SME Finance and Green Finance by ADB Biao Huang Private Sector Operations Department Asian Development Bank
Overview Financial Sector Development and Environment are two core areas of operations under ADB s Strategy 2020 Improving access to finance by MSMEs is central to ADB s operations in financial sector development ADB to double annual climate finance to $6 billon by 2020 covering finance to governments, corporates and SMEs At ADB, regional departments and Private Sector Operation Department have complimentary products Regional departments provide sovereign loans Loan to DMC governments backed by sovereign guarantee; On-lending to SMEs through commercial banks or government agencies Example: $200 million Second Small and Medium -Sized Enterprise Development Project in Bangladesh (2015) Private Sector Operations Department undertakes non-sovereign projects Financial Institutions Division works with banks and NBFIs Infrastructure Finance Divisions directly finance infrastructure projects Investment Funds Division works with private equity funds ADB has access to a wide range of funding sources, which can be combined or blended with ADB s own funding and/or risk-sharing instruments 1
Value Addition of ADB s Private Sector Operations Deep regional experience in Emerging Asia ADB has successfully operated and invested in Asia s emerging markets since 1966 Extensive network on the ground in Asia ADB has over 3,000 employees in 30 offices throughout the region One-stop shop PSOD provides comprehensive financial solutions to its clients, including loans, equity, and guarantees Cofinancing capital Mobilizing significant cofinancing capital: from equity co-investors and commercial colenders to sector-specific concessional funds and ADB-administered trust funds Standard of excellence is broadly recognized ADB s AAA rating, prudent transaction underwriting, and strict environmental and social safeguard policies are highly recognized in the market; seal of endorsement that enhances the credibility and market receptivity of our clients 2
Products and Services from ADB s PSOD Instrument Typical Size Typical terms When is it relevant? Debt $20M--$250M 5 years (corporate) to 15+ years (project) LIBOR / ADB cost of fund in local currency + credit spread Security on capex financed Established company with large balance sheet, strong cash flow Possibility to mobilize cofinancing under B-loan or risk participation Equity $2M--$75M 25% ownership maximum Board seat Minority protection rights Put on the parent company Growing company in a pre-ipo or pretrade sale situation Guarantees Up to $400M (PRG) $20M--$250M (PCG) Small to $50M (TFP/SCF) Political risk: market based, fees based off reinsurance market Credit guarantees: market based, fees based off lenders margin TFP/SCF: short term, market based fees In frontier markets (political risk) Where other lenders are more efficient than ADB in (i) mobilizing local currency, or (ii) reaching target customers (credit guarantees) Donor Funding $5M $10M Long term loan at concessional interest rate to be blended with ADB financing First loss cover Whenever donor funds managed by ADB are available Applicable for climate adaptation projects or low-income countries Technical Assistance $0.5M $1M For project preparation TA, reimbursable at closing For capacity development TA, nonreimbursable grant For projects in need of additional, concessional financial assistance (for example, technical assistance to contract farmers) 3
Main Products of SME Finance and Green Finance: From ADB s Private Sector Financial Institutions Division Loan to Banks and Non-bank Financials Institutions ADB can provide funding directly to financial institutions through term loans or lines of credit earmarked for MSMEs or a portfolio of small green projects. ADB receives interest on debt financing based on the risk of the financial institution (the borrower). The proceeds of the ADB loan shall be used for onlending to MSMEs or green projects as defined in the loan agreement Direct equity investment in FIs Actively looking at equity investment opportunities in banks and NBFIs with a focus on SME finance and/or green finance Interest on Loan ADB Bank Credit Line = Bank Risk Loans Sub-Borrowers (e.g. SMEs or green projects) 4
Other Products: Risk-Sharing /credit guarantee ADB can provide credit guarantees and thereby share the risk of underlying projects/sub-borrowers with financial institutions. ADB receives a risk/guarantee premium based on the perceived risk of the underlying borrowers. Risk Premium ADB Bank Guarantee = Borrower Risk Loans Sub-Borrowers
Energy Efficiency Financing: Introduction Energy efficiency financing generally refers to buyers of energy savings solutions, borrowing money to pay energy services providers for energy savings products and services and then repaying the loans through energy savings. Energy savings solutions (such as installation of more energy efficient machinery, change of thermostats and light controls, and improved energy management) typically have short payback period. Borrowers do not incur additional negative cash flow, as debt service is generally covered by energy savings, often guaranteed by the energy services provider. Loan Banks Buyers / Borrowers Debt service = energy savings Performance Guarantee Contract / service agreement (Energy savings solutions) ESCOs Energy services companies ( ESCOs ) negotiate energy performance contracts ( Contracts ) with selected buyers of energy savings solutions. Buyers (or Borrowers ) obtain loans from banks to pay for the energy savings solutions (products and services). Borrowers make debt service payment, which is generally covered by energy savings (typically guaranteed by the ESCOs).
Energy Efficiency Financing Sharing the risk with ADB In a typical risk-sharing facility, ADB provides a partial credit guarantee to a Partner Bank covering 50% of the credit risk of the underlying borrowers. The guarantee could potentially be divided into several tranches to accommodate specific risk requirements of the Partner Bank, e.g. ADB could potentially take a larger share of the first 10% loss and a smaller share of the remaining 90% losses, or the guarantee could be back-ended or increase over time. Partner Bank Loan Buyers Buyers EE Borrowers Partial Credit Guarantee Performance Guarantee Contracts / Service Agreements ADB ADB provides a partial credit guarantee to Partner Banks sharing the payment risk of underlying EE Borrowers. ESCOs The guarantee can be tailored to accommodate specific requirements of partner banks
Recent ADB projects BAN: Loan to BRAC Bank for Sustainable Projects PRC: Loan to CFPA Microfinance Management ADB Assistance: $30m loan Borrower: BRAC Bank (BAN) Background: The 2012 Tazreen factory fire and the 2013 Rana Plaza building collapse put the global spotlight on the unsafe working conditions of Bangladesh s garment factories. Substantial finance is required for upgrading 6,000 garment factories, estimated at $250,000 $400,000 per factory. Project Outline: ADB partners with BRAC Bank to channel $30 million in loans to Accord/Alliance member factories for improving safety standards Development Impact: The ADB loan will lead to better working conditions for 22,000 female garment industry workers. Health clinics and childcare facilities will be introduced as part of the gender action plan. Date Approved: 16 Sept. 2015 ADB Assistance: $50m loan Borrower: CFPA Microfinance Management (PRC) Project Outline: The loan will fund CFPAMM s collateral-free micro-finance lending in poverty-stricken counties designated by central and provincial governments. Sub-loans will be used to support micro-entrepreneurs engaged in agri-business, trade, handicraft, and services. Development Impact: Will support approximately 130,000 micro-entrepreneurs, mostly women. Date Approved: 17 May 2016 $ = US dollars $ = US dollars 8
Trade Finance Program (TFP) provides guarantees and loans to banks to support trade TFP s Objectives: fill market gaps deepen private sector involvement strengthen banking sector Works with over 200 banks 80+ local banks in developing Asia 150+ international banks worldwide Issues loans and guarantees within 24 hours Awards won by the TFP: 2016 Program Highlights Transactions supported (US$) $3.09 billion Cofinancing $1.77 billion Number of transactions 2,079 SMEs supported 1,597 2009-2016 $25.60 billion 2009-2016 $15.04 billion 2009-2016 13,105 2009-2016 9,204 Number of partner banks 200+ Six most active of 20 TFP countries Armenia, Bangladesh, Mongolia, Pakistan, Sri Lanka, Viet Nam
Supply Chain Finance Program works with corporates and PFIs to enhance SME access to working capital. 2016 Program Highlights Transactions supported $203 million Cofinancing $101 million SMEs supported 188 2015-2016 $296 million 2015-2016 $148 million 2015-2016 265
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