CREDIT GUARANTEE MANAGEMENT UNDER THE ECONOMIC CRISIS AND MEASURES TO BOOST ECONOMY By: DM Delute.

CREDIT GUARANTEE CREDIT GUARANTEE MANAGEMENT UNDER THE MANAGEMENT UNDER THE

ECONOMIC CRISIS AND ECONOMIC CRISIS AND MEASURES TO BOOST MEASURES TO BOOST

ECONOMYECONOMY

By: DM Delute

The Small Business Guarantee and The Small Business Guarantee and Finance Corporation (SBGFC), now Finance Corporation (SBGFC), now also known as Small Business also known as Small Business Corporation) was created in 1991 by Corporation) was created in 1991 by virtue of the Magna Carta for SMEs.virtue of the Magna Carta for SMEs.

It is the financing arm of Dept. of It is the financing arm of Dept. of Trade & IndustryTrade & Industry

Started operations on July 16, 1992.Started operations on July 16, 1992.

VISIONVISION ““The champion for a globally The champion for a globally

competitive and viable mSME sector”competitive and viable mSME sector”

MISSION

“Develop and provide financial services and capacity building

support programs in a progressive and sustainable manner to empower

mSMEs as viable businesses.”

MAJOR FINANCING MAJOR FINANCING PROGRAMSPROGRAMS

SME Wholesale LendingSME Wholesale Lending

Credit Guarantee ProgramCredit Guarantee Program

Retail Lending ProgramRetail Lending Program

Wholesale Microfinance ProgramWholesale Microfinance Program

ORGANIZATIONAL STRUCTUREORGANIZATIONAL STRUCTURE

Northern LuzonBDU

Southern LuzonBDU

VisayasBDU

MindanaoBDU

EVP – Financing Delivery Sector

President

GUARANTEE PROGRAM GUARANTEE PROGRAM PERFORMANCEPERFORMANCE

YEAR TOTAL LOANS GUARANTEED (In

Million Ph P)

Increase (Decrease)

2003 223 169%

2004 217 (3%)

2005 160 (26%)

2006 216 35%

2007 186 (14%)

2008 117 (37%)

Table 1 – Total Accounts Approved from Y2003-Y2008

COMPOSITE CLAIMS RATIOCOMPOSITE CLAIMS RATIO

Year

In Million Ph Pesos (Cumulative)*

Claims Ratio (%)

Total Loans Guaranteed

Guarantee Payments

(Gross)

Guarantee Payments

(Net of Recoveries)

Gross Net

2003 6,554 373 256 5.69 3.9

2004 6,771 375 215 5.54 3.2

2005 6,931 377 207 5.44 3.0

2006 7,147 384 199 5.37 2.8

2007 7,333 395 205 5.39 2.8

2008 7,450 406 206 5.45 2.8*Cumulative from 1993-2008

1. 1. To strengthen the program in both outreach To strengthen the program in both outreach and and sustainability, thus, better serving banks in sustainability, thus, better serving banks in their loan guarantee requirements and their loan guarantee requirements and expectations in terms of a robust and reliable expectations in terms of a robust and reliable guarantee call system guarantee call system

2.2. To provide a better fit for near bankable SMEs To provide a better fit for near bankable SMEs through more guarantee facility options, thus, through more guarantee facility options, thus,

assisting in their graduation from being pre-assisting in their graduation from being pre-bankable to being fully bankablebankable to being fully bankable

3.3. To highlight the surety nature of the SBC To highlight the surety nature of the SBC guarantee program where call on the guarantee guarantee program where call on the guarantee can be made “if the borrower will not pay”. can be made “if the borrower will not pay”.

CREDIT GUARANTEE PROGRAM REDESIGNED

Objectives:

Collateral Collateral consideration, consideration, including the credit including the credit guarantee is placed guarantee is placed solely under the solely under the Facility Facility Risk-Rating (FRR),Risk-Rating (FRR), and and the FRR factors should the FRR factors should only affect the pricing only affect the pricing of the loan and not the of the loan and not the credit decision.credit decision.

Credit supplementation framework Credit supplementation framework

The redesigned program The redesigned program adopts a risk-based adopts a risk-based lending framework, lending framework, moving away from moving away from traditional orientation traditional orientation of the collateral factor, of the collateral factor, and where evaluation is and where evaluation is purely based on risk purely based on risk factors pertaining to the factors pertaining to the borrower as aided by borrower as aided by the the Borrower Risk-Borrower Risk-Rating (BRR) system.Rating (BRR) system.

Risk-based orientationRisk-based orientation

Early Guarantee Early Guarantee Review and Guarantee Review and Guarantee Call ProvisionCall Provision

SB Corp. shall make an SB Corp. shall make an early issuance of the early issuance of the Certificate of Completeness Certificate of Completeness of Loan Documents, in of Loan Documents, in contrast to the earlier contrast to the earlier certification process where certification process where it would begin only upon it would begin only upon call on the guaranteecall on the guarantee

Credit supplementation Credit supplementation framework framework

Pro-active Monitoring Pro-active Monitoring and Remedial and Remedial Management PostureManagement Posture

SB Corp. response to SB Corp. response to PFI’s monitoring PFI’s monitoring compliance output shall compliance output shall be timely and focused, be timely and focused, with the end to prevent with the end to prevent further deterioration of further deterioration of the weakened business the weakened business and/ or credit position of and/ or credit position of the SME borrowerthe SME borrower

Credit Evaluation Policy:Credit Evaluation Policy:

BRR-based – Out of a 10-scale BRR-based – Out of a 10-scale

BRR system, “1” represents lowerBRR system, “1” represents lower

risk and “10” the highest. BRR 5risk and “10” the highest. BRR 5

is SBC passing mark.is SBC passing mark.

TABLE 3 – SB Corp. BRR SCORECARDTABLE 3 – SB Corp. BRR SCORECARD

Indicators Item MarkTotal Score

1. Administration

Experience of owners/management

Owners’ age, health & Succession

Financial Capacity of owners

Attitude to banks

5.0

5.0

5.0

5.0

20

2. Market

Clients/Customers

Increase in Sales

7.5

7.5

15

Indicators Item Mark Total Score

3. Production

Suppliers

Inventory

Production/Service

Capacity & Potential to

Increase Business Location

4.0

4.0

4.0

3.0

15

4. Financial

Current Ratio

Debt-to-Equity Ratio

Debt Servicing Capacity

Accounts Receivable Level

7.5

7.5

30.0

5.0

50

Total Score 100 100

Risk Description Probability of default 5 years Per Moody’s

Score Risk quality

1 Excellent 2% > 89 Very Low risk 2 Strong 3% 80-89 Low risk 3 Good 4% 70-79 Moderate risk 4 Fair 6% 60-69 5 Acceptable 8% 55-59 High risk 6 Marginal 15% 50-54 7 Insatisfactory 30% 45-49 Very high risk 8 Substandard 50% 40-44 9 Doubtful 80% 35-39

10 Expected Loss 100% < 35

TABLE 4 – BORROWER RISK RATING

1.1. The guarantee fee rate is based on the BRR of the SME The guarantee fee rate is based on the BRR of the SME borrower. Corresponding change is made thereafter borrower. Corresponding change is made thereafter depending on the fluctuation of the BRR as obtained depending on the fluctuation of the BRR as obtained from the review and account monitoring.from the review and account monitoring.

2.2. The guarantee fee is computed based on the estimated The guarantee fee is computed based on the estimated probability of default under the BRR, the cost of the 1/3 probability of default under the BRR, the cost of the 1/3 contingent liability fund of SB Corp. for the program, contingent liability fund of SB Corp. for the program, and the computed transaction cost. Presently, the fee and the computed transaction cost. Presently, the fee ranges from 1.0% to 3.0% per annum. ranges from 1.0% to 3.0% per annum.

Guarantee fee structureGuarantee fee structure

Table 5 – Guarantee Fee RateTable 5 – Guarantee Fee Rate

Borrower Risk Rating Guarantee Fee (p.a.)

1 1.00%

2 1.25%

3 1.50%

4 2.00%

5 3.00%

Account monitoring covenant & sanctions Account monitoring covenant & sanctions

1.1. The PFI shall be required to conduct a review of the The PFI shall be required to conduct a review of the BRR which includes a project visit on the SME BRR which includes a project visit on the SME borrower, and to make a timely report for borrower, and to make a timely report for submission to SB Corp. This will allow an early submission to SB Corp. This will allow an early response from SB Corp. in case of BRR response from SB Corp. in case of BRR deterioration.deterioration.

2.2. The monitoring schedule shall be BRR-based, as The monitoring schedule shall be BRR-based, as

follows: follows: TABLE 6 – BRR FREQUENCY TABLE 6 – BRR FREQUENCY BRRBRR BRR-Review FrequencyBRR-Review Frequency

1 or 21 or 2 Once a year full report with Once a year full report with project visitproject visit

3 or 43 or 4 Once a year full report with Once a year full report with project visit; plus semi-project visit; plus semi-annual credit investigation annual credit investigation (CI) update(CI) update

55 Semi-annual full report with Semi-annual full report with project visitproject visit

Other Government Support ProgramsOther Government Support Programs

Creation of Credit Surety FundCreation of Credit Surety Fund

-Contributed by participating coops, -Contributed by participating coops,

LGUs, Banks and Central Bank. LGUs, Banks and Central Bank.

-Used to guarantee clean loans of mSMEs who -Used to guarantee clean loans of mSMEs who are members of coopsare members of coops

and obtained loans from banksand obtained loans from banks

The Barangay Micro Business The Barangay Micro Business Enterprise(BMBE) Law & Creation of Enterprise(BMBE) Law & Creation of BMBE Development FundBMBE Development Fund

BMBE Law – provides exemption from income tax BMBE Law – provides exemption from income tax and minimum wage law to qualified micro and minimum wage law to qualified micro entrepreneur in the countryside.entrepreneur in the countryside.

BMBE DEVELOPMENT FUND – used to assistBMBE DEVELOPMENT FUND – used to assist

mSMEs in various requirements such as skills mSMEs in various requirements such as skills training, entrepreneurship development, business training, entrepreneurship development, business advisory, technology intervention, technology advisory, technology intervention, technology incubation/commercialization, policy advocacy, incubation/commercialization, policy advocacy, database development, business matching database development, business matching activities, trade fairs, etc.activities, trade fairs, etc.

End of presentationEnd of presentation

Maraming salamat po.Maraming salamat po.