1. 1 SME Policy Financing in Korea August 6, 2010 Moon-Hwan KIM SMBA, KOREA

2. 2 Ⅰ.Ⅰ. SME Financing Status SME Financing Policies Ⅱ.Ⅱ. Direction of SME Financing Support & Development Ⅲ.Ⅲ.

3. 3 Ⅰ. SME financing Status Borrowing from banks takes lion's share 1. General Introduction Share of direct financing like stocks, corporate debentures, etc: 2% in 2009 Bank borrowing 200720082009 370.0 6.4 422.4 6.7 443.5 9.0 2010.03 446.8 4.7 Direct financing Total 376.4429.1452.5451.5 2006 303.3 4.0 307.3 2009 2008 Bank capital 62.1 71.5 (98.7) (1.3) (98.3) (1.7) (98.4) (1.6) (98.0) (2.0) (99.0 (1.0) Policy capital 30.8 21.8 3.1 3.9 0.3 0.2 0.8 0.1 2.8 1.8 0.1 0.5 Stock Private debt ※ Source: Korea federation of small and medium business (Kbiz) Non-Bank finance institute Corporate debenture O’seas borrowing

4. 4 2. SME Financing by Sector 1) Borrowing From Banks Outstanding SME loans : 448.2 trillion won, accounting for 46.6% Since the 1998 foreign exchange crisis, bank lending to SMEs has increased steadily, affected by shrunken lending to big Total won-currency loans 200720082009 792.1 428.6 903.8 515.2 942.3 533.9 2010.05 961.3 545.6 Corporate loans SMEs 370.0(46.7)422.4(46.7)433.5(46.0)448.2(46.6) Household loans 363.5388.6408.6415.7 of aggregate won-currency lending conglomerates and stiffer regulations for household lending

5. 5 Sailent Points of Bank Lending to SMEs Blue chip-oriented lending practices continue Lending based on mortgage or certificate of guarantee ⇒ Financing bottlenecks stiffle promising SMEs with weak financing structure but holding competitive technology and growth potential as well as micro- enterprises ’08.12 ’09.06 ’09.10 ’09.12 ’10.05 Banks lending Interest rates for SMEs 6.91 6.75 5.43 5.67 5.455.24 5.56 5.89 5.56 Loan based on certificate of credit guarantee 23.1 Demand for savings & deposits 6.5 High Lending interest rate 22.7 5.26.69.2 Borrowing ceiling evaluation based on sales turnover 9.5 Difficult to borrow at right time Stiffer Loan screening Procedures Credit lending difficulty ※ Source: Kbiz Demand for Excessive real estate mortgage 15.9

6. 6 2) Capital Financing in Direct Finance Market SMEs, due to lower credit rating, face bottlenecks in access to SMEs’ capital from direct finance market: 1.7 trillion won, Angel investment is recovering slightly but remains at 2006 2007 2008 2009 2010.6 7,333 9,917 7,247 8,671 4,148 971 897 492 346 Venture capital Angel capital 2006 2007 2008 2009 2010.6 20.7 2.9 34.2 5.4 29.8 3.1 53.9 1.7 21.5 5.3 346 direct finance market accounting for 8% of large conglomerates stagnation level

7. 7 3) Capital From Policy Financing Characteristics of SME Financing SMEs-- Backbone of the national economy SMEs Large Enterprises Nos of Companies Employees Manufacturing Production Exports 0.1% 99.9% 53.7% 46.3% 67.6% 32.4% 88.5% 11.5% Mortgage-based lending practices and private finance institutes’ Role of Policy Finance Support for Biz start-up & areas of market failure - Compensating for shrunken lending, stemming from business fluctuation Pioneering in fostering of excellent tech & green facing next-gen. growth industries that are facing bottlenecks in access to finance markets avoidance of assistance lead to market failure including global financial crisis

8. 8 3) Capital Financing via Policy Finance Policy finance : policy capital, credit guarantee, on-lending, Policy financing scale: significantly expanded during global Policy capital(loans) Credit guarantee assistance 200720082009 2.8 44.7 3.2 50.3 5.9 75.3 2010 3.1 66.1 Aggregate-limit lending 6.48.110.08.5 On-lending--0.22.1 Policy financing Implementation (trillion won) aggregate ceiling lending, etc. 2009 economic crisis

9. 9 Ⅱ. SME Financing Policies 1. History of Development of SME Policy Financing 1) '60s~'70s Large enterprise and heavy & chemical industry-oriented growth Established finance and support institutes to Introduced mandatory minimum SMEs became targets for policy wise protection Industrial Bank of Korea ('61), Korea Credit Guarantee Fund (June '76), * Increased the bank loan ratio of provincial banks for SMEs: ‘06 7.7% ‘72 ‘06 ‘75 12.9% 56.7% 43.7% Provincial Banks Commercial Banks Loan Ratio to SMEs and export drive policies went into full swing implement SME policy financing Small and medium Business Corporation (Dec. '78) lending ratio system for SMEs (April '65) 30% → 40% ('72)

10. 10 2) '80 ~ Foreign Exchange Crisis While experiencing a high growth period, structural imbalance Compared with the '70s, bank loan ratios for SMEs increased Centering on provincial banks and special banks, household loans occurred between heavy & chemical industries and light industries and also between large enterprises and SMEs Awareness of SME functions and roles changed Major Policies Newly established a mandatory provision in the Increased bank loan ratio for SMEs Expanded structural improvement funds through 30%→35% Commercial Banks 40%→55% Provincial Banks 25% Domestic Branches of Foreign Banks started to be increased quantitatively but actual ratios turned out to be similar. restructuring of SMEs Constitution regarding protection and cultivation of SMEs

11. 11 3) After Foreign Exchange Crisis Breakaway from bank loans rose with large enterprises' efforts to (Early 2000s) Risk-avoidance tendency prevailed, and household Banks strengthened loan marketing for households and blue-chip SMEs. Loans to SMEs rose continuously. (After 2005) With the start of the policy restricting household strengthen their financial soundness in the wake of bankruptcy risk loans, SME loan ratio rapidly surged loan ratio began to outpace corporate loan ratio (Unit: trillion won) Banks' SME Loan Ratios ’05 년 ’06 년 ’07 년 ’08 년 422.2 371.7 303.3 258.0 ’09 년 443.5 during the foreign exchange crisis.

12. 12 SME Financing Support Scheme 2. Key Elements of Current SME Financing Support Systems Policy Fund On-lending Category Micro- businesses Start-up/Small enterprises 4.5% Supportive Interest Rates Bank Fund - 6 ~ 8% 3.7~5.0% 7.1~7.3% 4.3~8.4% Medium-sized enterprises 4.1~5.4% 5.5~6.3% 4.9~6.5% High Risk (Financial Expenditure: High) SME Financing Support Scheme Start-up & Promotion Fund (SBC) Fund of Funds (1.2 tril. won) Policy Fund (3.1 tril. won) Fund of Funds (1.2 tril. won) Credit Guarantee (67.1 tril. won) On-lending (KOFC) Aggregate Credit Ceiling System(BOK) Interbank Export Loan (2.1 tril. won) State-controlled Banks (178 tril. won) Private Banks (257.5 tril. won) Aggregate Credit Ceiling Loan (8.5 tril. won) Mandatory SME Loan Ratio (45~80%) InvestmentLoans Proxy Loan Direct Loan Investment Guarantees

13. 13 1) Support for Policy Fund Loans Business implementation agency: SBC Content of the business: Supply long-term, low-interest funds to SMEs avoided by private banks due to weak credit and collateral despite having technological and business viability Revamped corporate evaluation to focus on technological and business viability, including future marketability and growth potential, rather than on financial status, while strengthening complementary functions regarding market- failure areas Supply long-term (3~8 years) funds at low interest rate compared with * Policy fund interest for 2nd quarter of '10: 4.03~4.40% Areas of support: Initial period of start-up, long-term facility investment,. banking institutions micro-businesses, etc

14. 14 ‘06 43.8% (1.0 tril. won) 46.4% (2.2 tril. won) ‘09 Direct Loan ‘06 56.2% (1.3 tril. won) 53.6% (2.6 tril. won)) ‘09 Proxy Loan Support methods by lending type Direct Loan: SBC processes all the procedures, receipt of applications for Proxy Loan: SBC implements primary loan examination and banks carry fund - loan examinations - post management. out final loan examination - loan - post management functions. Support Results by Lending Type Operation scale (100 million won) Support Budget Outstanding Lending 200720082009 31,315 126,558 31,530 129,326 58,555 161,316 2010 31,355 164,946 (as of end June)

15. 15 Appraisal of operating performance Support the fund in the long-term with low interest rates for the areas, Supply funding to SMEs rapidly and minimize damage when shocks including start-up enterprises and facility investment, where private banking institutions find it difficult to carry out their roles, and contribute to SMEs' stable capital management and reduction of financing expenses occur due to non-economic factors, such as natural disasters and sharp international raw material price hikes, Jobs creation : 39,300 persons ('09 results) → 44,500 persons (plan for '10) - Average employment growth per enterprise: 3.21 persons ('09 results) - Job creation effect per 100 million won: 0.77 persons ('09 results) → 3.64 persons (plan for '10) → 0.88 person (‘10 target)

16. 16 2) Credit Guarantee Support Business implementation agency: Korea Credit Guarantee Fund Content of the business: Support credit guarantees for SMEs that are experiencing difficulties in obtaining loans from private banks due to a lack of collaterals Operate the system with differentiation of target enterprises for Non-technology- oriented SMEs Intensive Support ` KODITKOTECKFRCGF Technology-oriented SMEs Region-friendly micro businesses - Start-up firms - Export firms - Green growth firms - Venture firms - INNO-BIZ firms - Green growth firms - Small firms - Self-managed micro firms - Unregistered micro (KODIT), Korea Technology Finance Corporation (KOTEC), Korea Federation of Regional Credit Guarantee Funds (KFRCGF) intensive support after specialization of business areas by guarantee agency businesses

17. 17 Guarantee Support Scale (trillion won) Basic Structure of Guarantee Support KOTEC KFRCGF 200720082009 11.2 4.6 12.6 6.0 17.1 11.2 2010.6 17.5 12.6 Guarantee-applying enterprise Guaranteeing Agencies ④ Provide loans ② Collect data, conduct credit inquiry, examine guarantee ① Apply for consulting on guarantee ③ Issue guarantee certificate Banking Institutions, etc. 2006 11.2 4.0 Total44.449.067.671.143.7 KODIT 28.530.439.241.028.5

18. 18 Appraisal of credit guarantee operating performance Strengthen the public benefits of financing functions by supporting technological and business viability-oriented innovative enterprises having future growth potential despite their more or less weak collateral and low credit ratings. Government Strengthen financial health and support SMEs smoonthly in accordance with a downward adjustment of the risk weight (10%→0%) in Basel II. Banks Enhance accessibility to bank financing and obtain smooth supply of business funds in a timely manner by compensating for weak collateral and credit rating areas through guarantees SMEs SMEs were able to overcome the recent economic crisis at an early date with expanded policy financing through guarantees, etc. Credit guarantee facilitates loans to SMEs to reduce SME market failures and contributes to the development of the national economy.

19. 19 3) On-lending Support Overview of on-lending On-lending operating Korea Policy Banking Corporation (KPBC) suggests guidelines regarding target SMEs for support and supplies on-lending funds to financing companies. Financing companies examine applicant SMEs and decide whether to KPBC supports reinforcement of credit and liquidation to ease the risk burden of financing companies. No. of Cases Support Status (100 mil. won) 20092010 263 2,305 - 21,000 provide loans or not and the loan interest rates status

20. 20 4) Central Bank's Systematic Support BOK increased its aggregate credit ceilings significantly to overcome Based on the results of loans handled by banking institutions, the 4-1) Aggregate Credit Ceiling System Bank of Korea (BOK) supports funds to 17 banks after determining aggregate credit ceilings. ’94.3 ’97.2 ’98.3 ’01.1 ’01.10 ’02.10 ’07.1 ’07.7 ’08.11 ’09.3 ’10.7 Trends of Aggregate Credit Ceilings (trillion won) 8.8 3.6 5.69.6 11.6 9.6 8.0 6.5 9.0 10.0 8.5 BOK establishes aggregate credit ceilings by quarter and allocates funds to banking institutions according to the results of their lending to SMEs. the economic crisis (6.5 → 10.0 trillion won)

21. 21 Effects Loan interest rates lower than market interest rates have been applied to achieve policy goals, including expansion of SME lending and balanced regional development. Accelerate banking institutions' selective financial support for SMEs Actively handle loan products relevant to aggregate credit ceilings Reduce SMEs' expenses for supply of funds with application of Limitation ’94.3 ’01.9 ’04.11 ’06.6 ’07.7 ’08.8 ’08.12 ’09.2 5.0 2.5 2.0 2.5 3.0 3.5 1.75 1.25 preferential interest rates Effectiveness of interest benefit is less in low-interest eras like the present.

22. 22 Medium-term loan ratio of domestic banks ('09): 67.6% Encourages banks to support more than a specific ratio of the 4-2) Mandatory Minimum SME Loan Ratio System increased amount of loans from the won-currency finance fund to SMEs (May '65 ~ BOK) Commercial Banks: Over 45%, Provincial Banks: Over 60%, Domestic Those banks that do not observe these ratios will receive disadvantages * Cut the equivalent to 50% of the amount, which was not achieved, from aggregate credit ceilings. Branches of Foreign Banks: Over 35% from BOK at the time of allocating aggregate credit ceilings

23. 23 5) Other Support This a system in which SMEs insure sales bonds acquired from 5-1) Support for Insurance on SME Sales Bonds purchasing enterprises and receive insurance fund at the time of purchasing companies' default obligations. ’08 년 ’09 년 3.9 5.3 Results of Sales Bond Insurance ’10 년 (6 월말 ) 5.4 (±5%) Government Credit Guarantee Fund (Insurer) Purchasing Enterprise Insurance Contractor (seller of goods) Enforcement of Subrogation Right Implementation or Default of Obligation Payment of Insurance Money Insurance Subscription Business Supervision (SMBA) ((SME) Equity Investment Supply of Goods or Service (occurrence of sales bonds)

24. 24 99.3% of issuing enterprises' credit ratings: Lower than BB Support about 2.75 trillion won in funds for 1,053 SMEs that far 5-2) Support for Issuance of SME Corporate Bonds difficulties in issuing non-guaranteed corporate bonds in the financial market with their own credit ('00~'09: 21 times). '09 Results: Supported 152 billion won to 64 SMEs (purchased * Results of ABS (Asset Backed Securities) Issuance by Year (100 million won): 720 ('00) (Unit: %) subordinated bonds: 40 billion won) → 4,172 ('05) → 1,564 ('08) (speculative rating) Enterprises That Issued Corporate Bonds Enterprises That Issued ABS A Rating or higher BBB BB B

25. 25 Ⅲ. Direction of SME Financing Support & Development In connection with expanded policy financing, maintain optimum level of liquidity supply designed to support growth and Provide proper finance support system, helping micro-enterprises Strengthen technological viability-oriented appraisal system, providing financing access to those enterprises that possess excellent tech & Smoothe SMEs' capital raising in direct finance market, and development of future growth-promising enterprises; stand on their foot. business success potential but lacks finance and collateral capacity;

26. 26 Thank you