Views from a national holding fund on the JEREMIE implementation The case of Hungary: challenges, achievements and perspectives József Vingelman, CEO Venture Finance Hungary Plc. 29/30 November 2010

Information about Hungary JEREMIE Programme in Hungary Venture Finance Hungary Plc. (Holding Fund Manager) Overview of Financing Programmes Summary of experiences and future plans

Area: 93,030 km 2 Population: 10 million Population density: 108/km 2 EU accession: 1 May 2004 Area: 93,030 km 2 Population: 10 million Population density: 108/km 2 EU accession: 1 May 2004 GDP/cap. (2009): 63% of EU-27 average No of SMEs: cca. 700 th. (over 99% of total companies) SMEs produce 50% of GDP 70% of workers employed by SMEs GDP/cap. (2009): 63% of EU-27 average No of SMEs: cca. 700 th. (over 99% of total companies) SMEs produce 50% of GDP 70% of workers employed by SMEs Hungary at a glance

Regions of Hungary Southern Great Plain Northern Great Plain Northern Hungary Southern Transdanubia Western Transdanubia Western Transdanubia Central Transdanubia Central Hungary Development based on GDP/capita (% of EU average in 2006) 107%64.9%58.6%43.7%42.8%41.4%40.8% LeastMost

JEREMIE Programme in Hungary

Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis) Tool: New financial programmes 1.Refinanced loan programmes (Micro Loan, Small Loan, SME Loan, SME Working Capital Loan) 2.Credit Guarantee 3.Venture Capital Allocated Funds : cca. HUF 200 billion (EUR 699 million) Use of funds: a)As standalone financing, or b)own sources required for non-refundable subsidies Funds are granted via financial intermediaries with joint risk-taking Revolving funds, leverage effect Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis) Tool: New financial programmes 1.Refinanced loan programmes (Micro Loan, Small Loan, SME Loan, SME Working Capital Loan) 2.Credit Guarantee 3.Venture Capital Allocated Funds : cca. HUF 200 billion (EUR 699 million) Use of funds: a)As standalone financing, or b)own sources required for non-refundable subsidies Funds are granted via financial intermediaries with joint risk-taking Revolving funds, leverage effect

Kezességvállalás EDOP (GOP): ~ HUF bn (EUR 626 mn) CHOP (KMOP): ~ HUF 20.9 m (EUR 73.3 mn) Refinancing facilities Microloans; SME (investment) loans; SME working capital financing Portfolio guarantee Venture capital JEREMIE Holding Fund MV Zrt. (Fund manager) GuarantiesCapital financing Programme overview (1)

Programme overview (2)

Milestones Key events: Oct 2006: Approved GAP Analysis Q1 2007: First product term-sheets Aug 2007: Foundation of Venture Finance Hungary Oct-Nov 2007: First call for tenders (Micro Loan, Portfolio Guarantee) Dec 2007: First contract with financial intermediaries Jan 2008: First Micro Loan granted Oct 2008: Modification of Micro Loan conditions Nov 2008: Launch of SME Loan Programme Dec 2008: Notification of Venture Capital Programme Jan 2009: Launch of SME Working Capital Loan Programme Feb 2009: Call for tenders – Venture Capital Programme Oct 2009: Close of Venture Capital tender Apr 2010: Launch of Small Loan Programme Q2 2010: Venture Capital funds start their investment activities Sept 2010: Development of a new financial programme started (combination of Micro Loan and non-refundable subsidies)

Venture Finance Hungary Plc. (Holding Fund Manager)

Established in May 2007 with the aim of developing and running financial programmes which will expand the financing options of Hungarys micro-, small- and medium-sized enterprises (JEREMIE initiative) Sole activity: fund Management of financial resources committed by European Union and Hungary o Designated as the Holding Fund Manager by Article 21 (4) of Hungarian Government Decree 255/2006 (XII. 8.) Belongs to the Group of Hungarian Development Bank (MFB), 100% owned by MAG-Hungarian Economic Development Centre Plc (the Implementing Agency of EDOP). Share capital: HUF 2 billion (EUR 7 million) Scope of activities and obligations are determined by the National Development Agency (NDA) Equivalent financial service provider - compliant with BASEL II. criteria Controlled and regulated by Hungarian Financial Supervisory Authority Venture Finance Hungary Plc.

1)Prepare the Financial Programmes – Description of the programme – Relevant business terms – Required funding – Role of intermediaries – Scope of beneficiaries 2) Implement the Programmes Evaluation and accreditation of intermediaries Concluding contracts with intermediaries Monitoring the use of resources and recommending reallocations Preparing policy for terminating risk takings, withdrawing from investments 3) Audit and control Tasks and responsibilities of the Holding Fund Manager Level 2. Holding Fund Manager Contract 1. Funding agreement Role of Venture Finance Hungary The Funding Agreement also defines the main tasks of the Resource Management Organisation:

VFHs Organisation

Overview of Financing Programmes

Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis) Tool: New financial programmes: 1.Micro Loan 2.Portfolio guarantee 3.Venture capital Further specific programmes can be launched later on (counter guarantee, etc.) JEREMIE Programme in Hungary

I. Micro Loan Type of fund: refinancing fund for financial intermediaries Financial intermediaries: financial enterprises, local microfinance institutions Contribution by financial intermediaries: 10% Main conditions of Micro Loan Beneficiaries: micro enterprises Loan size: Investment loan: max. HUF 10 mn (EUR 35 th.) Working capital loan: max. HUF 6 mn (EUR 21 th.) Purpose of loan: capital expenditures and/or current assets Interest rate: freely determined by financial intermediaries Loan period: Investment loan: max. 10 years Working capital loan: max. 3 years Loan guarantee is available for intermediaries as an option Prohibited use of funds: credit redemption, VAT financing

II. Small Loan Type of fund: refinancing fund for financial intermediaries Financial intermediaries: Credit institutions (banks, saving cooperatives), bank- owned financial enterprises Contribution by financial intermediaries: 25% Main conditions of Small Loan Beneficiaries: micro- and small enterprises Loan size: max. HUF 50 mn (EUR 175 th.) Purpose of loan: capital expenditures and/or current assets Interest rate: Max. 0.3 * 3m BUBOR + 6% (=currently max. ~7.6% p.a.) Loan period: Investment loan: max. 10 years Working capital loan: max. 3 years Loan guarantee is available for intermediaries as an option Prohibited use of funds: credit redemption, VAT financing

III. SME Loan Joint programme of Venture Finance Hungary (MV) and Hungarian Development Bank (MFB) Main conditons of SME Loan: Beneficiaries: micro-, small- and medium enterprises Loan size: HUF million (EUR 35 th. – 350 th.) Purpose: capex and directly related current assets (only outside the Central- Hungarian region) Loan period: max. 10 years Interest rate: 3m EURIBOR* % + max 5% (=currently max. ~6.4% p.a.) Prohibited use of funds: credit redemption, VAT financing

IV. Working Capital Loan Joint programme of Venture Finance Hungary (MV) and Hungarian Development Bank (MFB) Main conditons of SME Working Capital Loan: Beneficiaries: micro-, small- and medium enterprises Loan size: HUF million (EUR 3.5 th. – 700 th.) Purpose: working capital financing serving for expansion of business activity Loan period: 1 year + 1 day or 2 years Interest rate: 1M BUBOR * % + max 4% (=currently max ~7.9% p.a.) Prohibited use of funds: credit redemption, VAT financing

Facility: automatic portfolio guarantee behind new SME loans Financial intermediaries: Credit institutions, financial enterprises Extent of guarantee: max. 80% of the loans Guaranteed SME loans: Loans refinanced by Venture Finance Hungary or loans provided from the credit institutions own funds Size: max. HUF 200 million (EUR 700 thousand) Maturity: max. 10 years Purpose: capital expenditures and current assets V. Credit Guarantee

VI. Venture Capital Aim: to improve the capital status of the Hungarian SMEs in the early (seed, startup) and growth stage. Facility: financial resources for venture capital funds 1 Co-investment Fund in the Central-Hungarian Region 7 Joint Funds outside the Central-Hungarian Region Financial intermediaries: Independent fund managers licensed by PSZÁF Private contribution required: min. 30% Investment policy: Investment size: Max. EUR 1.5 million investment per 12 months per target company (max. in 3 consecutive years) Target companies: Max. 5-year-old SMEs with less than HUF 1.5 bn (EUR 5 mn) turnover Sectorial and other restrictions: shipbuilding, coal industry, steel industry, financial sector, enterprises in difficulty Invested amount cannot be used for: credit redemption, development of real estate for sale, acquisitions

Status of the programmes (30 September 2010) Status of the programmes (30 September 2010) EUR/HUF =285 Financial Programmes Allocated funds Contracts with financial intermediaries Volume of contracts signed with final beneficiaries HUF bn; (EUR mn) No. Committed funds HUF bn; (EUR mn) % of allocate d funds No. of cont- racts From JEREMIE Fund HUF bn; (EUR mn) % of allocated funds Total value of the contracts HUF bn; (EUR mn) Micro Loan/Small Loan 55.6 (195)767651,67 (181)93%93% (49)25%15.8 (55.4) SME Loan (only in EDOP) MV-MFB joint refinancing (HUF 50 bn) 25 (87) (88)100% (11)12.7%6.3 (22) SME Working Capital Loan MV-MFB joint refinancing (HUF 100 bn) 50 (175) (175)100% (8.8)5%5.1 (17.7) Credit Guarantee (99) (181)183% (7.9)7.9%2.8 (9.8) Venture Capital (142) (110)77.8%30.28 (0.98)0.72%0.41 (1.45) Total (699) (705)105% (78)11.2%30.41 (106)

Summary of experiences and future plans

Micro- and Small Loan Experiences and future plans Micro- and Small Loan Experiences and future plans Highest utilization (24%) of allocated funds among VFHs financial programmes, but still under expectations Best performing financial intermediaries: regional enterprise development foundations and some independent financial enterprises Credit institutions (banks, saving co-operatives) show limited activity Limited use of funds due to EU regulations (e.g. expansion of business activity) There are other state-run microfinance programmes overlapping loan products - competition between institutions non-transparent system for potential beneficiaries Strategic goals, planned reforms: Introduction of a simple, easy-to-remember brand name Further standardization of the loans terms & conditions Simplified procedures Restructuring of the support system on state-level to eliminate parallel loan products and parallel intermediary networks Motivation of the best performing financial intermediaries, drawing in new intermediaries

SME Loan Experiences and future plans SME Loan Experiences and future plans Low utilization (under 12%) of allocated funds More complex procedures as the programme is jointly run by VFH and MFB longer lead-times At a smaller loan size, competition with other JEREMIE products (Micro Loan, Small Loan) There are other state-run working capital loan programmes overlapping loan products - competition between institutions non-transparent system for potential beneficiaries Not available in the Central-Hungarian Region Strategic goals, planned reforms: Reduction of allocated funds from HUF 50 billion (EUR 175 mn) to HUF 20 billion (EUR 70 mn) Restructuring of the support system on state-level to eliminate parallel loan products and parallel intermediary networks Simplification of procedures, reduction of MFBs lead-times

Working Capital Loan Experiences and future plans Working Capital Loan Experiences and future plans Very low utilization (under 5%) of allocated funds Limited usability of funds due to EU regulations (e.g. expansion of business activity) More complex procedures as the programme is jointly run by VFH and MFB longer lead-times There are other SME loan programmes overlapping loan products - competition between institutions non-transparent system for potential beneficiaries Strategic goals, planned reforms: Reduction of allocated funds from HUF 100 billion (EUR 351 mn) to HUF 15 billion (EUR 53 mn) (Programme period ends in December 2010) Further decrease of the loan period might improve the products competitiveness Simplification of procedures, reduction of MFBs lead-times Performance of currently inactive saving co-operatives may boost as a result of VFHs targeted communication

Credit Guarantee Experiences and future plans Credit Guarantee Experiences and future plans Competitiveness of the guarantee product is limited: To join the Programme, credit institutions have to implement expensive and time consuming IT and other developments No standard view on the risk weight to be applied to loans guaranteed by the Holding Fund Manager (Basel II rules) The guarantee fund is too small as compared to the banks SME portfolio Credit institutions prefer to use other, traditional guarantee products on the market Strategic goals, planned reforms: Reduction of allocated funds from HUF 28 billion (EUR 98 mn) to HUF 15 billion (EUR 53 mn) Expanding the circle of guaranteed SME loans (loan products of saving co- operatives etc.) Elaboration of counter-guarantee schemes Offering risk-free guarantee for traditional guarantee institutions (e.g. Garantiqa) with a large portfolio

Venture Capital Experiences and future plans Venture Capital Experiences and future plans All the 8 venture capital funds were set up in the first half of 2010 Funds started their activity some months ago – first investment decisions and investments has been made HUF 9 billion (EUR 32 mn) has not been allocated to venture capital funds – the reserved amount may be reallocated within or outside the programme based on future experiences

Problems on the level of financial intermediaries Problems on the level of financial intermediaries Micro Loan, Small Loan: Credit institutions (banks, saving co-operatives) show limited activity due to low loan size Limited usability of funds due to EU regulations (e.g. expansion of business activity) Credit Guarantee: Competitiveness of the guarantee product is limited: To join the Programme, credit institutions have to implement expensive and time consuming IT and other developments No standard view on the risk weight to be applied to loans guaranteed by the Holding Fund Manager (Basel II rules) The guarantee fund is too small as compared to the banks SME portfolio Credit institutions prefer to use other, traditional guarantee products on the market

Prospects BUSINESS TASKS Competition between programmes subsidied by State simplifying list of products Review of relationship of present intermediaries Implementation of new products and modification of present products (e.g. redemption limit) based on market requirements Renew communication campaign (tailor-made communication by intermediaries) OPERATIONAL ISSUES Simplifying data transfer Implementing unique IT system in favour of intermediaries Upgrade of service connection toward partners

New financial programmes New financial programmes Combination of Micro Loan and non-refundable subsidies in a one stop shop system for micro enterprises (under development) Refinancing loans to factoring companies New or revised guarantee schemes

Thanks for your attention!