Credit Guarantee Round Table: A dialogue to explore the application of credit guarantees Khula Credit Guarantee (SOC) Ltd 18. 06. 2020
CONTENTS • Corporate Profile • Background • Governance Structure • sefa distribution model • Guarantee Operational Model • WBG Diagnostic Assessment • Portfolio performance
KCG Corporate Profile 1. Shareholding 100% owned by sefa 1. Address market • State Owned Entity as per Co. Act failure in financial inclusion • Insurance Act 18 of 2017 – Short Term 2. Corporate Type Insurer • Financial Sector Regulation Act 9 of 2017 4. Partial credit 2. Revive KCG guarantees to • Department of Small Business entrepreneurial SMEs that lack Development (DSBD) – spirit in unserved & Objective 3. Reporting adequate (Executive Authority) underserved SMEs Authority collateral • Sefa (Parent entity) • Financial Sector Conduct Authority 4 . Other 3. Leveraging (FSCA) Regulatory financial sector’s • Prudential Authority - SARB Bodies skill base • Companies Act • PFMA 3
Background on journey of KCG 2018 2017 Supplier Credit Guarantees Collaboration with added to KCG products offering National Treasury and World Bank Group to design a new a Partial Department of Small Business Credit Guarantee Development was established - Executive Authority for sefa Khula Credit Guarantee 2014 became a subsidiary of sefa 2015 2012 Portfolio Guarantees developed 2012 and offered to commercial banks, NBFIs and Corporates The South African Micro-Apex Finance and Khula Enterprise Finance Agency and the Small Business Unit of Industrial Development Corporation merged to form sefa 1987 Khula Credit Guarantee was established to house a fund that would operate the credit indemnity scheme
sefa’s Distribution Model CREDIT GUARANTEE SCHEME Partner Financial Institutions 5
KCG Products Guarantees Individual Portfolio Supplier Credit Guarantees Guarantees Guarantees Through * Commercial Banks * Manufacturers commercial * Non Banks (NBFI) * Trade Credit banks * Corporates * Retailers FNB, SBSA, ABSA, Nedbank, FNB, SBSA, MacSteel, Sasol, TCBS, MrPrice, Praxis, ABSA, Nedbank, Barnes Reinforcing Industries Mercantile Bank 6
Guarantee Operational Model • Enables SME to access funding from a financial Purpose of institution the • For the acquisition, establishment or expansion of a Guarantee business • Covers fixed and or moveable assets Working capital • • SME facility up to R5 million • Facility is for 5 years Features of • Indemnity fees are between 1% to 3.5% the • Insurance cover from 50% to 90% Guarantee • Security may be requested by bank • 48 hours free post mentorship 7
Targeted SMMEs SMMEs which Shared PFIs & are viable and Marginal Risk partially KCG Scheme bankable SMMEs which are viable but Full Risk Sub-marginal not bankable KCG scheme from PFIs perspective The targeted SMMEs should meet the following: • SMMEs as per the definition of the Act – turnover , asset base, industry and loan amount sefa ’s targeted geographical areas – priority provinces • • Developmental impact areas • KCG qualifying criteria 8
How to access Portfolio Guarantee Facility Portfolio Guarantee Banks will conduct assessment, using their prudent bank lending criteria • Check the viability,if the deal is acceptable but lacks collateral • Underwrites and disburse (Portfolio) • Informs KCG of facilities granted to SMMEs • The pricing matrix applicable to portfolio guarantees Risk profile Very high High risk Medium Low Very low Coverage ratio 90% 80% 70% 60% 50% Fee structure 3.5% - 3% 3% - 2.5% 2.5% - 2% 2% - 1.5% 1.5%- 1% • Coverage ratios have been determined on a risk sharing basis to provide sufficient protection against the risk of default and moral hazard, while preserving incentives for effective loan origination and monitoring. • Higher coverage ratios should be provided to riskier types of borrowers, along with higher fees. • Fees should be high enough to discourage lenders in using guarantees for good borrowers, but not too excessive to avoid adverse selection. • Step up pricing : Periodic review of the portfolio performance and price increase with rising risk • Commencement fees for portfolio guarantees • 11 Taken-up (utilisation) fees for outstanding guarantee portion of the loan charged annually The price and the coverage have been set in line with international benchmarks.
International Benchmarks: Pricing Selected Risk Based Fees countries Fees vary according to borrowers’ credit Korea 0.5% to 3% p.a. worthiness/ rating. Fees linked to coverage ratio: 0.6% (40% France 0.6% to 0.9% p.a. of loan value coverage),0.9% (70% coverage) 2% of loan amount +1.25% p.a. on Canada No Scalability loan balance Fees depend on borrowers’ credit rating. Malaysia 0.5% to 3.6% p.a. Higher fees are charged to low rated customers 2% -3.5% of loan amount+0.55% Higher fees for larger loans United States p.a. on outstanding guaranteed balance Chile 1-2% p.a. Higher fees for banks with higher defaults Netherlands 2% -3.6% once-off Fees linked to coverage ratio Taiwan 0.75% -1.5% p.a. Fees linked to borrower’s risk rating 10 source: world bank 2015
International Benchmarks: Coverage Depends on borrower’s source: world bank 2015 11
World Bank Diagnostic Assessment : Weaknesses Identified Weaknesses on KCG : The Scheme offers one product whereas other PCGs have more than one (Individual, Portfolio, Hybrid, Wholesale Coverage ranges from 50 – 90%. Internationally it is limited to 50% for start-ups and higher coverage for other segments Fees are based on the loan amount not on risk A cap of 2 -3% over prime imposed on lenders and that limits the interest rate the banks can charge to borrowers Default rate prohibitively high close to 43%. Internationally it varies around 15%. A claim pay-out procedure requires exhausting all legal options for claims are accepted Non – existent MIS makes it hard to track loans The visibility of Scheme increases moral hazard 12
Suggested areas for changes in KCG Guarantee Institutional Claim approval structure pay-out process Monitoring Business Product and model offering reporting 13
What has been implemented • Increased product range • Different industries • Risk Based Pricing • Stop loss mechanism • Clearly defined claim payout process 14
What has been implemented • Increased product range • Different industries • Risk Based Pricing • Stop loss mechanism • Clearly defined claim payout process 15
Portfolio split 16
Product Development As part of the product development the following guarantee types will be introduced: Producer : minimum 51% South African shareholding, tenure 15 yrs, maximum finance R300 m Green Technology User : minimum 70% South African shareholding ,tenure 10 yrs. maximum finance R30 m Financing Scheme Guarantee cover 60%, rebate 2% of lending rate Franchisor be registered with the Department of Trade and Industry and Franchise Association Franchise Financing of South Africa (FASA) Scheme Net asset of shareholders funds R5 m, financing amount R20 m, tenure 10 years or 3 years Flexi Guarantee No limit on number of years in operation , net asset of shareholders funds R5 m, financing up to R5 m , Guarantee cover 30% - 80%, tenure 5 years, financing rate prime Scheme Blanket guarantee on loans already underwritten by FIs, FIs benefit from capital relief, FIs obtain Wholesale Guarantee additional security to unsecured or partially secured SME loans (Reduction in credit exposure) fixed guarantee fees payable yearly Improved methodology: Pricing fixed and agreed upfront, issuance of individual LG not required, Portfolio Guarantee turnaround time 3 days , method of submission Online, easy selling by FI sales team in view of pre-fixed terms
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