Small- and medium-sized businesses are facing greater challenges in their management and funding due to the sustained slump in the real economy and uncertainties at home and abroad. A credit guarantee is a policy that provides enhanced credibility to small- and medium-sized businesses with weak guarantee capacities, so that they can secure funding from the banking industry.
Existing credit guarantee funds in Korea are: the Korea Credit Guarantee Fund (KODIT), the Korea Technology Finance Corporation (KIBO), the Credit Guarantee Fund for Agriculture, Forestry and Fisheries (Nongshinbo), the Housing Finance Credit Guarantee under the Financial Services Commission (FSC), and the Korea Infrastructure Credit Guarantee under the Ministry of Strategy and Finance. In addition, although not funds, regional credit guarantee foundations under the Small and Medium Business Administration (SMBA) also provide credit guarantees to small businesses. The total amount of credit guarantees provided by these six institutions, the subjects of this study, in 2013 is KRW 96.3 trn, with a large volume of outstanding guarantees amounting to KRW 139 trn. These institutions carry out the important function of credit guarantee to small companies and small-business owners. To shed light on the significance of these organizations, this report evaluates the issues and the performance of credit guarantee businesses based on statistics relating to these programs, and proposes strategies for improvement.
First, a review of the business status of each guarantee fund shows that, at most institutions, the amount of outstanding guarantees is continuously increasing. In particular, the regional credit guarantee foundations and the Housing Finance Credit Guarantee have recorded sharp increases. Looking at the individual funds, KODIT's outstanding balance increased by more than KRW 10 trn over a five-year period, from KRW 28.5422 trn in 2007 to KRW 39.2813 in 2012, while KIBO's balance grew by more than KRW 6.4 trn, from KRW 11.1874 trn in 2007 to KRW 17.6583 in 2012. The guarantee balance of the regional credit guarantee foundations nearly tripled over the same period, from KRW 4.5867 in 2007 to KRW 13.5148 in 2012, while the Housing Finance Credit Guarantee’s balance quadrupled, from KRW 8.7213 trn in 2007 to KRW 28.7474 in 2012. The outstanding balance of the Korea Infrastructure Credit Guarantee nearly doubled, from KRW 3.9084 trn in 2007 to KRW 7.6587 in 2012. In contrast, Nongshinbo’s guarantee balance decreased, from KRW 12.9241 trn in 2007 to KRW 8.6895 trn in 2012.
The national budget for each guarantee fund or regional credit guarantee foundation consists of contributions to each institution or fund. With the exception of the Korea Infrastructure Credit Guarantee, such government contributions are not made on an annual basis, but rather according to the guarantee performance or on an as-needed basis in line with national policy. In 2013, contributions of KRW 70 bn and KRW 60 bn were made to KODIT and KIBO, respectively, from the SMBA’s general accounting budget. The Korea Infrastructure Credit Guarantee received its contribution from the Ministry of Strategy and Finance’s general accounting budget. In the case of the Credit Guarantee Fund for Agriculture, Forestry and Fisheries (Nongshinbo), there have been no government contributions since 2011.
From here forward, this report will provide assessment results of these funds, highlight relevant issues, and propose solutions.
To begin, the concentration of credit guarantees to blue-chip companies should be mitigated. In the case of KODIT, the percentage of credit guarantees to companies rated as “outstanding” or higher has increased, from 4.9% in 2007 to 14.2% in 2012, while the percentage of guarantees to “normal” or lower-grade companies has decreased, from 12.7% in 2007 to 7.9% in 2012. Thus, to mitigate the concentration of guarantees among large companies, the guarantee amount based on an applicant’s credit grade should be determined and managed from the planning stage. Korea Infrastructure Credit Guarantee provides three-quarters of its guarantees to large-cap companies. While this may be regarded as an unavoidable characteristic of the fund, ongoing efforts should be made to re-orient the guarantee mix toward small- and medium-sized businesses.
Second, guarantee institutions need to develop plans for reducing their long-term and large-sum guarantees, and moreover, need to achieve these targets. This is necessary because such guarantees can pose problems in terms of fund efficiency and fairness among companies. Long-term guarantees with outstanding balances of more than 10 years account for about 25% at KODIT and KIBO, 30% at Nongshinbo, and 6% to 8% at the Housing Finance Credit Guarantee. In regard to large-sum guarantees, the legal frameworks of each guarantee fund and regional foundation impose regulations stipulating the guarantee limit to an individual. In principle, the guarantee limit for an individual is KRW 3 bn at KODIT and KIBO and KRW 300 bn at the Korea Infrastructure Credit Guarantee. As of 2012, the percentage of guarantees exceeding the legal limit were 6.5% at KODIT, 8.3% at KIBO, and 1.1% at Nongshinbo. Since exceptions to the individual limit on guarantee amount are only granted through a resolution by the FSC board—and only in cases where flexibility is seen as necessary for the good of the national economy—in practice, the scope of exceptions should not be too broad. Moreover, in regard to the reduction of long-term and large-sum guarantees, each guarantee institution shall define the standards of short-term, long-term, and large-sum guarantees.
Third, it is necessary to formulate improvement plans aimed at reducing the number of duplicate guarantees. A review of the status of overlapping guarantees as of 2012 shows that KODIT provides duplicative guarantees in the amount of KRW 2.0792 trn to 4,977 companies already covered by KIBO, and KIBO provides KRW 1.5778 trn to the same number of companies serviced by KODIT. These figures account for 5.3% and 8.9%, respectively, of KODIT’s and KIBO’s total guarantee balance. Regional credit guarantee foundations also provide overlapping guarantees, in amounts of KRW 864.9 bn with KODIT, KRW 455.2 bn with KIBO, and KRW 23.1 bn with both KODIT and KIBO. Such a high number of duplications prevents the effective distribution of guarantee funds and can result in large-sum guarantees. Such overlap should be reduced. Moreover, at present there are no systems to link all policy loans and guarantees. To prevent duplicate guarantees and enable the underwriting of guarantees, accurate information on guarantees needs to be shared between and among institutions. A policy finance integration system should be established to link and share information on policy loans and guarantees.
Fourth, stronger management is needed of large-guarantee-fund businesses with a relatively higher potential for bad accounts. In the case of KODIT, alongside the increase in blue-chip accounts there was an increase in bad accounts, from 3.9% of accounts in 2007 to 4.8% in 2012, whereas at KIBO the percentage of bad accounts decreased from 5.4% to 5.1% over the same period. KODIT needs to strengthen its management of its growing number of bad guarantee accounts. Moreover, stringent management of subrogations at regional credit guarantee foundations is needed; their percentage has increased from 1.3% in 2007 to 3.5% in 2012.
Fifth, in relation to the original property and operation multiple, Nongshinbo's operation multiple decreased from 20.0x in 2007 to 3.9x in 2012. When the multiple is too low, the credit guarantee system does not fulfill the original purpose of institutional financing, which is to increase the utilization of funding by the subject of the guarantee or the applicants. Therefore, Nongshinbo is advised to raise its operation multiple; one method for doing so can be to transfer parts of the original property to government accounting.
Sixth, plans should be prepared to raise the profitability of surplus capital. The yield on guarantee institutions’ surplus funds hovered around 4% in 2011 and 2012. Presently, operations aimed at improving the profitability of surplus funds are limited. It is time to review new strategies for enhancing profitability.
Seventh, it is necessary to diversify the performance indices of each guarantee fund. The existing performance indices of the guarantee businesses of each fund or foundation only take into account the size of the guarantee provided, user satisfaction level, and IT system stability, which is insufficient for practical performance management. Therefore, other performance indexes should be defined to supplement these indexes, such as guarantee ratio by credit grade, overlapping guarantees with other guarantee funds, and profitability of surplus funds.
Kim Taekyu
Existing credit guarantee funds in Korea are: the Korea Credit Guarantee Fund (KODIT), the Korea Technology Finance Corporation (KIBO), the Credit Guarantee Fund for Agriculture, Forestry and Fisheries (Nongshinbo), the Housing Finance Credit Guarantee under the Financial Services Commission (FSC), and the Korea Infrastructure Credit Guarantee under the Ministry of Strategy and Finance. In addition, although not funds, regional credit guarantee foundations under the Small and Medium Business Administration (SMBA) also provide credit guarantees to small businesses. The total amount of credit guarantees provided by these six institutions, the subjects of this study, in 2013 is KRW 96.3 trn, with a large volume of outstanding guarantees amounting to KRW 139 trn. These institutions carry out the important function of credit guarantee to small companies and small-business owners. To shed light on the significance of these organizations, this report evaluates the issues and the performance of credit guarantee businesses based on statistics relating to these programs, and proposes strategies for improvement.
First, a review of the business status of each guarantee fund shows that, at most institutions, the amount of outstanding guarantees is continuously increasing. In particular, the regional credit guarantee foundations and the Housing Finance Credit Guarantee have recorded sharp increases. Looking at the individual funds, KODIT's outstanding balance increased by more than KRW 10 trn over a five-year period, from KRW 28.5422 trn in 2007 to KRW 39.2813 in 2012, while KIBO's balance grew by more than KRW 6.4 trn, from KRW 11.1874 trn in 2007 to KRW 17.6583 in 2012. The guarantee balance of the regional credit guarantee foundations nearly tripled over the same period, from KRW 4.5867 in 2007 to KRW 13.5148 in 2012, while the Housing Finance Credit Guarantee’s balance quadrupled, from KRW 8.7213 trn in 2007 to KRW 28.7474 in 2012. The outstanding balance of the Korea Infrastructure Credit Guarantee nearly doubled, from KRW 3.9084 trn in 2007 to KRW 7.6587 in 2012. In contrast, Nongshinbo’s guarantee balance decreased, from KRW 12.9241 trn in 2007 to KRW 8.6895 trn in 2012.
The national budget for each guarantee fund or regional credit guarantee foundation consists of contributions to each institution or fund. With the exception of the Korea Infrastructure Credit Guarantee, such government contributions are not made on an annual basis, but rather according to the guarantee performance or on an as-needed basis in line with national policy. In 2013, contributions of KRW 70 bn and KRW 60 bn were made to KODIT and KIBO, respectively, from the SMBA’s general accounting budget. The Korea Infrastructure Credit Guarantee received its contribution from the Ministry of Strategy and Finance’s general accounting budget. In the case of the Credit Guarantee Fund for Agriculture, Forestry and Fisheries (Nongshinbo), there have been no government contributions since 2011.
From here forward, this report will provide assessment results of these funds, highlight relevant issues, and propose solutions.
To begin, the concentration of credit guarantees to blue-chip companies should be mitigated. In the case of KODIT, the percentage of credit guarantees to companies rated as “outstanding” or higher has increased, from 4.9% in 2007 to 14.2% in 2012, while the percentage of guarantees to “normal” or lower-grade companies has decreased, from 12.7% in 2007 to 7.9% in 2012. Thus, to mitigate the concentration of guarantees among large companies, the guarantee amount based on an applicant’s credit grade should be determined and managed from the planning stage. Korea Infrastructure Credit Guarantee provides three-quarters of its guarantees to large-cap companies. While this may be regarded as an unavoidable characteristic of the fund, ongoing efforts should be made to re-orient the guarantee mix toward small- and medium-sized businesses.
Second, guarantee institutions need to develop plans for reducing their long-term and large-sum guarantees, and moreover, need to achieve these targets. This is necessary because such guarantees can pose problems in terms of fund efficiency and fairness among companies. Long-term guarantees with outstanding balances of more than 10 years account for about 25% at KODIT and KIBO, 30% at Nongshinbo, and 6% to 8% at the Housing Finance Credit Guarantee. In regard to large-sum guarantees, the legal frameworks of each guarantee fund and regional foundation impose regulations stipulating the guarantee limit to an individual. In principle, the guarantee limit for an individual is KRW 3 bn at KODIT and KIBO and KRW 300 bn at the Korea Infrastructure Credit Guarantee. As of 2012, the percentage of guarantees exceeding the legal limit were 6.5% at KODIT, 8.3% at KIBO, and 1.1% at Nongshinbo. Since exceptions to the individual limit on guarantee amount are only granted through a resolution by the FSC board—and only in cases where flexibility is seen as necessary for the good of the national economy—in practice, the scope of exceptions should not be too broad. Moreover, in regard to the reduction of long-term and large-sum guarantees, each guarantee institution shall define the standards of short-term, long-term, and large-sum guarantees.
Third, it is necessary to formulate improvement plans aimed at reducing the number of duplicate guarantees. A review of the status of overlapping guarantees as of 2012 shows that KODIT provides duplicative guarantees in the amount of KRW 2.0792 trn to 4,977 companies already covered by KIBO, and KIBO provides KRW 1.5778 trn to the same number of companies serviced by KODIT. These figures account for 5.3% and 8.9%, respectively, of KODIT’s and KIBO’s total guarantee balance. Regional credit guarantee foundations also provide overlapping guarantees, in amounts of KRW 864.9 bn with KODIT, KRW 455.2 bn with KIBO, and KRW 23.1 bn with both KODIT and KIBO. Such a high number of duplications prevents the effective distribution of guarantee funds and can result in large-sum guarantees. Such overlap should be reduced. Moreover, at present there are no systems to link all policy loans and guarantees. To prevent duplicate guarantees and enable the underwriting of guarantees, accurate information on guarantees needs to be shared between and among institutions. A policy finance integration system should be established to link and share information on policy loans and guarantees.
Fourth, stronger management is needed of large-guarantee-fund businesses with a relatively higher potential for bad accounts. In the case of KODIT, alongside the increase in blue-chip accounts there was an increase in bad accounts, from 3.9% of accounts in 2007 to 4.8% in 2012, whereas at KIBO the percentage of bad accounts decreased from 5.4% to 5.1% over the same period. KODIT needs to strengthen its management of its growing number of bad guarantee accounts. Moreover, stringent management of subrogations at regional credit guarantee foundations is needed; their percentage has increased from 1.3% in 2007 to 3.5% in 2012.
Fifth, in relation to the original property and operation multiple, Nongshinbo's operation multiple decreased from 20.0x in 2007 to 3.9x in 2012. When the multiple is too low, the credit guarantee system does not fulfill the original purpose of institutional financing, which is to increase the utilization of funding by the subject of the guarantee or the applicants. Therefore, Nongshinbo is advised to raise its operation multiple; one method for doing so can be to transfer parts of the original property to government accounting.
Sixth, plans should be prepared to raise the profitability of surplus capital. The yield on guarantee institutions’ surplus funds hovered around 4% in 2011 and 2012. Presently, operations aimed at improving the profitability of surplus funds are limited. It is time to review new strategies for enhancing profitability.
Seventh, it is necessary to diversify the performance indices of each guarantee fund. The existing performance indices of the guarantee businesses of each fund or foundation only take into account the size of the guarantee provided, user satisfaction level, and IT system stability, which is insufficient for practical performance management. Therefore, other performance indexes should be defined to supplement these indexes, such as guarantee ratio by credit grade, overlapping guarantees with other guarantee funds, and profitability of surplus funds.
Kim Taekyu