 Asymmetric information Outcome 1 Limited access to finance 2 Credit allocation by banks 3 High interest rate 4 Lack of long-term financing Underdeveloped SME Financing Market Government Intervention Required!! 5
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Financial Institutions (Bank, credit card, etc) Public Entities (Court, tax agency, public insurance) PCR KCIS (Korea Credit Information Service) < Individual Credit > < SME Credit > Financial Institutions Private companies (Electricity, telecom, trade information) CB (NICE, KCB) SME CB (KED, NICE) Banks, Guarantee Institutions (F/S and assessment) FSS & Dart (Financial statement) Financial Institutions Private companies Public Organizations 7
CGS(Credit Guarantee Scheme) provides guarantees on SME loans to cover the default risk of the borrowers. It is known as the most effective and market-friendly government intervention in SME financing. SMEs Hurdles of financing Banks Credit Evaluation CGS Guarantee (Reduce Credit Risk) 9
SMEs Banks Government Easier access to formal finance Lower interest rate Long-term investment Reliable collateral ensured Expansion of MSME market Improvement of capital adequacy ratio Enhanced economic competitiveness More Job & secured social safety-net Financial market development 10
1960 1961 Set up exclusive government division for SMEs Enacted law on SME bank Prepared Credit Guarantee Reserve Fund (inside SME bank) 1962 Launched the 1 st Five-year Economic Development Plan 1966 Enacted Basis Law on Small and Medium Enterprises 1967 Enacted SME Credit Guarantee Act 1974 1976 1989 2000 Enacted Korea Credit Guarantee Fund Act Established Korea Credit Guarantee Fund (KODIT) Spun off Korea Credit Technology Guarantee Fund (KOTEC) Established Federation of Credit Guarantee Foundation (KOREG*) * Federation of 16 regional credit guarantee foundations 11
There are three players in the market Korea Credit Guarantee Fund Korea Technology Finance Corporation 16 Regional Credit Guarantee Foundation Establishment 1976 Target market All SMEs Market share (2015) 57% Source of funding Central Government Banks Establishment 1989 Target market Tech-oriented Market share 24% Source of funding Central Government Banks Establishment 1999 Target market Small & Micro Market share 19% Source of funding Local Government Banks Central Government
KODIT is the largest credit guarantee institution in the world as a single entity Status: Non-profit, Non-capital Special Legal Entity Establishment : 1976 Capital Fund : USD 4.7 billion Outstanding Guarantee : USD 42 billion * New supply (in 2016): USD 12.1billiion Number of guaranteed companies : 205,361 Number of Employees : 2,300 Business network : 1 Head office, 9 Regional HQs, 106 Branches 13
Supervision Budget Planning Operation Supervision Capital Contribution The Board of Policy The Board of Directors Board of Audit and Inspection of Korea 14
Sources of Fund Government (irregular) : 45% Subject to yearly budget of the government Banks (regular) : 50% Mandatory donation in proportion to monthly balance of outstanding corporate loans of commercial banks Others (irregular) : 5% Occasional contributions from banks or large enterprises Corporate loans from banks LEs (25%) SMEs (75%) Interest payment Regulation for contribution CGS Fund Interest Margin Delivery cost Interest rate Korea Credit Guarantee Fund Loan guarantee Beneficiary Start-ups Innovative firms SMEs w/o collateral 15
How the Scheme Works? 1 Ordinary Procedure 2 SMEs Defaulted Government Contribution 2 Guarantee (fee) Contribution 1 Apply (Credit Review) 3 Loan 1 Loan Disbursement (guaranteed by KODIT) 4 Repay 2 Default 16
Key Operational Principles 17
Credit Risk Management (Rating Model) Financial Model Scores from Financial Factors Quantitative Model Scores from Quantitative Factors Qualitative Model Scores from Qualitative Factors Credit Investigation Owner s CB rating Combination of Model (Combined Score) Rating Median PD(%) Filtering Pre-Rating CCRS Rating (Final) K1 K2 K3 K15 0.10 0.30 0.60 30.0 * PD is not a real value 18
(Unit : billion USD) 35.0% 600 30.0% 25.0% 20.0% 15.0% 262 320.8 367.2 385.6 383.5 395.5 401.2 422.5 453.2 500.5 500 400 300 10.0% 5.0% 13.4% 11.0% 10.6% 13.9% 14.7% 14.2% 14.3% 14.4% 13.5% 12.7% 200 100 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 - * USD 1 = KRW 1,150 20 20
Since the establishment of KODIT, the proportion of SME lending has increased from 35.7% in 1975 to 77.3% in 2015 Government s guideline for SME loans of banks Operating a specialized bank for SME lending (Industrial Bank of Korea) Various policies for SME loans Unit : billion USD Category 1975 Amount % 2015 Amount % LEs 1.1 64.3% SMEs 0.7 35.7% Total 1.8 100.0% 152 23.3% 500 76.7% 652 100.0% * USD 1 = KRW 1,150 21
100% Asian Financial Crisis 25% 80% 60% Burst of IT Bubble & Credit Crunch Global Financial Crisis 20% 15% 40% 10% 20% 5% 0% -20% '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 0% -5% Source: Bank of Korea, KODIT (1 USD = 1,150KRW) 22
CGS in Asian Countries Outreach (utilization) Age (establishment) Category Low Middle High Old Middle Sri Lanka (1978) Philippines (1983) Kazakhstan (1997) Vietnam (2001) Young Mongolia (2012) India(1960) Malaysia(1972) Indonesia(1970) Japan (1937) Taiwan (1974) Korea (1976) Thailand (1991) * No CGS : Myanmar, Cambodia, Laos Challenges Misunderstanding about CGS (self-sustainable and profitable business?) Lack of fund Underdeveloped operational system as well as credit risk management tools Moral hazard and external interference 24
Comparison of Guarantee Outreach 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Guarantee / GDP 7.4% 7.6% 7.3% 7.4% 6.8% 6.8% 6.8% 6.3% 6.0% 6.1% 6.2% 5.7% 5.7% 5.8% 5.7% 5.8% 6.7% 5.5% 5.4% 5.5% 5.7% 6.4% 5.0% 5.9% 4.6% 4.6% 5.3% 4.3% 4.4% 4.0% 4.1% 4.3% 3.3% 3.4% 3.6% 3.2% 2.6% 2.9% 2.6% 2.7% 2.9% 1.9% 2.0% 1.5% 1.5% 1.4% 0.9% 0.1% 0.2% 0.2% 0.3% 0.3% 0.3% 0.4% 0.3% 0.4% 0.5% 0.6% 0.8% 0.8% 0.8% 0.7% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Japan Korea Taiwan Thailand Indonesia 25
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27 Thank you! leejg@kodit.co.kr