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SME Financing in the AsiaPacific Region: Crisis and Countermeasures Shanghai National Accounting Institute June 8-12, 2009 Mr. Ying Qian East Asia Regional Department 1 Introduction • • • • • • • • • 2 Background Impact of Crises on SMEs Access to Financing Government Support Lessons Learned Support Needed Credit Guarantee APEC Initiative ADB Recommendations Background • Asian Crisis (1997-98) sharp decline in domestic demand, combined with a credit crunch (ii) strong rise in input costs, mainly derived from the currency depreciation (iii) surge in interest rates (i) • Global Financial Crisis (2008-09) (i) same credit crunch and demand slump but from rapid and persistent fall in international demand (ii) currency appreciation (iii) lower interest rates 3 Impact of Crises on SMEs • Most vulnerable sector in the global economic crisis particularly labor-intensive and export-oriented companies • Shrinking orders, loss of business or suspension of operations as demand of foreign buyers continue to decline • Production chain shortened, broken • Increasingly tight squeeze on credit, as banks become more risk averse 4 Impact of Crises on SMEs 1997-98 Asian Crisis 2008-09 Global Financial Crisis • Slump in domestic and international demand but international demand quickly recovered (currency depreciation made products from crisis-affected countries quite cheap) • Insufficient international market demand Cancellation of contractual export orders • High inventories (for export-oriented SMEs with dire demurrage implications) • Drying up of formal credit (bank loans) and venture capital • Credit crunch liquidity crisis • Lower interest rates but more stringent requirements by risk-averse banks • Delayed payments - account receivables increasing 5 • Reduced output, employment, investment • Business suspension or bankruptcies • Most affected sectors: importdependent enterprises, • Most affected sectors: export, tourism and trade logistics services Access to Financing • High cost of capital (high interest rates, short repayment periods, advisory fees) • Lack of access to financing (insistence on collateral requirements, burdensome bank procedures; absence of venture capital) • General aversion of banks in dealing with a large number of small accounts Organizational structure of banks and processes create a specific bias against small loan portfolios • No proper credit information on SMEs • Banks are reluctant to lend to SMEs because of: Lack of transparency of financial condition of SMEs Lack of managerial/marketing skills of SMEs Loans to SMEs in the past have compounded banks’ non-performing assets problems 6 Government Support (1997-1998) • After the Asian crisis, almost all governments issued laws, decrees, and government regulations to improve SME access to financing Legal and regulatory reforms (creation of several agencies with mandates to exclusively support SMEs; issuance of laws, regulations decrees to strengthen SMEs • Direct financial support (creation of special credit funds for SMEs, credit guarantee funds) • Indirect financial support (tax incentives, lower interest rates, relaxation of requirements) 7 Government Support (1997-1998) • However, the reforms and interventions were poorly implemented, not well monitored PRC: government lowered benchmark interest rate for bank but some banks still increased interest rates for SMES by 20%-60%, charged advisory fees and required cash-strapped enterprises to pay loans in advance India - despite repeated and clear admonitions from Reserve Bank of India not to insist on providing collateral from SMEs, collateral is still required 8 Government Support (2008-2009) • Most common government response has been to increase loan guarantee programs for SMEs • However, banks are slow to participate because More time needed to implement the program through wide network of local branches Commercial banks have difficulty in finding bankable SMEs Government SME banks face huge amounts of NPLs 9 Government Interventions Region/ Country 1997-98 Asian Crisis Specialized agencies/ banks laws, regulations decrees 2008-09 Global Financial Crisis Special funds SME loans Loan guarantees South Asia India Small Industries Development Bank of India Micro, SME Development Act 2006 Credit facility; Risk sharing facility (guarantee reserves) Pakistan Small and Medium Industries Dev’t Authority; SME Bank; Microfinance Banks No separate law for SMEs Enterprise Competitiveness Support Fund Credit Guarantees Fund Trust for Micro and Small Enterprises Subsidized Interest rates Credit Guarantee Agency; Credit Information Center Southeast Asia Indonesia 10 Small rural development banks, Cooperatives of small scale industries, Export Support Board Partnership Law and Law No. 9/1995 on Small Business Small scale credit; Credit for village units; Subsidized credit for farmers and village cooperatives Direct People’s Business Credit Scheme (KUR) Tax incentives Government Interventions 1997-98 Asian Crisis Region/ Country Specialized agencies/ banks Laws, regulation s decrees 2008-09 Global Financial Crisis Special funds SME loans Loan guarantees Tax incentives Southeast Asia Malaysia Natl SME Dev. Council, Credit Guarantee Corp. Small and Medium Industries Dev’t Corp.; Malaysia External Trade Development Corp. Philippines SME Development Council, Small Business Corp Magna Carta for Small Enterprises Small Enterprise Financing Facility, Rediscounting, Guarantee funds Thailand SME Promotion Office; Institute of SME Development; SME Development Bank; People’s Naml SME Promotion Act 2000 Village funds (THA) (INO) 11 SME Growth Acceleration Fund Credit Enhancer Scheme SME grants SME Credit Bureau Exempt from income tax, import duty, for 6 years Portfolio Guarantee Scheme for SMEs Government Interventions 1997-98 Asian Crisis Region/ Country Specialized agencies/ banks Laws, regulations decrees 2008-09 Global Financial Crisis Special funds SME loans Loan guarantees Tax incentives Others China SME Dept in State Economic and Trade Commission Partnership Enterprise Law; Sole Proprietorship Enterprise Law; Law on Promotion of SMEs SME Credit Guarantee System 5 state banks to open special service credit outlets for SMEs in 5 yrs Additional RMB 1B for SMEs Korea S&M Business Administration, Small Business Corp. SME Basic Law Law for Assistance of SME Startup Korea Credit Guarantee Fund Increase loans to SME from $21.4 B to $31.4 B Increase credit guarantee for SME $35.7B won Japan Japan Finance Corporation for Small Business, National Life Finance Corporation and Shoko Chukin Bank New SME Basic Law Credit insurance system Credit guarantee system Safety Net Loan Emergency guarantee scheme of additional Y21T 12 Tax rebates for exports Reduction of corporate tax for SMEs to 18% w/ Y8million or less annual turnover Lessons Learned from 1997-1998 • Crisis had positive effects on SMEs Increased local demand for cheaper substitutes Sharp increase in number of SMEs partly due to more people losing jobs going into small business • SMEs weathered the crisis better than large enterprises as they had more flexibility to turn to export due to favourable exchange rate • The crisis renewed focus on crucial role of SMEs in their countries’ development that generally resulted in higher budget allocations and external aid for SMEs 13 Lessons Learned from 1997-1998 • Forcing state banks to provide cheap and easy credit to SMEs without careful review is more likely to result in resource misallocation SME Bank of Thailand reported that NPLs of SMEs amounted to 22% of total credit outstanding compared to avg. of 16-17 % for financial sector as a whole • Mere provision of capital or credit does not ensure that SMEs will be successful but with technology and skills it is easier for SMEs to find capital • Focus of assistance should be on long-term sustainable solutions i.e. not in helping SMEs survive crises but support capacity for long-term survival 14 Support Needed for SMEs • Most of the countries that provided government support to SMEs during and after the 1997-98 Asian crisis through various programs including credit and guarantee schemes have not evaluated the impact of such interventions. It will be opportune to assess effectiveness of various interventions to determine future policies and action in closing the SME financing gap • Experience from the past crisis indicated that capital injections into banks were not sufficient to increase lending to SMEs and government guarantees were also needed. However, banks are still reluctant to take up loan guarantees. Additional measures such as credit mediators; monitoring of SME lending by banks and code of conduct for SME lending may be further explored 15 Support Needed for SMEs • An SME’s creditworthiness is usually evaluated by intuition rather than by statistical analyses due to lack of data on the SME. Establishment of an SME database or credit bureau can reduce information asymmetry between SMEs and banks • Alternatives to bank loans should be further studied and explored and their availability widely disseminated to SMEs Equity finance - individual investors (“business angels”) and private equity houses invest in businesses in return for equity; these investors prefer innovative and highgrowth businesses which will provide reasonably high return on investment 16 Support Needed for SMEs • Asset finance - asset finance companies will purchase equipment specified by the SMEs and lease it to the enterprise; some companies will buy the SME’s existing assets and lease them back to the SME • Invoice finance - invoice finance companies will provide loans in proportion to the value of invoices in return for a percentage, daily interest or a management fee; invoice financing is appropriate for SMEs whose clients traditionally pays within 30, 60 or 90 days on invoice • Trade finance - can include letters of credit, export credit insurance, export factoring, forfeiting and others. In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions 17 Credit Guarantees • Credit guarantee schemes reduce losses incurred by banks from defaulting SMEs by assuming a share of these losses normally in return for a guarantee fee • Banks have traditionally avoided SME lending due to high administrative costs involved, asymmetric information about potential SME clients’ capacity and willingness to repay, high risk perceptions, and lack of acceptable collateral. • By diminishing banks’ risks thru risk-sharing and motivating banks to explore the SME market segment, credit guarantee schemes can make bank finance more accessible for SMEs, and improve opportunities for economic and employment growth. 18 Credit Guarantees • Credit guarantee schemes have been criticized for not being effective not really achieving additionality being administratively costly being subsidy-dependent increasing the danger of “moral hazard” contributing to a weakening of credit morality • Second level “moral hazard” on the part of the lending bank not motivated to supervise the loan properly will not pursue vigorously repayments when most of the loans are covered by a guarantee • There has been no sufficient reason for government intervention by means of publicly-funded schemes 19 Credit Guarantees • Credit market failures and distortions can be better addressed through further capital market, banking and regulatory reforms risk management training of bank staff establishing credit bureaus and enterprise databanks, initiating legal reforms in order to overcome asymmetric information and SMEs’ difficulties in pledging their property as collateral • The failure of many credit guarantee schemes in the 1980s and 1990s, mainly in developing countries, and the fiscal burden of European and the Japanese credit guarantee schemes, also led to controversy about the schemes’ justification and effectiveness 20 Credit Guarantees • The third generation of schemes and governing regulatory reforms in Europe, Japan and Korea have largely removed or avoided most problems through careful and prudent operational modalities encouraging private sector involvement prudent multipliers and provisioning for reserves and more discriminating eligibility criteria • Reformed schemes have proven more effective, resulted in lower default rates, and have been able to serve increasingly larger numbers of SMEs • Many credit guarantee schemes operate on a cost-recovery or self-sufficiency basis, and some even make a profit, but most larger schemes and all re-guarantee schemes are not sustainable without government subsidies 21 APEC Initiative SMEs should continue to receive support from the government in accessing the financial markets Authorities should explore more ways to assist SMEs to tap the term debt market, for example: sponsoring mezzanine funds to provide term capital for SMEs for investment such as land, buildings and equipment • Authorities should consider creating a centralized credit bureau for banks to access credit information on SMEs to help reduce transactions cost, create more supply, improve transparency, and provide a centralized way of getting credit information 22 ADB Recommendation 2004 • An independent, functional and powerful government agency is needed to support the needs of SMEs in China to: effectively advocate for SMEs within the government, and formulate and implement policies to address the need of SMEs in China play a more important role in supporting SME in China as provided in the Law on Promoting SMEs build the capacity of SMEs to formulate and implement SME support policies and regulations regarding financing, innovation and services 23 ADB Recommendation 2004 • Prioritize the enhancement and development of SME lending from policy and commercial banks: catalyze the birth of an SME Policy Bank in China and adopt a commercial orientation in its lending policies to SMEs with a longterm goal of becoming a private, specialized SME finance institution provide incentives to banks and non-bank financial institutions for SME finance; provide access to any technical assistance needed in order to lend to the SME sector pilot program for local SME-focused banks and facilitate investment and assistance into these institutions as much as possible improve SME credit guarantee operations and optimize risk and capital allocations through re-guarantee and co-guarantee schemes, supported by prudent institutional arrangement and operational procedures 24 ADB Recommendation 2004 • Prioritize the enhancement and development of SME equity investment funds and programs: develop an effective legal and regulatory environment for equity investment build up the skills of existing venture capital firms through policy support and access to technical assistance to existing venture capital funds investing in SMEs in China develop the pilot program for small business investment companies. Establish a new SBIC program, and create new funds through leveraging private investment with government investment promote capital market development by encouraging the development of the Shenzhen market and, where possible, helping SMEs and venture capital funds to use the market for exits and IPOs 25 ADB Recommendation 2004 • Take steps to develop a country-wide support system for SMEs and SME-related intermediaries: develop a one-stop access point for delivery of government related services to SMEs. The SBA could begin providing basic information and promoting existing services by government promote intermediaries to engage in SME-related services. The SBA should support relevant intermediaries through assistance and networking, and encourage them to work with SMEs 26 Thank you Ying Qian Principal Economist (Financial Sector) Financial Sector, Public Management and Regional Cooperation Division Tel: + 632 632 5945 Fax: + 632 636 2494 Email: [email protected] 27