SME Securitisation March, Footer June 9, 2016

Purpose of Securitisation To create a mechanism to move SME loan assets off of the books of the bank to reduce bank capital needs To create a mechanism to turn existing SME loan assets into cash so the bank can make more loans To increase bank profitability by receiving payment for servicing the loan even though the loan is not on the bank’s books To spread the risk with investors 2

Factors That Make a Securitisation Attractive Thorough initial underwriting by the lender—credit risk is understood Accurate loan performance data on which to base pricing A well managed loan servicing operation The transaction is rated by a reputable rating agency Good coverage ratios for the “A” and “B” tranches 3

On or Off Balance Sheet Transactions On Balance Sheet Transaction  Does not reduce capital requirement  May be necessary if the creditworthiness of the SME assets is hard to estimate  Is really a collateralized loan to the bank rather than a securitisation Off Balance Sheet Transaction  Reduces bank capital requirement  Bank earns additional profits from servicing the loans for investors 4

Business Practices of Banks That Will Help a Securitisation Excellent record keeping  All documents in loan files are in the same order  All files are neatly put together or electronic  Accounting for each loan is up to date and accurate  Loan and collateral documents are stored securely, but able to be reviewed for the due diligence phase of the securitisation  Electronic copies of documents speeds up the due diligence process 5

Securitisation Diagram Finance & Markets Global Practice Rating Agency Investors SPVLender Borrower Loan Servicer, usually the originating lender Special Account/ Servicer Cash Securities Cash Loan Receivables Loan Note Cash (borrower payment) Payments Lenders Share of Payments

Recent Legislative Changes New law allows securitization of SME loans and other non-real estate assets Nominee account can be opened for account holder to perform transactions with funds for which the rights are held by the beneficial owner This concept would mitigate risks that accruals on debtors’ securitised obligations and the rights transferred to SPV would be mixed with other assets of the originator (commingling assets risk) 7

Recent Legislative Changes Special Purpose Financial Companies are now permitted to own assets that are the collateral for the bonds being issued. This would be the SME loan notes Law changed to allow collateral to be sold to pay bondholders if SPV becomes bankrupt Originator must retain 20% of the bonds on its balance sheet Law permits subordinating issues within a transaction and sets order of priority for paying investors. This allows “A” tranche to be paid before “B” tranche and “C” tranche. 8

The Retained Tranche Russia requires a retention of 20% of the transaction. U.S. Bank regulators implemented a general rule that the issuer must retain a 5% exposure, however there are exceptions for certain residential mortgages. U. S. SBA requires securitizing lenders to hold a retained tranche equal to two times the lender’s loss rate. Thus, the higher loss rate requires a higher retention by the lender. E.U. Regulators required that investors be subject to 5% credit exposure, but are revising the rules to require the issuer to be subject to a 5% credit risk. 9

Developed Market Securitisation Activity Activity remains limited  There is some activity in the unguaranteed portion of U. S. SBA 7(a) loans, but the amount that the issuer must retain is very high, in the 25% range  European activity in 2014 was about €30 billion compared to €80 billion in 2007-(95% retained by lenders to use as collateral for central bank borrowing) 10

Recent SME Securitisation Activity Korea permits SMEs to issue bonds that could be securitised because they are guaranteed by Korea Credit Guarantee Fund and Korea Technology Finance Corporation, and thus have a government guarantee 11

Recent SME Securitisation Activity In April 2013, Alibaba Group priced RMB500 million of asset-backed securities backed by short-term loans or micro-loans made through their ecommerce platform to SMEs AAA rated tranche of RMB 375 million paying 6.2% interest Two unrated junior tranches of RMB 75 and RMB 50 million. The first pays 11% and the rate on the second was undisclosed. 12

Recent SME Securitisation Activity Ant Micro Loan in China (Alibaba subsidiary) issued a RMB100 million securitisation backed by micro loans in December Ant Financial tracks customers shopping history, utility bills, work and home addresses, contact information, properties and families. Based on this information, Ant Financial can establish credit profiles of customers 13

Recent SME Securitisation Activity Newtek Business Services Corporation in the U. S. issued a security backed by $40.8 million of the unguaranteed portion of SBA 7(a) loans. The transaction was ("S&P") AA rated. The interest rate on the transaction was 2.5%. The underlying interest rate paid by borrowers on these floating rate notes is currently 6%. The loans were backed by commercial, owner occupied real estate. Newtek makes partially guaranteed loans to SMEs in the U. S. A credit line is used to finance the unguaranteed part of the loan. They securitize these portions and pay off the credit line with the proceeds. This frees up space in the credit line to finance new lending. 14

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