15. Session 6 Kwon KOR PPT

7/28/2019 15. Session 6 Kwon KOR PPT

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ADB-OECD Workshop on EnhancingFinancial Accessibility for SMEs

2013/3/7 Session 6

1

March 7, 2013

The Role of Public Finance for Korean SMEs

Overview

. Operation Status of SBC Policy Funds

. Future Direction and Role of Policy Funds

.Korean Economy and SMEs


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I. Korean Economy and SMEs

4

Koreas Economic Growth

1948 1955 1965 1975 1985 1995 2005 2011

* GNI: $67 in 1953 $22,487 in 2011

Korea has transformed from one of the poorest countries into the worlds10th largest economy injust over 60years of economic development.

Rapid GrowthEconomic Stability

(1970s-80s)

Transition(1990s)

Mature Stage(2000s)

Industrialization(1960s)

1st(1973), &2nd(1979)Oil Crises

GovernmentEstablishment

(1948)

Sovereign

debt crisis

(2011)

($22,487)

Globalfinancial crisis

($17,041)

1996($12,518)

2007($21,632)

Korean War(1950~1953)

5-yearEconomic

DevelopmentPlan

(1962~1981)

Asianfinancial crisis

($7,607)

SeoulOlympics

(1988)


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5

SMEs

Share of SMEs in Korean Economy

99.9% 86.8%No. of Businesses (2010) No. of Employees (2010)

SMEs

88.0%(2,749,000)

8.1%(253,000) 3.8%

(120,000)0.1%(3,000)

Microenterprises

Smallenterprises

Mediumenterprises

Largeenterprises

37.7%(5,334,000)

19.3%(2,722,000)

29.8%

(4,206,000)

13.2%(1,872,000)

Microenterprises

Smallenterprises

Mediumenterprises

Largeenterprises

6

SMEs: (1980) 3.8 Bil.USD (35.2%) (2010) 196.1 Bil.USD(47.4%)

* Large Co.: (1980) 7 Bil.USD (64.8%)

(2010) 217.6 Bil.USD (52.6%)

No. of Businesses No. of Employees Added Value

< Growth of SME Manufacturers >

20

40

60

80

0

20

40

60

80

100

80 90 00 09

0

1

2

3

4

5

90

92

94

96

98

100

8 0 90 0 0 0 9

SMEs%

Largebusinesses%

EmployeesofSMEs%

AddedValuesofSMEs%(96.6%)

(3.4%)

99.5%

(0.5%)

(49.6%)

(50.4%)

77.1%

(22.9%)

(35.2%)

(64.8%)

47.4%

(52.6%)

SMEs: (1980) 29,779 (96.6%) (2010) 112,897 (99.5%)

* Large Co.: (1980) 1,044 (3.4%)

(2010) 567 (0.5%)

SMEs: (1980) 1,000,000 (49.6%) (2010) 2,289,339 (77.1%)

* Large Co.: (1980) 1,014,000 (50.4%)

(2010) 679,972 (22.9%)

SMEs Large Co. Large Co. Large Co.SMEs SMEs

1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010

*SME Manufacturers : Business with more than five employees


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7

Development of SME Policies

1970s~1980s

1960s

1990s

2000s

Present

Establishment of SME Policies: Legal foundation for promoting SMEs(with focus on industries and organizations)

- Framework Act on Small and Medium Enterprises(1966)

Protection and Promotion of SMEs: Large company-oriented economic development

policies focusing on vertical integration between large companies and SMEs

- 1st and 2nd Oil CrisesBuilt Foundation to support SMEs(SBC (1979), Korea Credit Guarantee Fund(1976))

Enhancement of SMEs Business Viability:

WTO (1995) policy shift towards autonomy, openness and competition

- Establishment of Small and Medium Business Administration(1996)

- KOSDAQ (1996), Special Act on Venture Businesses (1997),Special Act on Small Enterprises (1997), Womens Business Act (1998)

Structural Sophistication of SMEs:

Asian financial crisis (1998) promotion of new ventures and start-ups, Focus on

innovative SMEs

Strengthening the Basis for SME Competitiveness and Shared Growth

- Built Infrastructure for further growth of SMEs: promotion of start-ups, job creation, and global SMEs

- Shared growth between large compan ies and SMEs: fundamental industries, distribution/retailsector etc.

- Fostering new growth engines, as the green industry

8

SME Finance Challenges

SMEs suffer from disadvantages relative to larger firms in overallall management resources.

The government provides financial support for SMEs that are unable to get outloans from the bank

E.g.) credit guarantees, policy funds, aggregate credit ceiling system

Undervalued credit,Less favorable financing terms

Loan market instability,over-concentration of fundingdemands on the banking sector

Challenges in credit rating,higher credit risks

High cost unjustified by theprofit earned

Supply Side(Financial Institutions)

Demand Side(SMEs)


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9

Structure of SME Public Finance

Fund Consignment Fund ConsignmentFund Consignment

SBC(Execution institution under

the wing of SMBA)

Execution institutions underthe wing of individual government agencies

and local governments

Funding Investment

KVIC

Credit Guarantee

Direct Loans Business Loans Investment

BeneficiaryRecommendation

On-lending

Bank of Korea(Aggregate Credit Ceiling System)

Central Government(Operational Funds)

Local Government(Operational Funds)

Credit GuaranteeInstitution

SMEs

Financial Institution

KOFC

10

Policy Funds for SMEs

234.5

275.7

337.9

383.8403.2 400.9

413.5 419.5

11.211.5 11.7

12.0

14.614.3

13.714.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

0.0

100.0

200.0

300.0

400.0

500.0

05 06 07 08 09 10 11 12

bank loan SBC loan

3,290.9

2,877.3 2,847.2 2,866.4

5,323.6

3,032.7 3,048.23,293.6

25,42322,415

17,83715,441

59,968

18,094

23,581

28,334

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

05 06 07 08 09 10 11 12

Fund No. of SMEs

889.5953.9 971.7

1,177.5

2,031.2

1,277.5

1,431.9

1,583.4

3,511 3,4563,146

4,151

8,898

4,857

5,565

8,156

0

2,000

4,000

6,000

8,000

10,000

12,000

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

05 06 07 08 09 10 11 12

Direct No. of SMEs

604.6

502.0448.8

661.4

1,574.7

741.6781.5

980.7

2,6442,248

1,777

2,793

7,661

3,8234,315

7,027

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

05 06 07 08 09 10 11 12

Credit No. of SMEs

USD

billion US

D

billion

USDmillion No

.offirms U

SDmillion

USDmillion

No.o

ffirms

No.offirms

SME Loans by Banks and SBC SBC Policy Funds Provided

SBC Direct Loans Credit Loans of the Total SBC Direct Loans


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II. Operation Status of SBC Policy Funds

12

About SBC

Funding(policy funds)

Training for SME CEOs/employees and youth start-up promotion- CEO capacity building (Executive Management Program) and employee skills training

(technical skills, quality control, administration)

- Start-up Academy for promoting young entrepreneurship

DistributionChannel(marketing)

HR(HR

development)

The Small & medium Business Corporation (SBC) is a non-profit, government-funded

organization implementing government policies and programs for the sound growth and

development of Korean SMEs.

Technology(consulting, etc.)

Business diagnosis and employer/employee job matching- Tailored support via business diagnosis

(technical consulting, overseas recruiting support, etc.)

- Raising the profiles SMEs to attract young job seekers

BusinessDiagnosis

Step-by step support for SME exporters

(pre-engagement initial exporting advanced exporting)- Export capability assessment, on-line services Overseas delegations,trade fair participation Export incubators

* Overseas Business Network: 132 firms in 34 countries; 17 export incubators in 11countries

Funds by SME development phase: different loans for different needs- Start-ups Technology commercialization New growth

(Emergency business stabilization) Business conversion* Budget for 2012: 3.3 Bil. USD (Start-up Fund: 1.26 B il. USD)


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SBC Organization Structure

Office of President Auditing Office

Public Relations

President 30 Departments 31 Regional Offices 831 Employees 2 Business Support Centers

VP of BusinessFinancing Div.

VP of BusinessPromotion &Training Div.

VP of Capital AreaRegional

Headquarters

VP of CentralRegional

Headquarters

VP of SouthernRegional

Headquarters

SVP of Planning &Administraion

Planning & Budget

Administration

Fund Mgmt.

Sustainable Mgmt.

Business Strategy

Information

Technology

Business Loans

Convergent Financing

Corporate Diagnosis

Credit Risk Mgmt.

Trade Adjustment

Assistance & Business

Conversion Center

Human Resources

Development

Global Cooperation

Green Business

Marketing

Assistance

Quingdao Business

Support Center

SBTI :Central

Youth Startup

Academy

Metropolitan

Regional

Offices

Seoul(Main, Southeastern, Northern), Busan(Main, Eastern),

Daegu, Kyeongbuk(Main, Eastern, Southern) Incheon(Main,

Western), Gwangju, Jeonnam(Main, Eastern), Daejun,

Chungnam, Kyeonggi(Main, Eastern, Western, Northern),

Chungbuk(Main, Northern), Jeonbuk(Main, Western),

Ulasn, Gyeongnam(Main, Eastern, Western), Kangwon,

Kangwon Yeongdong, Jeju

SBTI : Daegu

Kyungbuk

Central Regional

Offices

SBTI : Honam,

Busan-Kyungnam

Southern

Regional Offices

Regional Offices

14

SBCs Geographical Presence

Qingdao BusinessSupport Center

Quingdao Business Support Center

Regional/District Offices

SBCs global and local presence supporting economic activities and co-prosperity of SMEs


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Role of SBC Policy Funds

Excludedfrom

support(IndustrialStructure

Adjustment)

Excluded fromSupport

(Left to the market)

Areas ofmarket failure(Eligible for policy

funds)

Low Medium High

Medium

High

Technology Feasibility

Accessto

Financing

Focus on Market Failure AreasStart-up promotion, Technology development,

Long-term facility support investment

High Growth Business

B - C

D

Eligible forcommercialbank loans

Eligible forpolicy funds

AAA~

BB

B~C

High potential SMEs with little access to commercial bank loans are carefully selected

to be transformed into high growth businesses.

Definition ofPolicy Funds

Allocation of limited financial resources to assistthe government in achieving certain policy goals.

16

Differentiated Services in Contrast to the Private Financial Sector

Focus is on helping high potential SMEs and early-stage start-ups with minimal access to the

private financial sector despite solid technology feasibility

A positive approach is taken to support strategic industries that lead to increased

production and employment

* 2012 : general industry(13.3%) + strategic industry(86.7%)

Focus on SMEs with little accessto the financial sector

% of small businesses(less than 50 employees)

(10)79.2(11)86.2 (12)87.1

Small Businesses(50 employees)

87.1%

Expanded support to early-stagestart-ups with high growth

potential

% of direct loans in policy funds

(10)39.2(11)45.2(12)50.4

Businesses Less thanFive Years old 50.4%

Positive approach in strategicindustry support

% of support to strategic industry

(11)87.6(12)86.7

Support toStrategic Industries86.7%


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Differentiated Services in Contrast to the Private Financial Sector(continued)

Conscious of short-term profitability, the private financial sector focuses on debt

recovery rather than growth potential in selecting recipient businesses

Direct and credit loans are provided to high potential SMEs that have solid technology

feasibility and bad credit

Provide credit loans to SMEs withweak collateral

% of credit loans in direct loans

(10)58.1(11)54.6 (12)61.9

Credit Loans61.9%

Expand direct loans to SMEswith bad credit

% of direct loans in policy funds

(10)45.4(11)53.3(12)55.3

Direct Loans55.3%

Increase the productivity of SMEsthrough long-term facility investment

loans

% of facility investment support

(10)66.5(11)65.3 (12)60.1

Facility InvestmentSupport60.1%

18

Financing of Policy Funds

Issued in accordance with the guidelines of the SME Promotion Act.

Funding from SBC-Bonds

Subsidized the gap between funding interest rates and policy fund interestrates

Government Contributions

(Unit : 2012 FY, million USD)

AA-Fitch Ratings,A+Standard & Poor (For FY 2012)

701 151

Expenses(B) Differences(B-A)

Subsidy 550

Category Income(A)


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Lending Terms of Policy Funds

Direct and indirect loans based on borrower preference

In the case of indirect loans, SBC set lending terms upon its business feasibi lity analysis and banksprovide the loans after receiving security from the borrower.

Interest rates are determined by policy funds standard rate reflecting the quarterly interestrate of the SME Promotion Bond, type of funding program, and the clients credit rating

(Policy funds standard rate for 1Q, 2013: 3.59%)

Lending period is longer than that of commercial banks

Loans for equipment: 3-year grace period, 5-year installment payment

Loans for working capital: 2-year grace period, 3-year installment payment* Credit loans: 5 years for equipment loans, 3-5 years for working capital loans

20

Policy Fund Application Procedure

Policy funds provide customized support via comprehensive diagnosis

Application

Received

Comprehensive

diagnosis

Company roadmap

planning

Linking further

support

Coordinatorsdesignated

SMEs

competitiveness

strengthened

Follow-up

Customizedsupporttailored toeach business

Funding,consulting

Marketing(export)

Training,Information-orientedmindset

Strength/weaknessanalysis

Mid/long-termstrategies

Plans to strengthencompetitivenessare established

Managementenvironment

Financialanalysis

Analysis of corecapabilities

TechnologyPotential etc

Regionalofficesof SBC

OrOn - Line


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Evaluation Model of Policy Funds

Business ratings are assigned based on technology feasibility, commercialization,

growth potential, management capability, and business plan feasibility.

Technology feasibility forms the basis of the rating, which is adjusted reflecting the creditrisk

* To formulate a better credit assessment framework, a quantitative non-finance model and CEO model are developed andadded to an improved version of the current finance model.

TechnologyBusiness FeasibilityAssessment Model

TechnologyFeasibility

Assessment


Rating


BusinessRating

LoanDecision

Bus

inessAssessment

CreditRisk

Finance RatingFinance Model

QuantitativeNon-Finance Rating

QuantitativeNon-finance Model

CEO RatingCEO Model

CreditRisk

Rating

Modelcombination

22

Evaluation Modules

SBC has a 54-module business evaluation system to appropriately allocateits policy funds.

Type of Module Description

Credit Risk EvaluationModules(5)

Technology Feasibility

Evaluation Modules(54)

Modules that use corporate financial and quantitative non-finance data

The evaluator makes a judgment based on non-financial factors

such as marketability, technology potential

and managerial abilities

Type of Evaluation Grading Structure

Credit Risk Grade(13)CR1, CR2+, CR2, CR3+, CR3, CR3-, CR4+, CR4, CR4-, CR5+,CR5, CR5-, CR6

Technology FeasibilityGrade(13)

J1, J2+, J2, J3+, J3, J3-, J4+, J4, J4-, J5+, J5, J5-, j6

Corporate Rating Grade(13) SA+, SA, SB+, SB, SB-, SC+, SC, SC-, SD+, SD, SD-, SE+, SE


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Standard Interest Rate of Policy Funds

Standard rate of policy funds: interest rates of the Public Capital Management Fund interest rates of SBCs SME Promotion Bond

* The quarterly interest rate of SME Promotion Bond is an average rate between the 21st day of the last month

of the quarter before the previous quarter and the 20th day of the last month of the previous quarter.

- Standard rate for 1Q 2013: 3.59%

* Separate interest rates for Hybrid Financing, Natural Disaster Relief programs

* Different interest rates for each client, depending on its credit rating

Venture Business Start-up, Commercialization ofR&D Results, Business Conversion

Funding Program

Policy funds standard rate 0.3%p

Program Interest Rate

Group

Promotion of the New Growth Industry Policy funds standard rate + 0.2%p

Management Stabilization(temporary programs, exports)

Policy funds standard rate + 0.6%p

Assistance for Small Merchants and Industries Policy funds standard rate + 0.2%p

Interest Calculation Reform

Interest Rates by Funding Program

24

Effectiveness of Policy Funds

Respondents : loan applicants between 2001-2011 who have financial statements for the

last four years or more

- No. of applicants : 12,284 firms, No. of ineligible applicants : 4,968 firms

< Business Performance Survey >

Operating income to sales(%)

Indicators

0.56%p

Difference(loan takers vs. ineligible applicants)

Net profit to total assets(%) 0.53%p

Total assets turnover(%) 6.24%pOperation

Labor costs USD 11,272Business

SizeSales USD302,636

Profitability

* Conducted by R&DB Foundation of Seoul National University (March-October, 2012)

Survey on clients business performance after taking out the loans


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Key Financial Programs

FinancialPrograms

Provides financial assistance for new facilities and operation of new venture firms duringtheir start-up and growth stages

FY 2013: KRW 1,250 bil. (USD 1.1 bil.)

Venture BusinessStart-up Program

Provides financial support to SMEs who have been negatively affected from tradeagreements by strengthening their industrial structure and inducing the restoration ofcompetitiveness

FY 2013: KRW 170 bil. (USD 0.2 bil.)

IndustrialStructure

AdjustmentProgram

Provides financing for eligible SMEs preparing to commercialize their intellectualproprietorship and the R&D results

FY 2013: KRW 300 bil. (USD 0.3 bil.)

Loans forCommercialization

of R&D Results

Provides financing to innovative SMEs in high-tech and low-carbon industry sectors toimprove their competitiveness

FY 2013: KRW 635 bil. (USD 0.6 bil.)

Promotion of theNew Growth

Industry

Provides funds to SMEs that are temporarily struggling due to natural disasters, difficultyin securing export financing and the lack of supply and demand of resources

FY 2013: KRW 95 bil. (USD 0.09 bil.)

ManagementStabilization

Program

Fosters small merchants by promoting new enterprises and creating job openings whileplanning economic vitality and increasing support to manufacturing industries and SMEs

FY 2013: KRW 750 bil. (USD 0.7 bil.)

Assistance forSmall Merchantsand Industrialists

Total Amount of Financial Program(FY2013) : KRW 3,850 bil. (USD 3.5 bil.)

Mezzannie Financing (A hybrid of debt and equity financing) for aspiring SMEs withtechnologies and potential in the marketplace *CB(Convertible Bond), Profit sharing loan

FY 2013: KRW 150 bil. (USD 0.1 bil.)Hybrid Financing

Provides funds for SMEs production and sales activities. SBC subsidizes 2.0~3.0%p of thetotal annual interest rates.

FY 2013: KRW 500 bil. (USD 0.5 bil.)

Interest RateSubsidized Loans

III . Future Direction and Role of Policy Funds


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Future Direction and Role of Policy Funds

Better allocatePolicy funds

Make up for structuralfailures in the financial

market

Enhance the

management of creditrisk

Enhance SMEs

Access to Financing

Enhance the effectivenessOf policy funds

Maintain the financialsoundness of policy funds

Documents

15. Session 6 Kwon KOR PPT