The World Bank 01OFCIAoUKL USE ONLY ReportNo. 6302 PROJECT COMPLETION REPORT KOREA SMALL AND MEDIUM INDUSTRY BANK (SMIB) (LOANS 1507 AND 1749-KO) June 24, 1986 IDF Division East Asia and PacificRegional Office This document has a stricted disibution and maybe used by recipients only in the performance of their official dutiea Its contentsnmynot otherwise be discosedwithout World Bankauthorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
The World Bank01OFCIAoUKL USE ONLY
Report No. 6302
PROJECT COMPLETION REPORT
KOREA
SMALL AND MEDIUM INDUSTRY BANK (SMIB)
(LOANS 1507 AND 1749-KO)
June 24, 1986
IDF DivisionEast Asia and Pacific Regional Office
This document has a stricted disibution and may be used by recipients only in the performanceof their official dutiea Its contents nmy not otherwise be discosed without World Bank authorization.
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EXCHANGE RATES
1977-79 US$ 3 Won (W) 4851980 US$ * Won 6631981 US$ = Won 7031982 US$ = Won 7451983 US$ * Won 8001984 US$ - Won 830
SMIB FISCAL YEAR
January 1 - December 31
ABBREVIATIONSADB - Asian Development BankBOK - Bank of KoreaCNB - Citizens National BankDFC - Development Finance CompanyFLD - Foreign Loan Department (of SMIB)IDF - Industrial Development and FinanceKDB - Korea Development BankKFSB - Korea Federation of Small BusinessKfW - Kreditanstalt fur WiederaufbauKLB - Korea Long-Term Credit BankMOF - Ministry of FinanceMTI - Ministry of Trade and IndustryNIF - National Investment FundOECD - Organization for Economic Cooperation and DevelopmentPCR - Project Completion ReportSMI - Small and Medium IndustrySMIB - Small and Medium Industry BankSMIPC - Small and Medium Industry Promotion CorporationSMIPF - Small and Medium Industoy Promotion Fund
FOR omFcIA USE ONL.YTHE WORLD BANK
Washington, D.C. 20433US.A.
Office oS DirectonrCe alOpMahnns Evakuatio
June 24, 1986
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Project Completion Report on Korea: Small and MediumIndustry Bank (SMIB) (Loans 1507-KO and 1749-KO)
Attached, for information, is a copy of a report entitled"Project Completion Report on Korea Small and Medium Industry BankProject (Loans 1507-Ko and 1749-KO)" prepared by the East Asia and PacificRegional Office. Further evaluation of this project by the OperationsEvaluation Department has not been made.
Attachment
This document has a restricted distribution and may be used by recipients only in the perfomance
FOR OFFICIAL USE ONLY
PROJECT COMPLETION REPORT
KOREA: THE SMALL AND MEDIUM INDUSTRY BANK(Loans 1507 and 1749-KO()
TABLE OF CONTENTS
Page No.
PREFACE .......*................................................... i
The Industrial 2.......................... ................ .. 2SMI .......................... ............................. 2
III. SMIB'S ROLE AND BANK LOANS' OBJECTIVES ....................... 3
IV. UTILIZATION OF THE BANK LOANS ........................ 4Rate of 4.............................................. ..... 4Subborrowers Characteristics ...... ... .. ...e.. ... ............ 4Subprojects Characteristics ........................................o 4Operational and Economic Performance of Subprojects........ 7
V*. INSTITUTIONAL ASPECTS............................................. 8Management, Operation and Staffing ......................... 8Procedures and Standards................................... 9
VI. OPERATIONAL AND FINANCIAL PERFORMANCE........................ 10Operational Performance............................................. 10Financial Performance ..... e..e.. ........................ ... .. 11Resource Mobilization ......... ............................. 13
VII. CONCLUSIONS* .......................................... 13
ANNEXES
Annex 1: Schedule Gf Estimated and Actual Disbursements....... 16Annex 2: Summarized Data on Subprojects....................... 17Annex 3: List of Subprojects Financed under Loan 1507-KO1...... 18Annex 4: List of Subprojects Financed under Loan 1749-KO ...... 24Annex 5: Characteristics of Subprojects Financed under
Loans 1507 and 1749-KO...................................... 32Annex 6: Performance of Subprojects Financed under
This document hasa restrcted distribution nd may be uod by recipints only in the performanceof their offcil dutiet Its contents may not othewie be diclosed without World Sank authoriaon.
Annex 8: Status of Subprojects Financed under Loan 1507-KO .... 37Annex 9: Status of Subprojects Financed under Loan 1749-KO .... 40Annex 10: Projected and Actual Lending Operations, 1980-84..... 44Annex 11: Projected and Audited Balance Sheets: 1980-84....... 45Annex 12: Projected and Audited Balance Sheets: 1980-84..o..... 46Annex 13: Collection Performance............................... 47Annex 14: Net Resources Position............................... 48Annex 15: SMI8's Organization Chart............................ 49
Attachment:Comments Received from the Small and Medium IndustryBank ........................................................ 50
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PROJECT COMPLETION REPORT
KOREA: THE SMALL AND MEDIUM INDUSTRY BANK(Loans 1507 and 1749-KO)
PREFACE
This project completion report covers the evolution of the Small andMedium Industry Bank (SMIB) of Korea and the Bank's relationship with it,particularly over the period 1980-84. The report focuses on subprojectsfinanced under Loan 1507-KO which was closed on December 31, 1982 andLoan 1749-KO which was closed on December 31, 1983. This PCR was prepared bythe IDF Division of the Projects Department, East Asia and Pacific RegionalOffice, on the basis of a mission to Korea and a draft PCR and additionalinformation furnished by SMIB.
In accordance with the revised project performance reportingprocedures this report has been read in the Operations Evaluation Department(OED) but the project was not audited by OED staff. The draft CompletionReport was sent to the Borrower for couments. A copy of their responseis included as an Attachment.
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PROJECT COMPLETION REPORT
KOREA: THE SMALL AND MEDIUM INDUSTRIES BANK
(Loan 1507-D0)
BASIC DATA SUEET
Key Project Data
AppraisalItem Expectation Actual
Loan Creditoriginal amount US$55.0 M US$55.0 MDisbursed US$55.0 M US$55.0 MRepaid to 01/31/86 US$44.8 MOutstanding to 01/31/86 US$10.2 MFinancial performance Satisfactory.Institutional performance Satisfactory.
AppraisalOther Project Data Expectations Actual
First mention in files or timetable 11/16/76Negotiations 11/28/77Board Approval 12/27/77Loan Agreement date 01/04/78Effectiveness date 03/10/78Closing date 12/13/821aBorrower Small & Medium Industry BankExecuting Agency Small & Medium Industry BankFiscal year of borrower January 1 - December 31Follow-on Project Name SMIB III
Loan Number LB. 1749-K0Amount (US$ million) US$60.0 millionLoan Agreement Date 07123/79
mission Dat
Sent No. of No. of Date ofItem by Month/year weeks persons Man-weeks report
Appraisal IDF 08/77 2 2 4 11/30/177Supervision I IDF 11/78 2 3 6 05/10/79Supervision II IDF 11/80 2 3 6 04/29/81Supervision III IDF 02/82 1 1 1 04/08/82Supervision IV IDF 11/82 3 1 3 01/31/83Supervision V IDF 03/83 1 2 2 04/08/83Completion IDF 07/85 1 1 2 03/31/86
Total 12 24
Country Exchange Rate
Name of currency (abbreviation) Won (W)Year:Appraisal year average 1977 Exchange Rate: US$1 485Intervening years average 1980 US$1 745Completion 1982 US$1 730
/a Final disbursement date.
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PROJECT COMPLETION REPORT
KOREA: THE SMALL AND MEDIUM INDUSTRIES BANK
(Loan 1749-KO)
BASIC DATA SHEET
Key Project Data
AppraisalItem Expectation Actual
Loan CrediturgTinal amount US$60.0 M US$60.0 MDisbursed US$60.0 H US$60.0 MRepaid to 01/31/86 US$38.9 MOutstanding to 01/31/86 US$21.1 MFinancial performance Satisfactory.Institutional performance Satisfactory.
AppraisalOther Project Data Expectations Actual
First mention in files or timetable 02/02/78Negotiations 04/23/79Board Approval 07/12/79Loan Agreement date 07/23/79Effectiveness date 09/26/79Closing date 12/31/83Borrower Small & Medium Industry BankExecuting Agency Small & Medium Industry BankFiscal year of borrower January 1 - December 31Follow-on Project Name SMIB IVLoan Number LN. 2004-KOAmount (US$ million) US$60.0 millionLoan Agreement Date 07/06/81
Nission Data
Sent No. of No. of Date ofItem by Month/year weeks persons Man-weeks report
Appraisal IDF 11/78 2 3 6 05/10/79Supervision I IDF 02/82 1 1 1 04/08/82Supervision II IDF 03/83 2 2 2 04/18/83Supervision III IDF 12/83 3 1 3 12/22/83Supervision IV IDF 03/84 1.5 1 1.5 05/02/84Supervision V IDF 09/84 3 4 12 01/09/85Completion IDF 07/85 1 1 1 03/31/86
Total 13.5 26.5
Country Exchange Rate
Name of currency (abbreviation) Won (W)Year:Appraisal year average 1978 Exchange Rate: US$1 485Intervening years average 1981 US$1 700Completion 1983 US$1 800
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PMOJECT COMPLETION REPORT
KOREA: THE SMALL AND MEDIUM INDUSTRY BANK(Loans 1507 and 1749-KO)
HIGHLIGHTS
This report reviews the evolution of the Small and Medium IndustryBank (SMIB) and the Bank's relationship with it particularly over the period1980-84. A PCR and a Project Performance Audit Report on Bank's first loan(No. 1175-KO) to SMIB covering developments up to 1979 were issued in 1980 and1983, respectively. Both these documents concluded that the objectives ofthat Bank project were satisfactorily realized. Special attention is given inthis PCR to projects financed under the second and third loans (Ln. 1570-KOfor US$55 million and Ln. 1749-KO for US$60 million).
Following up on the Bank's first loan to SMIB, the objectives ofLns. 1507 and 1749-KO were to: (a) transfer foreign currency resources forthe development of SMI enterprises, with a particular emphasis on reachingsmaller and labor-intensive projects; (b) contribute to further institutionbuilding of SMIB; and (c) support SMIB in its efforts to realize its majordevelopment objectives incorporated in its Development Strategy such asgeographic dispersal and the Saemaul Program (para. 3.03). These objectiveshave been largely achieved. A total of 550 subprojects with a total invest-ment of W 119.4 billion (US$201.1 million) were financed under the two loans(para. 4.04), resulting in the creation of about 10,300 new jobs (para 4.09).Financial results of subprojects have been adequate (para 4.08) and 'AIB'sportfolio has remained relatively trouble-free (para 4.08). A componentincluded under each project to reach smaller enterprises and labor-intensiveprojects elicited a greater response than expected as total lending for thispurpose under each loan surpassed the targeted amounts (para 4.09).
Since SMIB was already a well-managed organization at the time ofthe first Bank loan, its involvement with the Bank resulted in some modestfurther institution building. As under the first project, SMIB continued tofollow satisfactory operational procedures (paras. 5.03, 5.04 and 5.05).These procedures were further strengthened by introduction of a systematicstaff training system under the two projects under review. SMIB's branchnetwork expansion has been carefully planned and it has maintained the qualityof its management and staff despite its considerable growth over the pastseveral years. SMIB has generally maintained a satisfactory financialperformance and position (paras. 6.07 and 6.08). SMIB's portfolio is in asatisfactory condition; adequate provisions for possible bad debts have beenmaintained. It has been in compliance with the long term debt/equity ratio of10:l, covenanted under the Loan Agreement, having received additional equitycontributions from the Government as needed.
The major governmental priority outlined in SMID's Development Stra-tegy, formulated in consultations with the Bank, was to disperse industriesfrom the Seoul and Busan areas (para. 4.06). Toward this objective, projectsubloans to Seoul and Busan were limited to 50% of the loan amount under Ln.
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1507-K0 and 451 under Ln. 1749-K0. Actual figures were 481 and 331, respec-tively, and thus well within the target.
Having achieved the major objectives of the second and thirdprojects, SMIB's goals under its most recent Bank loan, Ln. 2515-KO are:(a) to reduce arrears, and (b) to define its role in a liberalized financialsector. The arrears reduction program aims at maintaining arrears to a levelof 31 of portfolio during 1985-89, which would be remarkably good for aninstitution dealing with the relatively risky SMI sectir. In order to help inthe definition of the role of a specialized SMI bank in a liberalisingfinancial system, and to examine whether SMIB should develop alternativesources of funding and broaden its clientele and the financial services itprovides a study has been commissioned. The study which would review thisissue will be completed by July 30, 1986.
From the review of performance of Ins. 1507-K0 and 1749-KO, thefollowing lessons emerged:
(a) although the objectives of the two loans were fully achieved, withhindsight the Bank could have been more active in supporting theinstitution building of SMIB. For example, the study on the futureof SMIB, which is to be implemented under the SMI loan (Ln. 2515-K0)could have been incorporated under the two earlier loans. Inaddition, some measures to reduce SMIBs substantial reliance on theGovernment for term resources, could have encouraged SMIB to movetowards self reliance for term resources (for example, commercialborrowing and other longer term financial instruments);
(b) despite the fact that the overall performance of the subprojectswere satisfactory, the ex-post ERRs of a number of subprojects fellbelow SMIB's estimates (para. 4.09). It is an indication of SMIB'seconomic appraisal, generally, being optimistic. The Bank couldhave focussed its attention to making suggestions for improving thisaspect. Fortunately, however, this optimism in economic evaluationhas not resulted in the financing of any unviable projects;
(c) prepayments to SMIB by relatively a large number of subborrowersunder the two loans was prompted by subborrowers' perception ofcontinued decline in the value of Won vis-a-vis US dollar and theirreluctance to carry the exchange risk on their subloans(para. 4.08). In other words, the effective carrying cost of Bankfunds to the end users far exceeded the cost of domestic currencyfunds used to repay the Bank subloans; invariably the domestic fundscarried interest rates lower than the free market rates. In recentyears this issue has become quite serious and has adversely affectedthe rate of utilization of Bank loans for SMI enterprises. Consi-dering that there is a role for the Bank to play, both in the SMIsubsector and institution building of SMIB and CNB, a workablemechanism should be developed so as to eliminate the bias againstforeign exchange loans; and
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(d) besides its sound appraisal quality, the success of SMIB in devel-oping and financing SMI enterprises is, to a large extent, a func-tion of (a) its large branch network and (b) its commercial bankingactivities which enable 3MIB to maintain a constant close contactwith its borrowers. This provides in most cases an early warning ofpotential operational and debt service problems. This institu-tional model could be reflected by the Bank in its SMI operations inother countries.
PROJECT COMPLETION REPORT
KOREA: THE SMALL AND MEDIUM INDUSTRY BANK(Loans 107 and 1149-KO)
I. INTRODUCTION
1.01 Project Context. The Bank's relationship with SKIS dates back to1975 when the first Bank loan (No. 1175-KO) for US$30 million war approved.The first loan was followed by five additional loans to SMIS amounting toUS$304 million: Ln. 1507-KO, 1977, for US$55 millions Ln. 1749-KO, 1979, forUS$60 million; Ln. 2004-KO, 1981, for U8$60 million, Ln. 2213-KO, 1982, forUS$29 million (a component of a US$70 million loan for the Small and MediumMachinery Industry Project) and Ln. 2515-KO, 1985, for US$70 million (a com-ponent of a US$111 million loan for the Small and Medium Industry Project).All these loans were to assist the development of the country's SMI sector.In accordance with the general guidelines for preparing PCRs, the presentreport covers the evolution of SMIS and the Bank's relationship with it par-ticularly over the last five years (1980-84), and focusses on the subprojectsfinanced under the second and third loans (Ln. 1507-KO and Ln. 1749-KO).
1.02 Evaluation of Results of Previous Bank Assistance. In 1983 OEDissued a Project Performance Audit Report (No. 4577 dated June 23, 1983)covering first Bank loan (Ln. 1175-KO) to SMIB, on tha basis of a PCR done in1980.
1.03 Status of Bank loans to SKIS is given below:
STATUS Of BANK LOANS TO SMIB AS OF JANUARY 31, 1986(US$ million)
/a Total loan amount of Small and Medium Machinery Industry Project is US$70 million, ofwhich US$29 million is allocated to SMIS.
/b Total loan amount of SMI Project is US$111 million, of which US$70 million isallocated to SMIB.
/c Loan agreement not signed yet.
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II. ENVIRONMENT
The Industrial Sector
2.01 Rapid industrialization has been the cornerstone of Korea's long-term economic growth. At 15%, the growth rate of Korea's manufacturing sectorranked among the highest in the world between 1960 and 1983. Dynamic growthhas been led in particular by manufactured exports, which primarily consistedof light industrial goods in the early 1960s but today include a diverse rangeof goods including steel products, electronics and chemicals.
2.02 During the 1960s Korea's development was associated with an inter-ventionist approach by Government whose key policies included: comprehensiveexport incentives; an extensive system of directed, concessional credit; andsubstantial spending on human and physical infrastructure. This approach wassuccessful until the two oil crises in the 1970s when it was found that: thepromotion of heavy and chemical industries had led to an increase in debt andexcess capacity; directed credit for priority industries had crowded out alarge numbers of companies, particularly SMIs and forced them to resort toinformal credit markets; and despite the continuous emphasis on technologydiffusion and technical training, a wide gap had emerged between thecapabilities of smaller companies and the larger corporate groups that werethe main focus of Government attention.
2.03 Recognizing these weaknesses, the Government adopted a new approach,emphasizing the bigger role of market mechanism, under the Fifth Five-YearPlan (1982-86). Government is now committed to policies of industrial, tradeand financial liberalization. Given these initiatives the prospects forfurther industrial development are bright provided that recovery in the OECDcountries can be strengthened.
SMI Sector
2.04 Small and Medium Industries (SMIs), which are defined as havingtotal employees of 50 to 700, depending on industries, with an assets ceilingof W 4 billion to 8 billion, have played a significant though declining rolein Korea's industrialization. In 1963, SHIs accounted for 62% of manufactur-ing jobs and for 50% of manufacturing value added compared to 541 and 361,respectively in 1982. This decline occurred due to (a) the growth of success-ful SMIs into large-scale firms taking advantage of economies of scale; and(b) previous Government policies which hampered SMI access to credit and otherneeded resources.
2.05 Recognizing these weaknesses the Government under its Fifth Five-Year Plan (1982-86), adopted a new approach, aimed at strengthening the SMIsector in the context of Government's broader objective of improving indus-trial efficiency. Specific policy measures in support of SMIs include:(a) financial assistance; (b) extension services, provided primarily by theSmall and Medium Industry Promotion Corporation (SMIPC); (c) promotion ofsubcontracting, which remains underdeveloped and problem-prone; and (d) tech-nology development assistance provided by institutions like the Korea
Technology Development Corporation, the Korea Technology Advancement Corpora-tion and the Korea Institute of Economics and Technology.
2.06 Financial Assistance. In the early 1960s, in addition to theestablishment of SMIB and CNB, the Korea Credit Guarantee Fund was set up toguarantee debt repayment, earmarking 40% of total outstanding guarantees forSMIs. City banks are expected to allocate 35% of their incremental loanportfolio to SMIs every year, while regional banks are supposed to allocate55Z. The Government has also set up the Small and Medium Industry PromotionFund (SMIPF) to help redress the neglect of SMIs in the allocation of creditduring the 1970s. SMIs can use the proceeds of the SMIPF to finance bothdomestic and imported equipment. SMIPF, channeled mainly through SMIB,accounted for about 10X of SMI capital investment in 1984.
III. SMIB'S ROLE AND BANK LOANS' OBJECTIVES
3.01 SMIB was incorporated under the Small and Medium Industry Act ofJuly, 1961 to extend financial and technical assistance to SMIs (as defined inpara 4.02). As a bank, it engages in commercial banking, including the mobi-lization of deposits, issuance of credit and short-term lending for workingcapital. As a development institution owned by the Government, it provideslong-term finance to its borrowers, the SMI sector in Korea. Like otherspecialized institutions, SMIB is subject to the broad supervision of theMinistry of Finance (MOF) whose approval is required for the revision ofSMIB's by-laws, operating manuals, annual plan of operations, and the appoint-ment of top management. Regarding commercial operations, SMIB is furthersubject to supervision by the Bank of Korea (BOK).
3.02 The Bank's association with SMIB dates back to 1974, when the KoreanGovernment submitted an application to the Bank for a first loan of US$30 mil-lion. The loan was approved and signed in November 1975 and became effectivein January 1976. It was closed without an extension in March 1980. In June1983 OED prepared a Project Performance Audit Report (Report No. 4577, datedJune 23, 1983) on the loan which was based on the first PCR on SMIB preparedby the East Asia and Pacific Regional Office. The PCR and PPAR covered theevolution of SKIB to 1979. The PPAR supported the conclusion of the PCR thatthe Bank's objectives of resource transfer and institution building wereachieved successfully. It also pointed out that the appraisal goals for theproject which included employment creation, increased sales and exports wereattained. As an appropriate allocator of Bank resources to SMIs in Korea andwith its operational capability, SMIB was recommended for a new loan of US$55million. The second loan (Ln. 1507-KO) was approved in December 1977 andthird loan (Ln. 1749-KO) of US$60.0 million in July 1979.
3.03 Loan Objectives. The main objectives of the two loans were to:(a) transfer foreign currency resources to SMIs with an emphasis on reachingsmaller enterprises and labor intensive projects; (b) continue institutionbuilding, which had been remarkably enhanced under the first project; and(c) help achieve objectives outlined in its Development Strategy such asgeographic dispersal and the Saemaul Program. SMIB's performance in achieving
these objectives has been satisfactory as brought out in the followingchapters of this PCR.
IV. UTILIZATION OF THE BANK LOANS
Rate of Utilization
4.01 Annex 1 gives the schedule of estimated and actual disbursement ofLns. 1507 and 1749-KO. SMtB's utilization of these loans has been satisfac-tory and both loans were committed and disbursed at a faster pace than esti-mated at appraisal; small amounts (US$11,399 for Ln. 1507-KO and US$25,773 forLn. 1749-KO) were cancelled. The loans were closed on the original dates, asstipulated in the loan agreements.
Subborrowers Characteristics
4.02 SMI in Korea were defined 21 by either total assets sizs or numberof employees at the time of processing Loans 1507-KO and 1749-K0._/ As thetwo SMI criteria were alternatives, the type of clients qualifying under chisdefinition could range from a labor-intensive enterprise with low total assetsto a very capital-intensive enterprise with a small number of employees. Withthe ob3ective of demarcating SMIB customers from larger-scale ones who areeligible to receive loans from the Korea Development Bank (KDB), the Bankreached understandings with SMIB that financing from Lns. 1507-KO and 1749-KOwould be restricted to enterprises with total assets below W 1 billion. Thenew ceiling was an increase from the W 600 million under the first SMIB Loan(1175-KO), to bring it in line with the Covernment's decision increasing thetotal assets limit for SMIs in 1977. SMIB was in compliance with this agree-ment.
Subprojects Characteristics
4.03 Data on subprojects financed under Lns. 1507 and 1749-KO aresunmmarized in Annex 2 and the list of these subprojects with some pertinentdetails are given in Annexes 3 and 4. Ln. 1507-KO was used to finance231 subprojects, of which 12 were "A" subprojects (above the free limit ofUS$0.5 million) while Ln. 1749-KO was used to finance 319 subprojects, ofwhich 9 were "A" subprojects. These "A" subprojects were submitted to the
2/ In SMIB Act and Presidential Decree No. 38.
3/ For manufacturing the definitions were either maximum total assets sizeof W 500 million or a maximum employment size of 300 workers (revised to500 workers for selected industries in 1979.) According to PresidentialDecree (No. 11313) amended in 1983, the present criterion is the numberof regular employees, principally. For manufacturing the general limitis 300 with exceptions up to 700 for some labor-intensive sub-sectors.Further more, some industrial sub-sectors have restrictions on the sizeof total assets, which vary from W 4 billion to W 8 billion.
Bank for prior review and approval. Specific comments were conveyed to SMIBon only one subproject under Ln. 1507-KO in respect of all the other sub-projects, the original submissions were found satisfactory at that time. SMIBconsiders the appraisal report review process to be worthwhile, but too timeconsuming especially in case of 'A' subprojects. The free limit for bothloans were US$0.5 million. The maintenance of the limit did not imply anydissatisfaction with SMIB's performance but rather reflected the recognitionthat the US$0.5 million limit for the first loan was already high as ahown bythe very small number (4 out of 144) of "A" projects under the firitc loan.The ceiling on subloans and size of subborrowers were US$1 million andW 600 million, respectively, under the first loan. To take into account thesteady expansion of SMI these ceilings were revised to US$1.5 million andW 1 billion, respectively, under Lns. 1507/1749-K0 (outside the specialcomponent for small-scale enterprises and labor-intensive projects). Theaverage loan sizes under Lns. 1507/1749-K0 were US$238,000 and US$188,000,respectively."' Expressed in Won, the average loan size of Ln. 1749-KObecomes W 131.6 million, 13% higher than that of Ln. 1507-K0, reflecting theconsiderable devaluation of the Won and economic growth during this period.Taking inflation into account this indicates that SMIB catered to the needs ofsmaller enterprises.
4.04 Total subproject costs amount#4 to W 49.5 billion (US$101.2 million)for Ln. 1507-K0, and to W 69.9 billion ' (US$99.9 million) for Ln. 1749-KO,of which on an average SMIB financed 63% and 69%, respectively (both domesticand foreign costs). SMIB financing ranged from 25Z to nearly 97% for indivi-dual subprojects. Subproject cost estimates of SMIB have been fairly accu-rate; actual total project costs were within 2X of estimates for Ln. 1507-K0and 9% for Ln. 1749-R0. Causes for major cost overruns/underruns areexplained in Annexes 3 and 4. The largest cost overrun was 39% due to anincrease of equipment cost. The largest cost underrun of 45% was attributedto the scale-down of a project. Estimated subproject completion dates werealso satisfactory. The longest delay of 15 months under pn. 1747-K0 was dueto slow delivery of equipment from the US. Procurement 6 of directlyimported equipment was mainly from Japan, accounting for about 80% underLn. 159Q-KO and 70% under Ln. 1749-K0 in terms of foreign currency expendi-tures._7 This reliance on Japanese equipment was mainly due to the economicproximity of the two countries.
4/ The average loan size under the first loan was US$212,000.
5/ Estimated on the basis of actual data for 220 subprojects (95Z of thetotal) for Ln. 1507-K0 and 311 subproject (97%) for Ln. 1749-K0. Actualdata for remaining subprojects were not available.
6/ SMIB does not insist on ICB; instead it requests its borrowers to obtainmore than two independent quotations from potential suppliers.
7/ The percentage for Ln. 1795-K0 was 77%.
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4.05 Sectoral Distribution. An analysis of the sector distribution ofsubprojects financed under the two loans is given in Annex 5. Subprojectswere largely concentrated in two subsectors: (a) machinery/metal productsmanufacturing; and (b) textiles. These subsectors together accounted for 41Xand 47X of the amounts of Lns. 1507/1749-KO, respectively. In comparison withthe first loan, which allocated 81X of the loan to these two subsectors,SMIB's exposure in the two industries had been reduced reflecting the relativeimportance of these industries in the SMI sector in terms of their value added(43X for the two industries in 1982). The remaining portion was mainlyallocated to paper and chemical/petroleum subsectors. Since these werepriority, high growth industries, SMIB's concentration in them was justified.
4.06 Geographic distribution. In accordance with Government policy, SMI8tried to reduce the concentration of the industries in Seoul and Busan. Thetargets stated in its Development Scrategy were to raduce the proportion offinancing for Seoul and Busan to 501 (under Ln. 1507-KO), and then to 45X(under Ln. 1749-KO). The actual figures of 481 for Ln. 1507-KO, and 331 forLn. 1749-KO were well within those targets. Also in line with this emphasis,SMIB had financed using its own resources on small rural projects under theSamaeul program since 1974. By end-1981, 883 of these projects had beensupported by SMIB, with the total financing amounting to W 41.4 billion.,'
4.07 Component for Small-Scale and Labor Intensive Projects. As part ofits resource transfer objective, the first Bank loan to SMIB attempted toassist small industrial projects in Korea, which, due to their small size,were usually not eligible for financing by other Bank-assisted financialintermediaries namely, Korea Development Finance Corporation (KDFC, whichlater became the Korea Long-Term Credit Bank) and Korea Development Bank(KDB). After the first Bank loan, SMIB continued this attempt to reachsmaller enterprises and more labor-intensive projects. This was consistentwith the Bank's objective of contributing to the alleviation of povertythrough the financing of labor-intensive investment projects. Toward thatobjective Ln. 1507-KO earmarked a component of US$20 million (361 of the totalloan amount) for: (a) projects that would create employment at a grosscapital cost per job not greater than US$6,000; or (b) enterprises with fixedassets not exceeding US$250,000. The total amount financed under this compo-nent reached US$24.6 million (45% of the total amount) exceeding the earmarkedamount by over 201. As the results of this component were considered to besatisfactory, Ln. 1749-KO repeated the effort, earmarking US$25 million (421of the total loan). The gross capital cost per job was increased to US$8,500and the fixed assets limit became US$300,000. At project completion,US$37.4 million (62% of the total loan) went to this component, again wellabove target. It should be noted that the considerable increase of thiscomponent under Ln. 1749-KO should be appropriately discounted to the extentthat the above-mentioned ceilings, when expressed in Won, shifted considerablytoward middle-scale industry due to the substantial devaluation of the Wonfrom 1979 to 1981. However, a Bank loan to the Citizens National Bank (CNB)
8/ From the development strategy for 1982-83, the emphasis to help theSaemaeul program was dropped.
-7-
in 1980, intensified efforts toward attainment of this objective since CNB wasestablished to deal with small business and consumers.
Operational and Economic Performance of Subprojects
4.08 Operational Performance. Annexes 6 and 7 give operational detailsof the subprojects financed under Lns. 15071)749-KO. Under Ln. 1507-KO, totalsales generated by a sample of subprojects Z1 in the second year of operationamounted to W 54.5 billion, exceeding the corresponding appraisal estimatesfor the year by 27%. At the same time, actual profits fell short of projec-tions by 10%9lor the same year. Performance of a sample of subprojects underLa. 1749-K0,- was less successful. Total sales of W 26.9 billion (US$38.5million) in the second year were lower than the corresponding appraisalestimates by 3X and actual profits fell short of projections by 42% reflectingthe depressed state of the economy after the second oil crisis. Reflectingthe difference in profit level of the two loans, repayment performance as ofend-1984 was satisfactory under Ln. 1507-KO, with only three subloans inarrears, while there are 18 subloans in arrears under Ln. 1749-KO, includingnine of more than six months 1Annexes 8 and 9). Loan arrears on subprojectsfinanced under these loans - as percent of total loan amounts were 0.2% and0.8%, respectively, which is a very acceptable range. According to the morerecent data (as of July 10, 1985), 9 out of 21 defaulting subprojects underthe two loans have since become up to date while 11 of the remaining 12 are inthe process of legal actions, mainly auctions. Subborrowers who opted toprepay the entire Bank subloans amounted to 35 and 34 for Lns. 1507 and 1749-K0, respectively. These prepayments were largely encouraged by substantialdevaluation of the Won over the period as subborrowers perceived a furtherdecline in the value of Won and tried to avoid further foreign currencyexchange risk losses. Total amounts outstanding under the two loans as ofend-November 1985 were US$12.3 million (22% of the total) for Ln. 1507-KO andUS$25.0 million (43% of the total) for Ln. 1749-KO. This is in sharp contrastto outstanding in amortization schedules (stipulated in Loan Agreements) ofUS$43.3 million (79% of the total) and US$52.0 million (86.7% of the total),respectively. This indicates that repayment periods of the two loans weresignificantly shortened due to the prepayment and to a back to back repaymentschedule of each subproject, decreasing the advantage of long-term loansassociated with Bank's financing.
4.09 Economic Perform&nce. Annexes 6 and 7 present details of economicperformance of subprojects under the two loans. The overall outcome wassatisfactory. The contribution of SMIs to Korea's exports has been signifi-cant with an average of 21% of industrial exports originating in the SMIsector during 1982-83. Under Ln. 1507-KO exports of W 10.4 billion (19% of
9/ Due to the difficulty to trace all the track records of 550 subprojects,.a sample of 29 under Ln. 1507-KO and 30 under Ln 1749-KO, representingvarious subsectors and regions, were chosen to examine the performance ofthe project.
10/ The arrers situation of SIB as a whole is discussed in para. 6.09.
0
-8 -
total sales) were realized by sample subprojects in the second year ofoperation. The equivalent figure for Ln. 1749-KO was W 5.2 billion, alsoaccounting for 19X of total sales. These actual results of sample subprojectswere almost identical with projections, which were W 10.5 billion forLn. 1507-KO and W 5.8 billion for Ln. 1749-KO. Both loans contributed toimprovement in productivity and maintaining international competitiveness ofthe SMI sector. Estimated total incremental employment totaled 5,175 for Ln.1507-KO and 5,138 for Ln. 1749-KO, but fell short of projections by 12X and20%, respectively. The average investment cost per job under Ln. 1507-KO wasUS$19,624, compared to the projected figure of US$17,545. The cost for Ln.1749-KO was US$19,443, 15% higher than the original projection. Both FRR andERR calculated for a sample of 15 projects under two loans are satisfactory.The FRRs ranged from 19% to 392 and 10 projects remained within 102 of theestimated FRRs. The ERRs showed a wider range from 202 to 542 and only 5projects remained within 102 of the estimated ERRs. The four subprojects withprojected ERRs over 602 proved too ambitious s the actuals were between 242and 482.
V. INSTITUTIONAL ASPECTS
Management, Organization and Staffing
5.01 The SMIB Act provides for a dual Board structure. The Board ofPolicy deals with overall policy matters and comprises seven members includingSMIB's President (acting as Chairman); one representative each from MOP,Ministry of Trade and Industry (MTI), BOK, Korea Federation of Small Business(KFSB) and two members representing SMI entrepreneurs who are selected byMOF. The Board of Directors which used to be an executing body of managementfor daily operations, totally changed its function in April 1984 while theBoard of Policy retains the same function. It now has overall decision-makingauthority on important matters related to SMIB's operation and managementwhich include operational objectives, budget, funding and operational plans,disposition of retained earnings, etc. It has ten members including SMIB'sPresident and nine non-standing members comprising a Chairman of the Board ofDirectors, vacant as of July 1985, and eight directors. The Chairman andSMIB's President are appointed by the President of the Republic of Korea. Inconnection with this change, former directors were renamed as Senior VicePresidents. SMIB has as Executive Officers, one Deputy President and fiveSenior Vice Presidents, who are appointed by the President of SMIB out of SMIBstaff. Before this change, the dual board structure performed adequately,allowing SMIB's management sufficient operational autonomy. As for the newstructure, it is too premature to draw a conclusion.
5.02 SMIB has 21 departments in its headquarters in Seoul, 173branches/sub-branches distributed throughout the country and three representa-tive offices located abroad. SMIB has aggressively expanded its branch/sub-branch network from 116 in 1980 to 173 in 1984. Total staffing increased from3,535 in 1980 to 7,325 in 1984. At end-1984, its staff strength included1,611 professionals (22% of total). Administrative expenses in the period1980 to 1984 have remained at about 32 of average total assets, the same level
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as expected at appraisal, indicating that SMIS's expansion during this periodwas carefully planned and efficiently executed. SMIB is a well-managedinstitution.
Procedures and Standards
5.03 Project Appraisal. SMIB's appraisal capability was satisfactory atthe time of the first Bank loan and this standard was maintained. Loan appli-cations are processed by the branch office with assistance when necessary fromthe head office's Extension Services Department for technical aspects and theCredit Analysis Department for credit checks. Working capital loans take intoaccount an elaborate point scoring system which emphasizes the borrower'scredit rating and collateral. Local currency equipment loans require moredetailed evaluation and basically are approved on the same basis. Foreigncurrency equipment loans require much more rigorous analysis with FRR and ERRcalculations required for all "A" subprojects. Both the coverage and qualityof appraisal are sufficient. For free-limit subprojects, SMIB submits t. theBank a simplified "Project Summary" giving only the essential financial undeconomic project data as agreed during appraisal of Ln. 1507-K0. In general,SMIB's selection of subprojects has been satisfactory; there were 13 rejec-tions under Ln. 1507-K0 and 35 under Ln. 1749-K0. The prudent selection ofsubprojects together with relatively high growth in the economy have beenresponsible for good repayment performance under both loans. In 1977, SMIStransferred appraisal and supervision operations for its foreign loans to itsbranch offices, and set a free limit for general managers' approval ofUS$100,000. The limit was revised to US$200,000 in 1982, and again toUS$300,000 in 1984 in parallel with the upward revision of domestic currencyterm loans. The sanction expedited the loan processing period, almost halvingthe time between receipt of a subproject application to the opening of aletter of credit. The training program on appraisal and supervision techni-ques, which started in 1977 continues on a semi-annual basis. The text coversbroad aspects of loan processing.
5.04 Project Supervision. During implementation of projects under Loans1507-K0 and 1749-K0, SMIB continued to follow supervision procedures whichwere considered satisfactory under the first projects. All loans are super-vised by the staff of the branch office involved, with assistance whenrequired by the head office. Projects are visited at least once a year fornormal projects and as often as necessary for problem projects. Projectsrequiring technical input are referred to SMIB's own Extension ServicesDepartment or to Small and Medium Industry Promotion Corporation (SMIPC).Projects encountering financial or operational difficulties are closelymonitored by the responsible branch office. SMIB branch managers havereceived training in basic managerial and financial problem solving. Projectsupervision is also assisted by SKIB's Applied Research Department (expandedas a result of Ln. 2004-K0, SMIB Iv) which periodically prepares and circu-lates bulletins/papers on practical solutions of common SMI problems.
5.05 Procurement. SMIB's procurement procedures conform to governmentguidelines and to the special requirements of small firms; these procedureswere considered quite adequate to meet the Bank's requirements under its Loans1507 and 1749-K0. Procurement is normally based on limited competitive bid-
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ding procedures with more than two competitive quotations from potentialsuppliers. Bid evaluation for foreign currency loans is done by staff of theForeign Loan Department. SMIB's procurement procedures were further streng-thened as a result of measures implemented under Ln. 2004-KO. SMIB's controlover disbursement is satisfactory and ensures that funds are disbursed forapproved purposes.
VI. OPERATIONAL AND FINANCIAL PERFORMANCE 12/
Operational Performance
6.01 SMIB offers a wide variety of services including equipment loans,working capital loans, guarantees, checking accounts, overdrafts and extensionservices.
6.02 Equipment Loan Operations. SMIB's equipment loans may be in eitherlocal or foreign currency. Local currency loan approvals showed substantialgrowth (a nominal 36%) during 1980-84 (Annex 11). On a yearly basis, actualequipment loan approvals have invariably exceeded projections done at the timeof appraisal of both Lns. 1507 and 1749-KO. In a sharp contrast however,foreign -urrency equipment loans have fallen consistently behind the appraisalestimate , and their annual volume has also fluctuated. The most notable yearwas 198' when total foreign currency equipment loan approvals declined to W 28b-illion -m W 40 billion in 1983. This decline can be attributed to thesetting uis if the Small and Medium Industries Promotion Fund which provideslocal curr aicy denominated loans for financing of both domestic and importedequipment and also the fact that more locally manufactured equipment is beingsubstituted for imported. Of the total loan portfolio outstanding, foreigncurrency equipment loans accounted for 17% in 1980 but only 6% in 1984, whilethe projection under Ln. 2004 for 1984 expected 10%. Local currency equipmentloans increased from 16% in 1980 to 25X in 1984, which was projected to be152.
6.03 Working Capital Loan Operations. Working capital loans have grownby 24% (nominal) since 1980 in tetrms of outstanding. This growth was muchfaster than projected under Loans 1507 and 1749-KO. However, 1984 was excep-tional in that the actual net increase in working capital loans was less thanthe appraisal expectations. Portfolio turnover rate of these loans hasaveraged about seven weeks during the past five years.
6.04 Guarantee Operations. SMIB issues guarantees (almost all short-term, averaging less than 90 days) against trade documents, payments of importduties etc. Outstanding guarantees as of year-end 1984 totaled W 158.8 bil-lion, of which 9Z were in foreign currency. The total is almost four times as
10/ Since projections under Ln 1749-KO covered only up to 1982, projectionsunder Ln. 2004-KO were used for 1983-84 period to cover the recent fiveyear period.
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much as the projection under Ln 2004-KO. Long-term guarantees are issued,mainly in foreign currency, to other financial institutions lending to clientsof SMIB whose collateral is already pledged to SMIB.
6.05 Investment Operations. SMIB invests in government securities, bondsand debentures, and makes equity investment in SMI companies. For the pastfive years, Government securities have accounted for approximately 75-80X ofinvestments and are typically three to five year National Investment Bondsredeemable at face value yielding approximately 10% per year. SMI debenturesand bonds are also medium term (2-3 years) instruments yielding 10-14% peryear. As of end-1984 the outstanding balance of SMIB investments in equity orshares of SMI companies amounted to W 1,710 million or 18Z of totalinvestment.
6.06 Extension Services SMIB's extension services, which started shortlyafter its establishment, continue to provide appropriate solutions to manage-rial and technological problems faced by SMI clients. In-plant consultantservices on a no-cost basis were requested by only 46 clients in 1979 but thenumber of such requests has since steadily increased and amounted to about150 firms in 1984, the same as in 1977/78. The Extension Service Departmentwhich has a professional staff of 36 (as of end-1984) also conducts seminarsfor SMI executives, assists when necessary in assessing technology require-ments for loan appraisals, and issues selected studies on SMI topics through atechnical newsletter. Previously, the Extension Department handled foreigncurrency loan bid evaluations but in 1983 this responsibility was transferredto the Foreign Loan Department. Considering that SMIPC's extension servicesare available on a referral basis, SMIB's extension services are adequate. Onthe whole SMIB's Extension Services Department's performance was consistentwith the expectations at the time of appraisals.
Financial Performance
6.07 Financial Position. A comparison of SMIB's financial statements andratios for 1980-84 with those forecast at appraisal of Lns. 1507, 1749 and2004-KO is given in Annex 11. As of December 31, 1984 total assets amountedto U 3,431 billion (US$4.1 billion) showing a growth of 25% per annum since1980. The total assets were 8% less than the projection under Ln 2004-KO.SMIB's long-term portfolio has averaged approximately 27X of total assetsduring 1980-84. Of SKIS's total assets at end-1984, 67% were financed bycurrent liabilities (43X by sbort-term deposits), 26% by long-term liabili-ties, and 7% by equity. BOK borrowing increased from 7% of total assets in1980 to 14% in 1984. As of year end 1984 SMIB's paid-in capital amounted toW 157 billion as compared to W 57 billion at year end 1980. Reserve andretained earnings also increased substantially from W 17 billion to W 70 bil-lion for the period. Reflecting these improvements, SMIB's long-term debt toequity ratio has declined from 4.8:1 in 1980 to 3.7:1 in 1984, well below thecovenanted ratio of 10:1. SMIB's total debt to equity ratio has also declinedfrom 18:1 in 1980 to 15:1 in 1984. The current ratio has varied between 0.9and 1.1 during the five year period ending 1984; however, SMIB is in no dangerof illiquidity as it has good access to BOK resources. The financial positionof SMIB is satisfactory.
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6.08 Financial Performance. SMIB's projected and audited income state-ments for 1980-84 are given in Annex 12. For the period 1982-84 SMIB's levelof income and profits was substantially lower than forecast. SMIB's grossspread declined from 5.1 in 1980 to 3.1 in 1982 and 1983, when it sufferedlosses. This resulted from Government's decision in June 1982, to reduceinterest rate ceilings on loans from 14Z to 10 and on deposits fr#j 121 to8Z. The new loan interest rate was mandatorily applied on all outstandingloans, but the new interest rate was applicable only on new deposits. Since alarge proportion of deposits had longer term maturities extending up to 5years, there was a considerable imbalance in the structure of SMIB's intereston lending and borrowing. A new and higher interest rate structure was intro-duced by the Government in 1984 which along with repayments of older andhigher cost deposits increased SMIB's gross spread in that year to 3.61 andenabled it to make a profit of W 5.5 billion. Barring any further sudden dis-tortion in interest rate structure, SMIB's profitability is expected to remainsatisfactory in future years.
6.09 Portfolio Quality. Considering that SMIB serves the relatively highrisk SMI sector and its portfolio consists of over 50,000 clients with about160,000 loan accounts outstanding, its portfolio is in an extremely goodconditon (Annex 13). As of end 1984, 1,629 clients were in arrears withoverdue payments of principal and interest totalling W 64 billion or 2.71 oftotal loan portfolio; 591 of that amount had been arrears less than threemonths and only 61 for more than a year. Total outstanding principal affectedby arrears accounted for 2.91 of total outstanding loans as of end 1984 and isbelow the targeted rate of 3.01 to be achieved through an arrears reductionprogram agreed with the Bank in 1985. By loan category the same ratio has notvaried significantly: 2.81 for foreign currency loans; 2.91 for workingcapital loans; and 3.01 for domestic currency equipment loans. SMIB's loancollection performance has usually been good with collection rates of 93.81for local equipment loans in 1984, 95.41 for foreign currency equipment loansand 99.6% for working capital loans (Annex 14).
6.10 Provisions. Under the SMIB Act, 251 of net income is to be setaside as an equity reserve covering possible loan losses. As of end 1984,reserves and retained earnings reached W 70 billion. In addition, provisionsfor doubtful accounts are set aside. In 1980 this was adjusted upward from a0.031 to 0.71 in view of the adoption of new policy to: (a) increase thelending ratio to the appraisal value of collateral; and (b) increase lendingto extremely small enterprises without collateral. However, as the actualwrite-off rates during 1980-82 were 0.012X on average, SMIB reduced the ratioto 0.21 in 1983. The ratio is satisfactory in the light of this low arrearsratio.
6.11 Audit. SMIB's accounts have been audited since 1977 by independentauditors acceptable to the Bank; their reports have been unqualified. Longform audit reports were received by the Bank within the specified period offive months.
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Resource Mobilization
6.12 SMIB's efficiency in resource mobilization has been satisfactoryover the period 1980-84 with total resources (domestic and foreign) increasingat an average rate of 26% per year, allowing the loan portfolio to grow atapproximately the same rate of 24Z (Annex 15). Domestic resources have grownat a much higher rate (292) than foreign resources (112) and thus the mix ofdomestic to foreign resources has gradually shifted from 78:22 to in 1980 to87:13 in 1984, supporting a higher local currency content in SMIB's portfo-lio. The share of long-term resources in total domestic currency resourceshas remained stable at about 292 over the period 1980-84, reflecting the highproportion of short-term deposits in SMIB's total resources. This hasconstrained SMIB's ability to supply larger amounts of long-term equipmentloans.
6.13 Domestic Currency Resources. SMIB has become increasingly dependenton the Government for a large part of its domestic currency resources. During1980-84, SMIB's long-term and short-term borrowings from various governmentfunds such as the National Investment Fund (NIF) and BOK grew from 15% to 261of SMIB's local currency resources. This represents an annual average growthof 661. Long-term deposits grew at only 19% p.a. during 1980-84, and short-term deposits by 232 p.a., while borrowing from BOK showed a 412 annualaverage growth. However, in an effort to be independent from Governmentresources, SMIB has also raised about W 212 billion in the years 1982-84through the issuance of both long-term and short-term debentures with anaverage interest rate of 122 p.a.
6.14 Foreign Currency Resources. Between 1965 and 1984 SMIB hadmobilized a total of approximately US$607 million in foreign currencyresources. ADB (US$215 million) and the Bank (US$234 million) have suppliedabout 742 of these resources while the Korea Foreign Exchange (KFX) scheme wasthe next largest source supplying US$75 million or approximately 12Z of thetotal. The KFX scheme, which was funded during 1976-80 with the foreignexchange reserves of the 80K, is no longer active. In recent years (1980-84)SMIB has received more than 892 of its foreign exchange resources from ADB(US$90 million) and from the Bank (US$89 million). The balance was providedby KFW and from Yen-denominated ADB cofinancing.
Vil. CONCLUSIONS
7.01 Following up on Bank's first loan to SMIB, the two Loans (1507 and1749-KO) under review aimed: (a) to provide foreign currency resources, whichwere largely unavailable to SMIs due to a directed credit system, with anemphasis on reaching smaller enterprises and labor-intensive projects; (b) tocontribute to the institution building process; and (c) to support govern-mental priorities outlined by SMIB's Development Strategy. These objectiveshave been achieved satisfactorily. The provision of funds to the SMI sectorto finance imported equipment had the intended results. A total of 550projects with a total cost of W 119.4 billion (US$201.1 million) were financedunder the two loans (para. 4.04) and about 10,300 new jobs were created as a
- 14 -
result of the two loans (para. 4.09). Financial results of subprojects havebeen adequate and the portfolio has remained relatively trouble-free. Acomponent included under each project to reach smaller enterprises and labor-intensive projects elicited a greater response than expected( para. 4.07), andtotal lending for the purpose under each loan surpassed the targeted amounts.
7.02 Since SMIS was already a well-managed organization at the time ofthe first Bank loan, its involvement with the Bank resulted in some modestfurther institution building. As under the first project, SMIB continued tofollow satisfactory operational procedures. These procedures have beenstrengthened by a systematic training system under the two projects underreview. SMIB's branch network expansion has been carefully planned and it hasmaintained the quality of its management and staff despite its considerablegrowth over the past several years. SMIB has generally maintained satis-factcry financial performance and position (paras. 6.07 and 6.08). SMIB'sportfolio is in a satisfactory condition; adequate provisions for possible baddebts have been maintained. It has been in compliance with the long termdebt/equity ratio of 10:1, covenanted under the Loan Agreement, havingreceived additional contributions from the Government as needed.
7.03 The major governmental priority outlined in SMIB's DevelopmentStrategy was to disperse industries from the Seoul and Busan areas(para. 4.06). Toward this objective, project subloans to Seoul and Busan werelimited to 50% under Ln. 1507-KO and 45% under Ln. 1749-KO. Actual figureswere 48% and 33X, respectively, and well within the target.
7.04 From the review of Lns 1507-KO and 1749-KO following lessonsemerged:
(a) although the objectives of the two loans were fully achieved, withhindsight the Bank could have been more active in supporting theinstitution building of SMIB. For example, the study on the futureof SMIS, which is to be implemented under the SMI loan (Ln. 2515-K0)could have been incorporated under the two earlier loans, Inaddition, some measures to reduce SMIBs substantial reliance on theGovernment for term resources, could have encouraged SMIB to movetowards self reliance for cerm resources (for example, commercialborrowing and other longer term financial instruments);
(b) despite the fact that the overall performance of the subprojectswere satisfactory, the ex-post ERRS of a number of subprojects fellbelow SMIB's estimates (para. 4.09). It is an indication of SKIB'seconomic appraisal, generally, being optimistic. The Sank couldhave focussed its attention on making suggestions for improving thisaspect. Furtunately, however, this optimism in economic evaluationhas not resulted in the financing of any unviable projects;
(c) sixty-nine subborrowers (out of 550) opted to prepay the entire Banksubloans (para. 4.08). This was prompted by subborrowers' percep-tion of continued decline in the value of the Won vis-a-vis the USdollar and their reluctance to carry the exchange risk on theirsubloans. In other words, the effective carrying cost of Sank funds
- 15 -
to the end users far exceeded the cost of domestic currency fundsused to repay the Bank subloans; invariably the tomestic fundscarried interest rates lower than the free market rates. In recentyears this issue has become quite serious and has adversely affectedthe rate of utilization of Bank loans for SMI enterprises.Considering that there is a role for the Bank to play, both in theSMI subsector and institution building of SMIB and CNB, a workablemechanism should be developed so as to eliminate the bias againstforeign exchange loans; and
(d) besides its sound appraisal quality, the success of SMIB indeveloping and financing SMI enterprises is, to a large extent, afunction of (a) its large branch network (173 branches in 1984), and(b) its commercial banking activities including deposit taking andworking capital loans which enable SMIB to maintain a constant closecontact with its borrowers. This provides in most cases an earlywarning of potential operational and debc service problems. Thisinstitutional model could be reflected by the Sank in its SMIoperations in other countries.
- 16 - ANNX I
THE SMALL AND MEDIU?4 INDUSTRY RANK (LOANS 1507 ANI 1749-K0)
PROJECT CAWPLUTTOM REPORT
Schedule of Esttmated and Actual nisbur.ementsunder Loans 1501 and 1749-K(0
(Us$ million)
Loan 1507-10 Loan 1749-K0Projected Actual Projected Actual
disbursements dishursements disbursements disbursementsAmount 2 a Amount 2 /a Amount 2 /a Amount X /a
/a Since 110 subprojects out of 231 for Loan 1507-K0 and 102 subprojects outof 319 for Loan 1749-KO were already repaid as of end-1984, it becamedifficult to trace all the subproject data. As an alternative, a Bankmission in 1984 agreed that SMIB choose about 30 samptl subvroiects foreach loan, representing various industries and locations. The figuresquoted in the parentheses are based on these sample projects. Averageforeign exchange rate applied is W 489.2 per U8$1 for Loan 1507-K0 andW 700 per US$1 for Loan 1749-KO.
/b For 11 subprojects, of wiich actual cost data were not available,estimated cost of US$7.9 million was used.
/c Estimates based on the relationship between projected and actual figuresof a sample of subprojects.
/d For 8 subprojects, of which actual cost data were not available,estimated cost of US$1.4 million was used.
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THE SMALL AND P4E1tUI tNDUSrItY SANK (LOANS 1507 AND 1749-KO)
PROJECT COMPLETION REPORT
Met Resoorce ostn.1980-84(Won millon)
1980 1081 1982 1983 1984
1. Dotettc CurrencyA. Leap-Term
Equtty: Paid-in capital 57,06U 107,060 137.060 147,060 357,060Reserves and retained earnings 19,325 34,596 3,25 3,541 66,S14
Total Equtty 76,385 141,656 140.310 150,601 223,S74
SN? debentures - - 2,474 56,844 15,472borrowtags from Government 10,858 16,154 19,664 19,767 22,397Borrowings from NIP and IRW, ERF, KFTIF, SIAKF, KDPCF and
Resources available for further disbursement (111,785) (156,182) (181,424) (136,524) (242,448)Lesss Undisbursed commitmentsResources avatlable for further comtmtment (111,785) (156,182) (181,424) (136,524) (242,448)
B. Short-TermDemand deposits 189,210 244,460 417,384 584,277 583,633Savings deposits (less than one year) 470,430 634,097 728.872 791,170 895,316Short-term borrowings from BOK 84,901 269,794 411,323 45S,650 464,786SRI debentures - - 15,620 51,771 71,485Olter .resources 33,584 34,472 38,814 33,934 34,923
Total Short-Term Domestic Currency Resources 778,125 1,182,823 t.612,03 1916.802 2.050.141
Resources available for further disbursement 48,321 27,719 85,140 152,009 126,578Less Undisbursed loan commitments - - - - -Resources available for further commitment 48,321 27,719 85,140 152,009 126,578
2. Foreign 9,rrencyTotal foreign currency resources 292,048 352,377 383,195 425,938 441,613leess: Foreign currency loans disbursed 237,606 279,880 280,499 318,748 370,093Resources available for further disbursement 54 442 72 497 102 696 107 190 71 520Less: Undisbursed loan commttments 142871 216,S96Net resources available for further commitment 37.645 57 626 94,318 84.470 54 924Less: Unommitted approvals 1,409 6 MN 1,150 8,243Nat resources available for approvals 36.236 50,787 93.168 76.227 51.416
/a Long-term lease deposits, properttes acquired through foreclosures and recetvables from the sale of such properties.
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