Download D-G PPT - CABIS, October 2008

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