EUROPEAN MUTUAL GUARANTEE ASSOCIATION 40, rue Washington, BE 1050 Brussels Tf 32 2 640 16 65 infoaec

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EUROPEAN MUTUAL GUARANTEE ASSOCIATION40 rue
Washington BE 1050 BrusselsTf 32 2 640 16 65
info_at_aecm.be
THE GUARANTEE A FINANCIAL TOOL AT THE SERVICE
OF SMES PERFORMANCE INDICATORS A. DOUETTE
SECRETARY GENERAL
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CREDIT
CREDIT lt LATIN CREDERE TO
BELIEVE CREDIT IS THE MATERIALIZATION OF A
TRUSTFUL RELATIONSHIP BETWEEN A LENDER AND A
BORROWER THE LENDER HOLDER AND RESPONSIBLE OF
PUBLIC SAVINGS CANNOT AFFORD TO LOSE MORE THAN
ONE TRANSACTION OUT OF 100 OF THE SAME VALUE
1st PROTECTION THE WILLINGNESS OF THE BORROWER
TO REPAY HIS LOAN 2nd PROTECTION THE EXISTENCE
OF SECURITIES WHICH PRIORITIZE HIS LOAN IN CASE
OF BANKRUPTCY
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CREDIT AND SMEs


99 of the 23 million European
businesses Bank 70 of their external
resources Usual managerial risks competition
change in demand in technology unrecovered
commercial receivables economic cycle...
Specific SME elements no strategic view
inconsistent financial statements inadequate
management capabilities low equity low
profitability in lending high cost in obtaining
information Personal risks small entrepreneur
as all round man health divorce SME are
constrained in getting formal finance
SMEs
WEAKNESSES
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A MARKET ORIENTED APPROACH TO SME FINANCE

• Focuses on reducing the risks and transaction
  costs associated with lending to SMEs
• Risk sharing techniques
• Preparation of the credit file / accompaniement
  and
• follow-up (consulting pre and post granting
  the credit)
• Strengthens the capacity of financial
  institutions to serve smaller clients promotes
  sustainable lending to SMEs
• Learning process what is a SME how is
  it managed
• Less bureaucratic procedures simplified
  credit file easier
• decision making accessible language

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THE GUARANTEE
GUARANTEE lt OLD GERMAN WARJAN WARRANCE
SOMETHING GENUINE TRUE English warantee
French garantie symbolic colour red a
precious dyeing plant la garance IN THE
FINANCIAL INDUSTRY the guarantee is the
combination of two techniques FINANCIAL ANALYIS
a professional assessment of the creditworthiness
of the borrower the exposure providing an
added value to the decision process made by the
lender JURIDICAL MACHINERY the legal provisions
that rule the rights and obligations of a
personal security offered as a partial and
complementary collateral substitute.
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EFFECTS OF THE GUARANTEEPERFORMANCE INDICATORS

• Market relevance of the instrument
• Economic additionality
• Financial additionality
• Leverage
• Effectiveness
• Efficiency

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PERFORMANCE INDICATORSRELEVANCE
Capacity to fill / reduce market gaps in SMEs
lending Criteria CGOs in countries with low
level of financial intermediation Offer a
general incentive to lend for bankers who usually
express a general reluctance to address SMEs
markets and have unaffordable collateral
requirements (150 to 200 of the loan amount).
CGOs in more advanced financial economies
Much more targeted in addressing at the
choice of the banker a range of businesses that
are vulnerable (weaker financial sructure
located in less developed areas in a threatened
sector in a risky position on the life curve
addressing the bank in the down turn of the
economic cycle)
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PERFORMANCE INDICATORSECONOMIC ADDITIONALITY
Macro-economic benefits of an efficient Credit
Guarantee Organisation Criteria Added value
creation (GDP) Market behaviours new needs new
market trends Innovation new products
processes management.. Productivity and
competitiveness of the economy Jobs additional
employment sliding employment Continuity
ensure the transfer of generations Densification
of the productive tissue of an economy Additional
income tax opportunities Reconversion of
depressed areas animation of rural regions And
so on
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PERFORMANCE INDICATORSFINANCIAL ADDITIONALITY
Access to credit for applicants that would
otherwise be rejected (/- 15 credit rejections
in EU) Access to better credit terms Reduces
information asymetry and adverse selection
(start-ups immaterial investments
micro-guarantees) by e.g. -Qualitative
assessments (complementing a quantitative
analysis) -Appraisal by peers (mutual
systems) Improves the lending conditions for
small borrowers (gap with large firms) -Longer
term loans grace periods.. -lower interest
rates -Less collaterals by external
protection CGOs might help developing
institutional capacity in SME lending through
changes in behavior and perception of lenders
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PERFORMANCE INDICATORSLEVERAGE
Capacity to develop a much larger portfolio
than the own funds at the disposal of the CGO -
Leverage Outstanding guarantee commitments /
own funds - Multiplier Outstanding underlying
loans / own funds of the guarantor Specificity
of CGOs economic utilization of the equity
cheaper setting up with a maximum effect How
to raise the leverage Through a good
supervision Through diversification of risks
in the portfolio Through counter-guarantees Thro
ugh modulation of the guarantee rate
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PERFORMANCE INDICATORSEFFECTIVENESS
Capacity to reach a good macro-economic
performance in terms of market reach Ex Italy
40 of craftsmen are partners of
Confidi Criteria Market share Number of
guarantees granted How to improve the
effectiveness. Combine Guarantee
Advice Improve visibility accessibility
networking Develop complementarity with
lenders Create dedicated products
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PERFORMANCE INDICATORSEFFICIENCY
Productivity quality of the management Linked
with the structure and the critical size of a
CGO Criteria -Speed to deliver the service
(intranet ) -Minimize the Cost Income ratio How
to improve the efficiency -Cutting costs
(focusing on the decision making and the
follow-up). -No red tape (easy application
same file as the banker..) -Under conditions
portfolio guarantee -Formation and training of
the staff
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Some conclusions

• Beyond obvious positive performance criteriathe
  situation can be contrasted and variable from
  scheme to scheme
• Focus on
• The social economic role a balanced target
  between the macro-economic incentive effect
  and the micro-economic Long term sustainability
  and growth capacity
• Not too much subsidy dependance (fair public
  private partnership)
• Management of the default rate

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Some conclusions

• No obvious benchmark
• Three key elements to take into account in
  assessing the performance
• How (un)favourable is the environment (law
  courts supervision consensus between SMEs
  lenders and authorities to accept a CGO)
• How the CGO is designed (simple to put on the
  paper tough to set in practice rely on good
  experiences !)
• How do the Board and Management conceive the
  strategy and the policies (target limits
  leverage fee marketing in daily management)