27
MSMEs and Government Support in Korea
Credit Guarantee System in KODIT
Performance
Implications to Asia and the Pacific
4
SMEs (99%) L Number of Enterprises
Number of Employees
Exports
SMEs (88%) L (12%)
SMEs (33%) LEs (67%)
Total : 3,545,000 SMEs: 3,542,000
Total : 15,963,000 SMEs: 14,028,000
Total : 553 billion USD SMEs: 183 billion USD
Business sector Total Asset Sales
Manufacturing (clothes, pulp, furniture, leather, etc.)
≤ USD 455 million
≤ USD 136 million
Mining, agriculture, construction, gas supply manufacturing, whole sale & retail (food production, automobile, etc.)
≤USD 91 million
Publication, broadcast, transportation, Manufacturing (beverage, healthcare, etc.) ≤ USD 73 million
Science service, leisure, art, etc. ≤ USD 55 million
Real estate service, education, etc. ≤ USD 36 million
Definition of SMEs in Korea
5
■ 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
“ Government Intervention Required !!”
Underdeveloped SME Financing Market
6
PCR KCIS (Korea Credit Information Service)
Public Entities (Court, tax agency, public insurance)
CB (NICE, KCB)
Financial Institutions
(Bank, credit card, etc)
Banks, Guarantee Institutions (F/S and assessment)
FSS & Dart (Financial statement)
SME CB (KED, NICE)
Financial Institutions
Private companies (Electricity, telecom, trade information)
Financial Institutions
Public Organizations
Private companies
< Individual Credit > < SME Credit >
7
SMEs Banks
Credit Evaluation
Guarantee (Reduce
Credit Risk) CGS
Hurdles of financing
9
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.
• Easier access to formal finance • Lower interest rate • Long-term investment
SMEs
• Reliable collateral ensured • Expansion of MSME market • Improvement of capital adequacy ratio
Banks
• Enhanced economic competitiveness • More Job & secured social safety-net
• Financial market development
Government
10
Set up exclusive government division for SMEs Enacted law on SME bank
Enacted Korea Credit Guarantee Fund Act
1967 Enacted SME Credit Guarantee Act
1962 Launched the 1st Five-year Economic Development Plan
Prepared Credit Guarantee Reserve Fund (inside SME bank)
1966 Enacted Basis Law on Small and Medium Enterprises
1961
1960
1974
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
1976
1989
2000
11
Establishment 1976 Target market All SMEs Market share (2015) 57% Source of funding Central Government Banks
Korea Credit Guarantee Fund
Korea Technology Finance
Corporation 16 Regional Credit
Guarantee Foundation
There are three players in the market
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
14
The Board of Policy
The Board of Directors
Budget Planning Operation Supervision Capital Contribution
Board of Audit and Inspection
of Korea
Sources of Fund
Government (irregular) : 45% Subject to yearly budget of the government
Others (irregular) : 5% Occasional contributions from banks or large enterprises
Banks (regular) : 50% Mandatory donation in proportion to monthly balance of outstanding corporate loans of commercial banks
LEs (25%)
SMEs (75%)
CGS Fund Korea Credit
Guarantee Fund
SMEs w/o collateral
Innovative firms
Start-ups Interest Margin
Delivery cost
Interest payment
Corporate loans from banks
Regulation for contribution Beneficiary
Loan guarantee
15
Interest rate
16
How the Scheme Works?
① Ordinary Procedure ② SMEs Defaulted
② Default
① Loan Disbursement (guaranteed by KODIT)
④ Repay
③ Loan
Government
Contribution ② Guarantee (fee)
① Apply (Credit Review)
Contribution
17
Key Operational Principles
Credit Risk Management (Rating Model)
18
Credit Investigation
Owner’s CB rating
Combination of Model (Combined Score)
Pre-Rating
Filtering
CCRS Rating (Final)
Quantitative Model
Scores from Financial Factors
Scores from Quantitative Factors
Scores from Qualitative Factors
Financial Model Qualitative Model
Rating Median PD(%)
K1 K2 K3 • • •
K15
0.10 0.30 0.60
• • •
30.0
* PD is not a real value
20 20
262
320.8
367.2 385.6 383.5 395.5 401.2
422.5 453.2
500.5
13.4% 11.0% 10.6%
13.9% 14.7% 14.2% 14.3% 14.4% 13.5% 12.7%
-
100
200
300
400
500
600
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(Unit : billion USD)
* USD 1 = KRW 1,150
21
Category 1975
Amount %
LEs 1.1 64.3%
SMEs 0.7 35.7%
Total 1.8 100.0%
Unit : billion USD
2015
Amount %
152 23.3%
500 76.7%
652 100.0%
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
* USD 1 = KRW 1,150
22
-5%
0%
5%
10%
15%
20%
25%
-20%
0%
20%
40%
60%
80%
100%
'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
(1 USD = 1,150KRW) Source: Bank of Korea, KODIT
Asian Financial Crisis
Burst of IT Bubble &
Credit Crunch
Global Financial Crisis
24
CGS in Asian Countries
Outreach (utilization)
Age
(est
ablis
hmen
t)
Category Low Middle High
Old Sri Lanka (1978) Philippines (1983)
India(1960) Malaysia(1972) Indonesia(1970)
Japan (1937) Taiwan (1974) Korea (1976)
Middle Kazakhstan (1997) Vietnam (2001) Thailand (1991)
Young Mongolia (2012)
* No CGS : Myanmar, Cambodia, Laos
• 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
• Challenges
25
Comparison of Guarantee Outreach
7.4% 6.8%
6.3% 6.0% 5.7% 5.8% 5.7%
6.8%
7.6% 7.3% 7.4%
6.8% 6.2%
5.7%
5.9%
6.7% 6.4% 5.7%
5.0% 4.6%
4.3% 4.6%
6.1% 5.8%
5.5% 5.4% 5.5% 5.3%
1.5% 1.5% 1.9%
2.6% 3.3% 3.4%
2.9% 2.6% 3.2%
3.6% 4.0% 4.1%
4.4% 4.3%
0.1% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.5% 0.9%
1.4% 2.0%
2.7% 2.9%
0.4% 0.4% 0.6% 0.8% 0.8% 0.8% 0.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Japan Korea Taiwan Thailand Indonesia
Guarantee / GDP
26
