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Policies and Programs of ADB to Enhance Access to Finance for SME

Joint Regional Symposium: Best Practice Regulatory Principles Supporting MSME Access to Finance

Manila, 27 June 2011

Qifeng Zhang

Principal Financial Sector Specialist

Asian Development Bank

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this presentation and accepts no responsibility for anyconsequences of their use. Unless otherwise noted, $ refers to US dollars.

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Outline• Introduction: about ADB

• ADB’s Policies on SME Finance

• ADB’s Operations on SME Finance

• Good Practice for SME Finance (Financial Intermediation Program)

• Two Examples of ADB Project for SME Sector Development

• Final Remarks and Recommended ReadingFinal Remarks and Recommended Reading

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Introduction: About ADB

More info: <http://www.adb.org/About/>More info: <http://www.adb.org/About/>

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ADB: a Regional Development Bank

• Established in 1966

• 67 members (48 regional, 19 non-67 members (48 regional, 19 non-regional)regional)

• Vision: Asia and Pacific free of povertyVision: Asia and Pacific free of poverty

• Capital increase in 2009: from $55 Capital increase in 2009: from $55 billion to $165 billionbillion to $165 billion

• AAA ratedAAA rated

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Major Financial Instruments

• LoansLoans• Multitranche financing facility (MFF)Multitranche financing facility (MFF)• Technical assistance (TA)Technical assistance (TA)• GrantGrant• Equity investmentsEquity investments• GuaranteesGuaranteesMore info: <http://adb.org/documents/policies/financial-More info: <http://adb.org/documents/policies/financial-

instruments-procedures/default.asp>instruments-procedures/default.asp>

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Departments in ADB Working on SME finance

Public sector operations• Central and West Asia Department

(CWRD)• East Asia Department (EARD)• Pacific Department (PARD)• South Asia Department (SARD)• Southeast Asia Department (SERD)

Private Sector Operations Department (PSOD) Office of Regional Economic Integration (OREI)

2010 Approvals

Loans: $11.5 billion, for 118 loansLoans: $11.5 billion, for 118 loans TAs: $175.5 million, for 243 projectsTAs: $175.5 million, for 243 projects Grants: $982 million for 40 projectsGrants: $982 million for 40 projects Equity investments: $243 million, for 8 Equity investments: $243 million, for 8

projectsprojects Guarantees: $982 million for 5 projectsGuarantees: $982 million for 5 projects

Note: the foregoing consists of total approvals for all sectors.Note: the foregoing consists of total approvals for all sectors.

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ADB’s Policies on SME Finance

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2001: Private Sector Operations (PSO)

– Strategic Directions and ReviewFour Major Elements of the PSO Strategy• Focus primarily on existing strengths in

infrastructure and capital markets• Extend country and sector reach in new areas

(New sector areas include: SME, IT and social infrastructure)

• Make wider use of innovative financial instruments• Build strategic alliances and partnerships with

other institutions

More info: < http://www.adb.org/Documents/Policies/PSO/strategic-directions.pdf?bcsi_scan_7823DFCE46415F3E=IboKGwqcKeintJ6cw25bDgMAAABdW2kD&bcsi_scan_filename=strategic-directions.pdf >

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2001: Private Sector Operations (PSO)

– Strategic Directions and ReviewPolicy Guidance on SME Finance under

PSO• Acknowledged key role of SMEs for economic

prospects of most DMCs• Assistance to SMEs to be provided mainly

through investment funds or local institutions (i.e., financial intermediation) instead of direct lending

• Other appropriate models to be explored

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2008: Long-Term Strategic Framework

Five core areas of operations under this strategy (also called Strategy 2020)

• Infrastructure• Environment• Regional cooperation and integration• Finance sector development (FSD)• Education

More info: <http://www.adb.org/strategy2020/>

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FSD Under Strategy 2020• FSD is essential to ensuring sustainable private

sector-led economic growth • Support financial sector at the regional and national

levels• Develop financial infrastructure, institutions, and

products and services • Create enabling environment for microfinance, rural

finance institutions, and SMEs• Explore the use of technologies to expand the reach

of the formal financial system • Continue to help build the capacity of financial

institutions—and of their regulators—by introducing international best practices

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2011: Financial Sector Operational Plan

Two priority areas for FSD under FS Operational Plan

• Financial inclusion (including SMEs’ access to finance)

• Capital markets for infrastructure finance

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2011: Financial Sector Operational Plan

Major focus for SMEs’ Access to finance

• Access to credit

• Financial infrastructure (secured transaction regime, contract enforcement mechanism, and credit information system)

• Leasing

• Credit guarantee

• Factoring

• Insurance

• Capital markets

• Trade financing

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ADB’s Operations on SME Finance

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ADB SME Finance Projects Approvals (as of 14 March 2011)

Public sector loans: $840 million, for 18 projects

Non-sovereign operations (loan, equity investment, and guarantee): $543.2 million, for 49 projects

TA: $6.64 million for 16 projects RETA: $0.33 million for 2 projects Grant: $2.54 million for 1 projectTotal approvals: $1.39 billion

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Good Practice for SME Finance (Financial Intermediation Program)

More info: <http://www.adb.org/Documents/SES/REG/SES-REG-2008-71/SES-REG-2008-71.pdf>

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Creating a Conducive Policy and Regulatory Framework

To ease constraints on SME finance:• Lack of institutional interest in financing SMEs• Lack of property right or mechanism to enable

SMEs pledge assets for borrowings• Lack of loan guarantee arrangement • Lack of competition in banking• Lack of credit information registries• Regulatory and institutional barriers for entry to

capital markets

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Financial Sector Policy

To promote financial sector development:• Maintain macroeconomic stability • Deregulate interest rates for adequate spreads

to cover lender’s cost • Reduce barriers to entry to create a more

competitive banking environment• Enhance legal, regulatory, and prudential

supervision framework

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Prudential Standards Affecting SMEs

Appropriate prudential norms for:• Capital adequacy• Portfolio quality• Loan classification• Loan provision• Risk assessment systems• Risk control capability of financial institutions

management, staff, and supervisory agencies

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Adequate Debt Recovery Systems

• Clear legal title to property • Creation of security interests (permitted to

pledge a variety of assets for borrowing)• Perfection of security interests (accurate

registries)• Enforcement of security interests (permitted to

agree to rapid, nonjudicial enforcement of loan contracts)

• Bankruptcy law and regulations

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Information Collection and Use

• Regulatory framework for establishment and functioning of credit bureau

• Collection of positive as well as negative credit information

• Comprehensive information to include not only loan and credit card, but also payment history (trade creditors, retailers, utilities), lawsuits, and bankruptcy

• Enable sharing of data while protecting the rights of borrowers

• Protect the credit bureau in respect of their bona fide acts

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Capacity Building for SME Lending

Imparting international good practices is important for new or small SME financing institutions, to improve credit skills and operating processes

• Ownership of capacity building program• Clear capacity development targets• Proper sequencing of interventions• Adequate incentive systems• Recognition of local value• Flexibility of the program• Fitting the program into the bank’s overall strategy for SME

finance for sustainability of the training• Integrating the training into the bank’s plan and procedures

(such as credit assessment methods)• Interactivity, continuous refinement and improvement

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Key Lessons for Profitable SME Lending

• Strong strategic approach and commitment• Proper risk management framework• Defined market segments, with core tailored

products• Cross-selling of deposit and fee-based products• Separate department / division for SME lending• Network and customer relationship with SMEs• Centralized processing, with field marketing,

origination, monitoring, and collection

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Key Ingredients of Service Delivery Approach

• Strong sales culture, responsiveness, and dedication to efficiency

• Strong SME financing policies and procedures

• Strong decision-making and control mechanisms

• Lending officer made responsible throughout the entire lending cycle

• Performance-based compensation

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Credit Guarantee Scheme

• Should be independent legal corporation, operated by the parties involved, and open to competing lending institutions

• Needs to prevent moral hazard and not to affect incentive for banks to monitor and retrieve loans

• Defines clearly the conditions that will trigger claims and repayment in the contract with lender

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Two Examples of ADB Project for SME Sector Development

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PAK: SME Sector Development Program

Basic Info• Country: Pakistan• Year of ADB approval: 2003• Instruments:

OCR loan: $152 million equivalentADF loan: $18 million equivalentPartial credit guarantee: $65 million TA grant: $0.25 million

• More info on this project:

<http://www.adb.org/projects/project.asp?id=34327>

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PAK: SME Sector Development Program

Major components in project design• Key Result Area (KRA) 1: Improve SME policy environment

Develop SME policy Establish effective labor protection and inspection

policies Enhance effectiveness of SME Development Authority

• KRA 2: Improve market-based SME access to business development services

• KRA 3: Improve market-based access to and delivery of SME finance Improve regulatory and credit information infrastructure Build private financial institutions’ capacity Restructure and privatize the SME Bank

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PAK: SME Sector Development Program

Major outputs delivered under KRA for improving regulatory and credit information infrastructure

• Central bank issued prudential regulations for SME finance to support non collateral-based lending for SMEs

• Central bank improved asset classification and risk provisioning requirements

• A study was completed on strengthening the Secured Transactions Framework (establishing a system to create security interest on moveable and immovable assets to facilitate access to formal financial intermediations by small borrowers)

• New system was developed to enhance the Credit Information Bureau (CIB), by expanding coverage to all credit transactions (threshold eliminated) and shortening reporting period from within 15 days after the month of transaction to within 10 days from the date of settlement

• Credit information reports could be generated on consumer and corporate borrowers as essential credit information for lending decisions

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PAK: SME Sector Development Program

Assessment made by the Program Completion Report (PCR) as validated by Independent Evaluation Department (IED)

• Design and formulation of the program: relevant

• KRA 3.1 on improving regulatory and credit information infrastructure: fully satisfactory

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PRC: Development of Financing Policies and Mechanisms for SME

Basic info

• Country: People’s Republic of China (PRC)

• Year of ADB approval: 2000

• Instrument: TA grant for $700,000• More info on this project:

<http://www.adb.org/Documents/TARs/PRC/R294-00.pdf>

<http://www.adb.org/Documents/TACRs/PRC/tacr_prc_3534.pdf>

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PRC: Development of Financing Policies and Mechanisms for SME

Scope of the project• Provide advice on suitable SME finance policies and

mechanisms• Survey and review existing SME credit guarantee

fund operations in PRC• Identify suitable strategies and conditions for SME

finance from equity investors• Design a pilot equity support scheme for SME

finance• Disseminate TA findings

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PRC: Development of Financing Policies and Mechanisms for SME

Major outputs delivered - a comprehensive three-volume TA report comprising:

• Review and assessment of the SME-related policy in PRC, including major government support program

• Review of major laws and regulations in PRC in relation to SME financing

• Identification of major impediments• Presentation of international practices (e.g., USA, Australia, etc)

on government support to SMEs• Provide model legislation, regulations, and operating procedures• Recommendations on a broad range of issues, including

establishment of a credit reporting system More details on TA consultant’s report:

<http://www.adb.org/Documents/Reports/Dev_SME_Fin_System/default.asp>

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Final Remarks and Recommended Final Remarks and Recommended ReadingReading

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Final Remarks

• Access to finance alone is not the magic bullet for SME development. Holistic approach and synchronized efforts are needed to ease constraints in other areas, such as licensing, land/property title, judicial system, levies and taxes, etc.

• SME access to finance could not be addressed only through credit expansion. A financial eco-system is required, which includes suitable financial infrastructure (e.g., credit bureau, creation and enforcement of collateral) and mutually reinforcing financing channels (guarantee scheme, equity funds, venture capital, capital market)

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Final Remarks

• Commercial banks may have natural tendency to shy away from SME lending. Tightening capital and liquidity rules may further disincentivize bank lending to SME. A balance is needed to continue supporting SME lending while maintaining financial stability (in particular avoiding systemic risk)

• Microfinance, SME finance, and corporate finance serve different market segments, and have distinctive features. Hence, the approach and focus of their regulation and supervision should also be tailor-made

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Final Remarks• Consumer protection and responsible finance are

conducive to healthy financial sector development and should be properly incorporated in the structure of regulatory and supervision system for SME finance

• Country context differs. It is important to carefully examine key conditions for regulatory and supervision rules to be relevant, implementable, and effective

• Broad consultations with all stakeholders is a necessary step in the process of establishing/ improving regulatory and supervision rules

• Success lies in details and in coordination for implementation

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Recommended reading• ADB: Enterprises in Asia-Fostering Dynamism in SMEs (2009)http://www.adb.org/documents/books/key_indicators/2009/pdf/KI2009-Special-Chapter.pdf?

bcsi_scan_7823DFCE46415F3E=b3Zj4fQw3bTkwVcQRmM+YwMAAACwzokD&bcsi_scan_filename=KI2009-Special-Chapter.pdf

• AFI: Financial Inclusion and Financial Stability: Current Policy Issues (2010)

http://www.adbi.org/files/2010.12.21.wp259.financial.inclusion.stability.policy.issues.pdf

• IFC: Scaling-Up SME Access to Financial Services in the Developing World (2010)

http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEFinanceStocktaking/$FILE/G20_Stocktaking_Report.pdf?bcsi_scan_7823DFCE46415F3E=l73R9+A+ooEPdXkg6LdsEQMAAAADWo0D&bcsi_scan_filename=G20_Stocktaking_Report.pdf

• Korea Capital Market Institute: Financial System Architecture for Effective SME Financing (2010)

http://www.aric.adb.org/pdf/seminarseries/SS37ppt_Financial_System_Architecture.pdf

• KPMG: BASEL III: Issues and Implications (2011)http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/basell-III-issues-implications.pdf

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Thank you.