Global financial crisis on SMEs • Global financial crisis • Triggered by US subprime mortgage crisis in 2008 • Huge Impact on both emerging and developed countries • Impact of Crisis on SMEs • Vulnerable to the credit crunch due to limited financing resources, weak structures, and low credit ratings • SMEs suffered most in global crisis from demand slump and lack of access to financing

Korea’s credit guarantee policy in the pre-financial crisis period • Enhancing the efficiency of the guarantee and reinforcing the role of the private sector • These policy directions were temporarily suspended because of the current financial crisis

III. Support to SMEs in Crisis

Contingency Measures • Contingency plans have been implemented on four occasions to cope with the global financial crisis proactively.

Contingency Measures Announcement of the government’s plan for an epoch-making expansion of credit guarantees (Contingency Measure IV) • Contingency plans to overcome the financial crisis • Continuing the global crisis despite of implementation of contingency measures I ~ III • SMEs’ financial difficulties amid the crunch in the fund market due to the global financial crisis

Contingency Measures Contingency Measure IV (2009.02) • Extension of the guarantee period for existing guarantees- Existing guarantees due in 2009 is extended. - Businesses that have gone bankrupt or ceased operating • are excluded from the extension • Mitigation of qualified levels- Of the ten categories, from level 6(B) to level 8(CC) • The ceiling for the guarantee amount was increased - 100% → 130 ~ 150% • Concentrated support for priority sectors - exporting businesses, green growth-related businesses, • hi-tech businesses and startups

Focused Supporting Group • Sectors creating new growth engines • Green growth-related sectors, venture startups, exporting and technology innovative business are selected as 'Focused Supporting Group' (Unit: hundred million won)

Selective Support System • Selective support system to bolster SMEs’ competitiveness • Four service categories • For those requiring managerial improvement or restructuring, the service is provided on condition that the beneficiary submits a plan for technological enhancement and improvement of its financial structure

Improving SMEs access to Finance [Changes in the Plan for Provision of Guarantees (Unit: Trillion Won)] • Planned target figure for outstanding guarantees was increased to 17.1 trillion won • Changed from the 14.5 trillion won in consideration of the market situation.

Improving SMEs access to Finance 1.78times↑ 3.08times↑ [Total Amount of Guarantees Provided] [New Guarantees Provided] • Guarantee amount increased rapidly • In May 2009,The total amount provided increased 1.78-fold from the corresponding period in the preceding year. - The amount provided by the newly established service increased 3.08 fold (Unit: Hundred Million Won)

Default rate (Unit : hundred millon won, %) • Despite the expansion of the guarantee volume, the default rate remained at lower level • Considering the time difference between the provision of the service and the occurrence of default, however, it is too early to say whether the above point has much significance.

The Result of Measures (Unit : %) • Mid term lending market did not contract as much as expected, even in the global financial crisis • The extension of guarantees and ease of terms on debt have defended SMEs against insolvency • The delinquency rate for loans to SMEs began to show signs of stabilization

III. Pitfalls and Countermeasures

Pitfalls of Increasing Guarantees • Moral Hazard of lending banks and SMEs • Lending Banks are not motivated to screen and monitor the loans properly when loans are fully covered by guarantee institutions. • SMEs become subsidy-dependent • Misallocation of Resources • Without careful screening, government supports to SMEs are likely to result in misallocation of resources

Measures against the moral hazards • A system designed to combat fund misappropriation • Imposition of obligations intended to prevent fund misappropriation • Making it compulsory to submit a fund execution plan in the case of a new guarantee for an amount of 3 hundred million won or more and verifying whether the plan has been complied with. • In cases of fund misappropriation, Kibo considers prohibiting guarantee and exercising claim collection right. • Checking changes in management related matters of SMEs • Making it obligatory for SMEs to notify any changes in important management -related matters • Example of events which required obligatory notification : Changes in management boards or shareholders, transfers of business, sales of major assets and so on.

Encouraging the private sector Special Contribution 11banks are signed to join this program Financial Institution Ceiling of guarantees provided (12times the contribution amount) Guarantee(100%) SMEs (Businesses serving as new growth engines] Loans (preferential treatment in interest rate) Preferential treatment such as reduction of guarantee fees • Special guarantee program under financial institutions' special contribution • The special guarantee is provided up to an amount equal to 12 times of financial institution’s special contribution to Kibo • Preferential treatments Kibo offers 100% coverage guarantee and reduces guarantee feeLowering interest rates or simplifying the handling procedure. • Agreement signed with 11 banks and amounting to 216.5 billion won, the guarantee ceiling has been set at 2,748 billion won.

Encouraging the private sector 대기업 Large-sized businesses ① Agreement ② Deposit an amount ④ Recommendation ③ Request selection as a beneficiary of the service ⑤ Apply for guarantee ⑥ Issue a guarantee letter ⑤ Apply for a loan Subcontractor Financial Institution ⑦ Loan made • Special guarantee program under special contribution from large-sized firms • Large-sized firms and financial institutions make special joint contribution to guarantee-providing institutions, or large-sized businesses deposit a certain amount into a no-interest accruing account at a bank (bearing the burden of interest for loans) • Large-sized firms recommend their sub-contractors, Kibo provides a preferential service to such subcontractors • Guarantee ratio: 95% or higher , Service fees : Additional Reduction by 0.2 ~ 0.3%

IV. Conclusion

The role of a guarantee-providing institution amid the current financial crisis • Proactive financial support for SMEs to cope with the global financial crisis - expanding credit guarantees and the policy funds. • Credit guarantee scheme serves as a useful policy measure that supplements the function of the market • Providing cash liquidity to SMEs in a prompt and efficient way • Preventing defaults ⇒ Stabilizing financial market • In the current crisis, guarantee institutions should minimize the moral hazard of lending banks and SMEs • Allocation of resources is also critical factors for the success of the guarantee scheme amid current financial crisis

Thank you !

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