Counseling and advisory services for improving the capacity and the capability of SMEs Presented by Naoyuki Yoshino Professor, Keio University, Japan, July 25, 2011 Video Presentation from Japan 1 1

Outline of Presentation 1, SME dominates Asian Economy 2, SMEs are difficult to borrow money from Banks 3, Heavy reliance on Micro-credit 4, Book Keeping Data collection 5, Financial Education 6, Interest rate, Amount of sales 2

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SMEs in China (Red Mark is SMEs’ share) 5

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Loan Supply Curve SME versus Large Companies 7 SME Loan Supply Curve Large Companies Interest Rate Loan Supply

Lack of Data for SMEs Large corporations SMEs Banks Micro Credit Capital Market Stocks and Bonds Credit Rating Credit Guarantee 8

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Basel Capital Requirements 1, Adequate Capital for Banks 2, To keep healthy 3, SME loans will decline 4, Micro credit 5, Loan sharks 6, Education to SMEs and borrowers 11

Keeping books by SMEs (i) Cash & deposits (ii) Amount of Sales (iii) Inventories (iv) Buying price (v) Amount of goods laid in (vi) Various costs Equipment and Personal costs (vii) net profits 12

How much interest rate could SME pay ? 1, Amount of loans / Net profits 2, number of years to borrow 3, expected growth rate of sales 4, interest rate SME has to pay 5, ratio of savings out of net profits 13

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Financial Planning for SMEs (i) Education for SMEs (ii) Japan’s Government Bank provided consultation for SMEs (iii) Financial Education for individuals and SMEs  Text book and Education training 15

Bankers and Micro credits have to provide honest service to SME borrowers Association of Micro credit companies was established in 2009 in Japan. Education to money lenders (micro credit companies) Self regulations by the Association 16

Four Accounts by SMEs Would SME disclose true data ? SMEs Tax Authority Banks Showing to his wife His Own 17

SMEs (14.4million data) Defaults (1.7million data) Financial Institutions 200 Regional Banks Credit Associations Credit Cooperatives Government Banks Central Bank Credit Guarantee Corporations (Collect Data of SMEs) 52 1, Government Support 2, Reliability 3, Security of Information CRD SME Data base 18

Credit Rating System 1, AAA, AA, BBB ………….. Single Number 2, Various Characteristics needed to be focused on: (i) Growth potential (ii) Good Management (iii) Technology etc. 3, Sudden Down-grading after Crisis 19

Loan Supply Curve SME versus Large Companies 20 Large Companies Interest Rate On Loans Loan Supply SME  Loans

CRD (Credit Risk Database) Membership composition (Oct,2010) Credit guarantee corporations 52 Government financial institutions 3 Private financial institutions 35 Credit-rating agencies, etc. 5 Small and Medium Enterprises Agency, Bank of Japan, etc. 5 Total 200 Annual fee=4 million (1 st Year) 3 million yen (2 nd yr) 21

CRD Data: Since 1995 Corporations March-2010 Total 11,450,000 (1,887,000) Default data 1,368,000 (239,000) Individual owned company Total 2,920,000 (887,000) Default data 369,000 (369,000) Number of (Number of Accounts companies) 22

Sectors (number of companies) 1, Construction 418,000 2, Manufacturing 345,000 3, Transport & communications 77,000 4, Wholesale 245,000 5, Retail 258,000 6, Food & Restaurants 71,000 7, Real estates 105,000 8, Services 256,000 9, Others 13,000 23

Default Risks, Model Estimation 24

Risk Based Interest Rate (1) General Credit Risk (2) Credit Cost Ratio [Default ratio}x(1-recovery rate) (3) Costs = Personal and Equipment (4) Interest rate to raise money (5) Monitoring of SMEs by banks 25

26 CRD Data Collection CRD Data Collection  Financial data – B/S and P/L  Non-financial data -E.g. date of establishment, geographical location and Successor or not  Default data  3 months or more arrears;  de facto bankruptcy;  subrogation by credit guarantee corporations  possible bankruptcy. 26

References Yoshino, Suzuki, Maehara and Abe (2009) Development of Corporate Credit Information Database and Credit Guarantee System, ASEAN Secretariat, Feb Yoshino, N.(2010),OECD, Southeast Asian Economic Outlook, Fall 2010, Chapter 6 Yoshino, N., OECD-ADB, THE GLOBAL IMBALANCE AND THE DEVELOPMENT OF CAPITAL FLOWS AMONG ASIAN COUNTRIES March 17, 2011, OECD 27

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Asia’s Characteristics 1, Large Share o ｆ SMEs (Small and Medium Enterprises) 2, Bank Dominated Market 3, Long term commitment 4, Large Share of Micro Credit 5, High Savings Rate 29