2011 Knowledge Sharing Program with Kazakhstan Dr. Eyijong KWON(KODIT)Mr. Yongpyung PARK(KODIT) Mr. Jonggoo LEE(KODIT)Mr. Myungho YOO(KDS)

2011 Knowledge Sharing Program with Kazakhstan 2 A part of businesses by DAMU Support by Regional Gov’t(20% of CG) No fee paid by SMEs and banks Ceiling per company : USD 31 million Establishment of a New Fund Annual contribution by central Gov’t Fee paid by SMEs(1.5%) & banks(2%) Ceiling per company : USD 1.3 million AS is… To be… Major IssuesPolicy Recommendations Limited target market & insufficient outreach  Expansion of target market Complicated decision-making process  Simplifying evaluation process Lack of risk management  Strengthening evaluation by experts  Credit rating system(long-term) Positive changes for better credit guarantee system

2011 Knowledge Sharing Program with Kazakhstan New Law for Credit Guarantee Fund, organizational structure, recruiting, supervising body and framework etc. Issues on the Establishment Mission of CGS, defining guarantee targets, structuring income and expenditure, operating mechanism(direct or indirect) Issues on the Business Model Guarantee fee, coverage ratio, credit ceiling, devices for credit and operational risk management, agreement with banks etc. Issues on the Operation 3

2011 Knowledge Sharing Program with Kazakhstan What will be included in the law? Mission, purpose and main businesses of CGS Raising capital fund or contribution and leverage ratio Priority sectors and prohibiting SMEs Government coverage of loss, etc. What will be included in the law? Mission, purpose and main businesses of CGS Raising capital fund or contribution and leverage ratio Priority sectors and prohibiting SMEs Government coverage of loss, etc. 4 Who will supervise the Fund? Possessing own autonomy in ① approving each application case, ② maintaining for efficient operation will be crucial Clarifying the roles of the supervisory bodies  MEDT : policy directions, budget control, (entrusted) annual evaluation Regular internal and external audit and inspection (moral hazard issue) Who will supervise the Fund? Possessing own autonomy in ① approving each application case, ② maintaining for efficient operation will be crucial Clarifying the roles of the supervisory bodies  MEDT : policy directions, budget control, (entrusted) annual evaluation Regular internal and external audit and inspection (moral hazard issue)

2011 Knowledge Sharing Program with Kazakhstan 1) Supporting Competitive SMEs in Priority Sectors 2) Facilitating SME Financing in General 3) Leading and Improving Private Credit Market Why do you choose CGS as SME financing tool? SMEs in priority sectors vs. General SMEs Loan for investment vs. Loan for working capital What are target SMEs and target loans? 5

2011 Knowledge Sharing Program with Kazakhstan ▪ Maintaining Credit Guarantee institution burdens the government due to the high credit risk of outstanding guarantee ▪ Maintaining Credit Guarantee institution burdens the government due to the high credit risk of outstanding guarantee In order to lower long-term overloads on the government budget, banks and SMEs must pay their share of expenses  (Unique scheme of Korea) Banks’ contribution enforced by law 6

2011 Knowledge Sharing Program with Kazakhstan Evaluation of application by CGI(direct) or Banks(indirect)?  Direct (Korea, Japan) vs. Indirect (Taiwan, Thailand) Evaluation of application by CGI(direct) or Banks(indirect)?  Direct (Korea, Japan) vs. Indirect (Taiwan, Thailand) Banks’ credit loan experiences, proficiency of loan officers Moral hazard issue, potential credit risk and default rate Cost : high operating cost vs. high payment rate under guarantee Outreach : short-term vs. step-by-step  Korea used both methods but now almost ceased the indirect method Banks’ credit loan experiences, proficiency of loan officers Moral hazard issue, potential credit risk and default rate Cost : high operating cost vs. high payment rate under guarantee Outreach : short-term vs. step-by-step  Korea used both methods but now almost ceased the indirect method Things to Consider (Direct or Indirect) 7

2011 Knowledge Sharing Program with Kazakhstan At an initial stage of CGS, low and fixed rate is recommended  Floating rate based on credit rating of each firm can be a long-term plan  Best Practice : 1 ~ 2% At an initial stage of CGS, low and fixed rate is recommended  Floating rate based on credit rating of each firm can be a long-term plan  Best Practice : 1 ~ 2% Guarantee Fee Low ceiling is good for the fair distribution of CG For special purpose CG(i.e. investment projects), high ceiling is acceptable  KODIT’s general ceiling : about 150 times of GDP per capita special ceiling : about 350 times of GDP per capita Low ceiling is good for the fair distribution of CG For special purpose CG(i.e. investment projects), high ceiling is acceptable  KODIT’s general ceiling : about 150 times of GDP per capita special ceiling : about 350 times of GDP per capita Guarantee Ceiling Need to consider both acceptability by banks and risk taken by the CGI Differentiation between investment loan and W/C loan  Best Practice : 70 ~ 85% Need to consider both acceptability by banks and risk taken by the CGI Differentiation between investment loan and W/C loan  Best Practice : 70 ~ 85% Coverage Ratio 8

2011 Knowledge Sharing Program with Kazakhstan Factors affecting credit risk of guarantee portfolio  Skillful and independent evaluations by internal experts  Credit rating system  Social and cultural issues such as attitude of debtors etc. Operational risk management especially by internal control  Fraud, corruption, bribery cases can frequently happen in the early stage of the guarantee business Factors affecting credit risk of guarantee portfolio  Skillful and independent evaluations by internal experts  Credit rating system  Social and cultural issues such as attitude of debtors etc. Operational risk management especially by internal control  Fraud, corruption, bribery cases can frequently happen in the early stage of the guarantee business 9

2011 Knowledge Sharing Program with Kazakhstan Standardized SME data should be accumulated (5 years or more)  Basic company information, quantitative and financial data  SME and personal default data (transparently) Improvement of credit information infrastructure  Establishing a new PCR or strengthening the First Credit Bureau (FCB)  PCR(public credit registry), personal CB (credit bureau), company CB etc. Standardized SME data should be accumulated (5 years or more)  Basic company information, quantitative and financial data  SME and personal default data (transparently) Improvement of credit information infrastructure  Establishing a new PCR or strengthening the First Credit Bureau (FCB)  PCR(public credit registry), personal CB (credit bureau), company CB etc. 10

2011 Knowledge Sharing Program with Kazakhstan Improving skills of loan officers of banks Simplifying loan handling process of banks Enhancing customer services (i.e. easier documents preparation etc.) Restructuring foreclosure process and collateral bidding system Transparent and easier legal action by the court SMEs’ multiple transactions with diverse banks Strict penalty system for the failure of loans repayment Other Points to Consider Other Issues for Better Financial Market 11

2011 Knowledge Sharing Program with Kazakhstan StageTasks and Strategies 1 st Stage2 nd Stage3 rd Stage 6 mths1 yr2 yrs3 yrs3 yrs + Establishment Enacting Credit Guarantee Law and related Decree Setting up organizational structure Recruiting experts for establishment Operation Rules and Guidelines for guarantee operations Setting guarantee products Development of credit information inquiry and management system Development of automated and computerize operating system Agreement with banks Start of guarantee service Risk management and expansion Set-up of new branches (Optional) Educating and training analysts Development of credit rating system 12

2011 Knowledge Sharing Program with Kazakhstan Outreach vast enough to stimulate the changes in behaviors of banks and SMEs  Expansion of Outreach & Additionality Managing stable cash inflow and outflow  Maintaining Financial Sustainability Supervisory framework, external assessment and auditing systems Independent decision-making by experts  Regulatory Framework 13

2011 Knowledge Sharing Program with Kazakhstan Thank You Thank You KODIT∙KDS Consortium for 2011 KSP