putting in place the conditions to set-up a credit ... · to set-up a credit guarantee scheme for...
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OECD Eurasia Competitiveness Programme 1
EASTERN EUROPE AND SOUTH CAUCASUS INITIATIVE
PUTTING IN PLACE THE CONDITIONS TO SET-UP A CREDIT GUARANTEE SCHEME FOR AGRIBUSINESS SMES IN UKRAINE
Sixth Task Force Meeting
Tuesday 23 February 2016, Kyiv
OECD Eurasia Competitiveness Programme
Today’s meeting
2
1 – Key directions
2 – Project management
a) Provide comments on primary and secondary features of the CGS
b) Provide comments on identified location options to register the scheme’s funds
c) Provide comments on recommended risk management tools (including risk policy manual;
asset/liability mismatch tool and accounting, tax and compliance tool)
d) Provide comments on the Presentation and the two draft project reports by 29 February 2016
e) Endorse and provide comment on next steps following project completion (appointment of parties responsible for pursuing seeking funds from donor institutions, etc.)
FOR ACTION
OECD Eurasia Competitiveness Programme 3
Primary features Secondary features
To design a CGS for Ukraine, the OECD identified a set of primary and
secondary characteristics
Those aspects which constitute the basic concept
of the CGS – the “public policy” decisions of the
scheme
Definition
Including:
Definition
Including:
All other design features of the CGS. They are
developed based on an analysis of how best the
primary features of the CGS can be developed
within the specific institutional and market
context and the projections of a financial model
Mission
Targeting
Type
Guarantee product
Funding and registration
Governance and staffing
Guarantee process
Monitoring and evaluation
A B
OECD Eurasia Competitiveness Programme
To increase credit access for target group
4
Primary characteristics decisions
Agricultural SMEs, based in Cherkassy, Kharkhiv, Poltava and
Vinnytsia
Internationally-funded, public/private entity
Mission Targeting
Type
A
Primary characteristics form the basic concept of the CGS
Primary characteristics REMINDER
OECD Eurasia Competitiveness Programme 5
Strategy: Supervisory Board (public/private)
Operation: Lean management team (private)
Fund seeded with €3 million
Guarantee application: banks
Loan appraisal: banks
Partners: 2-3 banks
Products: WC/E/I
Eligibility: firm size +
nature; loan nature
Guarantee
Processes
Claim: foreclosure begun
Claim payment: staggered
Collateral recovery: banks
In case of default
Recovery income: 50/50
Monitoring and
evaluation
Guarantee
Product
Secondary characteristics
Coverage rate: 50%
Governance and staffing
Funding and registration
Bank-focused LLC / NBFI
providing individual guarantees
Fund seeded with €10 million
Pricing: 1% + 1%
Sustainability elements
Additionality elements
B
From these characteristics a set of secondary features has been
developed, based on the specific institutional and market environment….
OECD Eurasia Competitiveness Programme 6
…. as well as modelling various assumptions in a financial model that has
been developed for the CGS in Ukraine
Development of a financial model
Analysis of Ukrainian
environment and target
group
OECD / CESEE best practice
Discussions with
stakeholders
Design features based on …
Secondary characteristics B
OECD Eurasia Competitiveness Programme 7
Strategy: Supervisory Board (public/private)
Operation: Lean management team (private)
Fund seeded with €3 million
Guarantee application: banks
Loan appraisal: banks
Partners: 2-3 banks
Products: WC/E/I
Eligibility: firm size +
nature; loan nature
Guarantee
Processes
Claim: foreclosure begun
Claim payment: staggered
Collateral recovery: banks
In case of default
Recovery income: 50/50
Monitoring and
evaluation
Guarantee
Product
Secondary characteristics: guarantee product
Coverage rate: 50%
Governance and staffing
Funding and registration
Bank-focused LLC / NBFI
providing individual guarantees
Fund seeded with €10 million
Pricing: 1% + 1%
First, recommendations have been made on the scheme’s product
offering
2
1
3
4
5
AGENDA
Sustainability elements
Additionality elements
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee product
Guarantees would be provided on three types of loan product
8
PRODUCTS 1
Investment capital - machinery: seed drills, combines, land
€80,000-500,000 Av.: €120,000 (~₴2.8 mn.)
• Type: Equipment/investment loan • Seasonality: None required • Average maturity: 36mth av.
Light trucks, trailers, transport equipment
€60,000-120,000 Average: €75,000 (~₴1.76 mn.)
• Type: cash/equipment/investment • Seasonality: some may be required • Average maturity: 18-20mth av.
Working capital - small machinery: seed drills, combines
€20,000- 60,000 Average: €40,000 (~₴940,000)
• Type: cash loan • Seasonality: usually, yes. May need
to be paid before winter • Average maturity: 8-10 mnth av.
Production Equipment Investment
A review of the loan products of select commercial banks in Ukraine found that:
• 88% offered working capital loans (here: production)
• 78% offered short-term investment loans (here: equipment)
• only 22% offered long-term investment loans (here: investment)
For which the target group was eligible
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee product
9
Quality check
Limited tender
2-3 Initial group of CGS
partner banks
Relevance check
Pre-selection
7-10 Based on quantitative
questionnaires and
qualitative interviews
Eligibility check
Initial screening
17/43 Check based on positive
(e.g. history of
sustainable agricultural
lending, presence in
pilot regions) and
negative criteria (e.g.
transparency & stability)
Delivered by a carefully-chosen set of partner banks, based on the
agreed bank selection methodology
Preliminary assessment of first two steps conducted
PARTNERS 2
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee product
The final selection of which would be based on a tendering and due-
diligence process
10
Tendering process
1. Limited tender
— only open to eligible &
relevant banks
2. Transparent
3. Demanding
Annual review and tender renewal
1. Selection of add. partner banks
2. Monitoring / quality checks
3. Knowledge sharing
4. Review of pricing
Due diligence process
Assessment of bank:
1. Policies
2. Procedures
3. Processes
4. Concrete lending results
5. Future targets
Technical support to be provided by NBU or international experts
The quality assessment would also provide
information for the application of a risk-
based pricing model.
PARTNERS 2
OECD Eurasia Competitiveness Programme 11
Agenda
Participants
Agricultural production technology
Financial analysis tools for agricultural entities (II)
Financial analysis tools for agricultural entities (I)
• Characteristics and segmentation of target group
• Key indicators /factors that influence production outcomes
• Strategic planning and risk management
• Risks affecting production outcomes & ways to minimize
• Special tools for evaluation of agricultural producers
‒ Technological maps and crop analysis
‒ Livestock movement statements and livestock analysis
• Balance sheet for agriculture
• Income statement for agriculture
• Cash flow statement for agriculture
• Ratio analysis
‒ Continuation of (I), plus:
• Determination of loan conditions; minimum and maximum loan
amounts; amount of loan relative to owner's investment;
repayment conditions and schedules; interest rates; fees and
penalties
Since our last Task Force meeting, the OECD has held capacity-building
seminars for bank representatives that could participate in the scheme
Agricultural finance Theme
Representatives of:
Crédit Agricole, ProCredit, Raiffeisen
Bank Aval, Pravex, Ukreximbank,
Ukrsotsbank, Oschadbank, Megabank,
UkrSibbank
Secondary characteristics: guarantee product
Five days of training
(1-5 February 2016)
TRAINING
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee product
12
A. Eligibility criteria (Yes/No) Yes/No Result
1 Land size Segment of 100 - 2,000 ha? Yes Proceed
2 Location of borrower Located in target region? Yes Proceed
3 Type of business Agriculture more than 75% income? Yes Proceed
4 Business experience At least two seasons/cycles? Yes Proceed
5 Annual turnover USD 30,000 to USD 1,500,000? Yes Proceed
6 Loan term 5 yrs or less (inv.) or 1.5 yrs or less (w/c)? Yes Proceed
7 Loan purpose Business use? Yes Proceed
8 Credit history Negative check? Yes Proceed
In order to be guaranteed, the project recommends that the scheme’s
client should meet certain eligibility criteria
ELIGIBILITY 3
Nature of loan
Other characteristics
Firm size Criteria based on land size and annual turnover
Criteria based on loan term and loan purpose
Criteria based on location, business experience and credit history
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee product
And in its early days the scheme would guarantee 50% of the loan
principal
13
COVERAGE 4
Risk coverage of 50% is recommended, given the
newness of the scheme & homogeneity of the target
An individual scheme can usually accept
more risk (60-80%)
Schemes that just target agriculture
usually provide lower coverage (50-
60%) due to higher covariant risks
Schemes that are new
don’t usually start by
covering a high share of
risk
Coverage must be sufficiently
attractive to banks
Raise
Lower
Coverage rate could be increased to 70% as the
scheme matures, depending on agricultural sub-
sector
-0.4
-0.2
0.0
0.2
2016 2017 2018 2019 2020
Ch
ange
s in
pro
fit
ove
r b
ase
rat
e (
mn
.)
Result of adjusting coverage rate up or down*
40% 45% 55% 60% 70%
Anticipated impact on profitability of rate adjustment
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee product
It is proposed that the pricing of guarantees should initially be an
upfront 1% of loan principal and an annual 1% of guaranteed amount
14
PRICING 5
In Yr1/Yr2 of operation:
it is proposed that the pricing of guarantees is based on international best practice,
analysis of the Ukrainian context, and the projections of the scheme’s financial model
Afterwards:
A pricing model can be developed based on expected operating costs and the
ultimate net loss probability, as well as additionality aims
Upfront fee:
1% of principal
Annual fee:
1% of
guaranteed
amount
TBD as scheme
matures
> with greater
coverage?
During this time the scheme will build up its knowledge base
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
15
Strategy: Supervisory Board (public/private)
Operation: Lean management team (private)
Fund seeded with €3 million
Guarantee application: banks
Loan appraisal: banks
Partners: 2-3 banks
Products: WC/E/I
Guarantee
Processes
Claim: foreclosure begun
Claim payment: staggered
Collateral recovery: banks
In case of default
Recovery income: 50/50
Monitoring and
evaluation
Guarantee
Product
Coverage rate: 50%
Governance and staffing
Funding and registration
Bank-focused LLC / NBFI
providing individual guarantees
Fund seeded with €10 million
Pricing:
Second, the OECD has made recommendations on the size of the fund
and its legal form
AGENDA
1
2
Sustainability elements
Additionality elements
Eligibility: firm size +
nature; loan nature
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
16
Model projected for 5 yrs
Capital: seeded with €10 mn. & €1.5 mn. TA for
start-up and administrative costs over 24 months
Coverage rate: 50%
Recovery rate: 20%
Interest rate on deposits: 2%
Tax rate on profit: 18%
No. guaranteed loans: 4,620 over 5 years
Av. guarantee size: €75,000
Av. guarantee term: 24 months
Leverage: 1.5 – Yr1; 5 – Yr5
Financing costs: 5% annually
Dividend payout ratio: 50% on after-tax net
income from Yr3; 0% expected for first 3 years
Assumptions Outcomes
Claims rate: 2% in Y1; 2.8% by Y5
Counter-guarantee: 50% from Yr2
The recommendation on fund size has been calculated based on the
projections and assumptions of the scheme’s financial model
FUNDING 1
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
17
The nature of its funding should be a lump-sum contribution provided
by international donors
Decision 1: who will
finance guarantees?
International
donors
Decision 2: how will they
be funded?
Lump-sum
contribution Equity
State Commercial
actors
Decision 3: where will funds
be localised?
Decision 4: provided as a
loan or grant?
Decision 5: how much
required?
Outstanding
questions
FUNDING 1
€10 million, based on projections
of scheme’s financial model
provided as a grant, with dividend
payments possible after year 3
Lump-sum recommended
as the only form of
finance that would
provide the scheme with
sufficient liquidity (as a
scheme that provides
individual guarantees) and
credibility to banks that it
can honour its guarantee
committments
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
18
Although the decision must be made by the Task Force and the scheme’s
donors on where the funds are localised
TO BE DISCUSSED
Local registration Foreign registration
• Risk of F/X and dividend
restrictions
• Greater potential of possible
misuse or misallocation
• Relatively easy and simple to
form
• Relatively cheap to form
• Greater access to relevant
legal services
• More credible to partner
banks
• Can mitigate loss in fund
value stemming from LCY
devaluation and other types
of F/X risk
• Better shield against
resource misallocation
• High transaction costs
• Significant legal costs O
P Pros
Cons
FUNDING 1
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
19
Two examples of
OECD CGS
registered in a
foreign
jurisdiction
ACGF* EPGF**
In September 2014, the ACGF was
registered in Germany as an
incorporated foundation under
German civil law in accordance with §
2 StiftG NRW
Status
Benefits
Registering a CGS as a foundation in
Germany means that the inherent
risk can be transferred and, at the
same time, strongly protected
against third parties
Costs
However, registration and operation
of the ACGF as German foundation
turned out to be a complex and very
bureaucratic undertaking, which
caused high legal and other
transaction costs
Status
Benefits
Costs
The Stichtings don’t have any legal
owners so that they can put money
or other assets outside the reach
of government authorities or
other interested parties
The EPCGF, so called a “Dutch
Stichting”, is a legal person, created
through a legal act, with no
members or share capital that exists
for a specific purpose
If funds are to be registered in a foreign jurisdiction, a number of options
already exist in OECD countries
Key: * Afghan Credit Guarantee Foundation; ** European-Palestinian Credit Guarantee Fund
Fairly high legal and other
transaction costs, albeit less so than
with other jurisdictions. More study
needed by qualified legal firm to
quantify these costs.
FUNDING 1 TO BE DISCUSSED
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
20
It has been recommended that the scheme is registered as a Limited
Liability Company (LLC) and a Non-Bank Financial Institution (NBFI)
REGISTRATION 2
Registration of the scheme as an LLC
provides it with more flexibility than
registration as a foundation or a joint-
stock company. It is the only legal
form that Natskomfinposlug have said
that they would accept for such a
scheme.
Registration as an NBFI is in-line with
the regulation of guarantee issuance
under Ukrainian law
Regulated by
Natskomfinposlug *
* However a draft law is currently being discussed by
Parliament which sees the dissolution of
Natskomfinposlug & the transfer of its responsibilities to the NBU and the National
Commission on Securities and Stock Market (NCSSM)
OECD Eurasia Competitiveness Programme
Secondary characteristics: funding and registration
21
D
Register as a legal entity in the State Register of Legal Entities
Register as a legal entity in the FSC’s formal register of FIs
Obtain an FSC license for provision of specific CGS activities
Finally, a preliminary review has been conducted to identify the steps for
registering the scheme as both an LLC and an NBFI
Processes required to register as a financial service and begin operations
• An accounting system that meets FSC & legal requirements
• CEO with experience and qualifications meet requirements
Requirements
Requirements
Requirements
1
2
3 • An exhaustive list of financial services to be provided
• Evidence of CGS document regulating its FS procedure & contracts
• An accounting system that meets FSC & legal requirements
• The required share / capital funds
• Compliance director & chief accountant qualifications meet requirements
• Evidence of owned/leased premises, as registered in SRoLE
• Documents on company ownership and purpose
• Company formation application signed by founders
• The required share capital funds
• Identification of KYC rules for bank account opening
REGISTRATION 2
OECD Eurasia Competitiveness Programme
Secondary characteristics: governance and staffing
22
Strategy: Supervisory Board (public/private)
Operation: Lean management team (private)
Fund seeded with €3 million
Guarantee application: banks
Loan appraisal: banks
Partners: 2-3 banks
Products: WC/E/I
Guarantee
Processes
Claim: foreclosure begun
Claim payment: staggered
Collateral recovery: banks
In case of default
Recovery income: 50/50
Monitoring and
evaluation
Guarantee
Product
Coverage rate: 50%
Governance and staffing
Funding and registration
Bank-focused LLC / NBFI
providing individual guarantees
Fund seeded with €10 million
Third, recommendations have been made on the scheme’s governance
and staffing
AGENDA
Sustainability elements
Additionality elements
Pricing: 1% + 1%
Eligibility: firm size +
nature; loan nature
1 2
OECD Eurasia Competitiveness Programme
Secondary characteristics: governance and staffing
23
A two-tier governance structure has been proposed, with a Supervisory
Board for strategy and a Management Board for operations
Organisational structure
GOVERNANCE 1
Quality
assurance
Supervisory Board Strategy & supervision
General manager Team & institution
Credit risk management
Governance body Organisational Committee
Financial risk management Legal risk management
In addition, an external quality assurance committee, which reports to the Supervisory Board, has
been recomennded, and three committees which report to the General Manager
• 1 general manager • 1 DM/risk manager • 1 lawyer • 2 loan officers • 1 administrative staff
Staffing in yr1
OECD Eurasia Competitiveness Programme
Secondary characteristics: governance and staffing
24
It is proposed that these four committees should be responsible for
designing, executing and overseeing key policies and procedures
• Establishes how the CGS shall operate within the
policy direction of the board of directors
• Addresses business strategy, investor relationships,
CGS funding issues, and approach for implementing
board policies generally – such as guarantee
monitoring and administration, claims and asset
liability management
Management committee
Guarantee & bank partnership comm.
• Assesses the duration and gap between CGS
guarantee asset maturities and the maturities of
liabilities funding these assets
• Ensures that assets and liabilities are carefully
managed so CGS income and profitability does not
become adversely affected by interest rate or
foreign exchange movements
Asset/liability management comm.
Quality assurance committee
• Approves applications from new partner banks and
reviews guarantee applications above internally-set
threshold (recommendation: €250,000 of individual
loan exposure)
• Reviews problem loans and guarantee pay-out
procedures in order to update policies and modify
as needed
• Externally assesses CGS operations and performance
on a semi-annually basis before each supervisory
board meeting
• This task consists of one week of onsite and one
week of offsite monitoring and compliance review
for reporting to the board
Operational committees
GOVERNANCE 1
OECD Eurasia Competitiveness Programme
Secondary characteristics: governance and staffing
25
And the duties and composition of the scheme’s Supervisory Board and
the general management are proposed as follows
• Support the establishment of the CGS institution
• Negotiates with the regulatory bodies
• Authority to appoint and dismiss general manager
• Approves guarantee policies and procedures
• Provides strategic direction
• Provides assistance and guidance as needed
Supervisory Board (3-4 persons)
Management Board (3-4 persons)
Board representation * Role
Lead investor rep. (TBD) Chairperson
1-2 ministry rep. (TBD) Co-chair
Independent expert Provide independent
expertise, e.g. audit skills
Committee Member
Credit risk
management
Deputy manager and snr.
guarantee officer
Financial risk
management
Deputy manager and snr.
guarantee officer
Legal risk
management
Deputy manager and snr.
legal specialist
Quality assurance Consist of a CGS expert and a
local lawyer
Suggested composition Function
* It is recommended that the board should start out lean, and grow as the scheme expands
and matures. The scheme’s representative from the government would be responsible for
coordinating with the other ministries when inputs and policy facilitation is required
STAFFING 2
General manager:
• Manages CGS business
• Leads interface with various stakeholders (i.e.
supervisory board, CGS committees and partner
banks)
Deputy manager:
• Manages operational processes such as fee-setting
Snr. guarantee officer:
• Managing credit analysis and PB due diligence
Snr. legal specialist:
• Ensures legal compliance in guarantee transactions
TO BE DISCUSSED
OECD Eurasia Competitiveness Programme 26
In order to ensure effective governance and staffing, the OECD is holding
capacity-building seminars on regulation and management
22
Feb
CGS regulation and management
Session on CGS overview and
management
23
Feb
Advanced session on CGS
Regulation
24
Feb
Advanced session on CGS Risk
Management
Background & challenges to establishment of a CGS
Specific features of a CGS
Date
Eligibility criteria for CGS beneficiaries & partners
Formation and Governance of the CGS
CGS Regulatory issues
Supervision and government oversight roles
CGS Prudential standards
CGS Guarantee activities
CGS Principles of Risk Governance
CGS Risk mitigation and management tools
IAS, IFRS and ICC standards for CGS schemes
AML from prospective of a commercial bank
Topic Agenda
Theme
Secondary characteristics: governance and staffing TRAINING
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee processes
27
Strategy: Supervisory Board (public/private)
Operation: Lean management team (private)
Fund seeded with €3 million
Guarantee application: banks
Loan appraisal: banks
Partners: 2-3 banks
Products: WC/E/I
Guarantee
Processes
Claim: foreclosure begun
Claim payment: staggered
Collateral recovery: banks
In case of default
Recovery income: 50/50
Monitoring and
evaluation
Guarantee
Product
Coverage rate: 50%
Governance and staffing
Funding and registration
Bank-focused LLC / NBFI
providing individual guarantees
Fund seeded with €10 million
Fourth, recommendations have been made on the scheme’s processes for
granting and paying guarantees
AGENDA
1
2
Sustainability elements
Additionality elements
Pricing: 1% + 1%
Eligibility: firm size +
nature; loan nature
Application
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee processes
An individual guarantee mechanism has been proposed, yet one that is
light-touch
28
APPLICATION 1
Is there a maximum guarantee ceiling?
It is proposed that managerial authorisation should be
required if guarantee amount is above €250,000
Appraisal
Bank or CGS conducts credit appraisal?
Application
Ex-ante or ex-post? Bank or client applies?
If former, how does CGS appraise applications?
What is the criteria?
Ex-post Bank applies to CGS Criteria identified in the
product offering
Bank should conduct credit appraisal
It is proposed that guarantee is granted if bank’s risk
management procedures perform well & loan meets
CGS eligibility criteria
OECD Eurasia Competitiveness Programme
Secondary characteristics: guarantee processes
The same approach is envisioned in the event of loan default, with banks
taking the lead on collateral recovery
29
DEFAULT 2
Recoveries
Bank or CGS responsible?
When can claim be called? Validation criteria
How are recoveries shared?
How many days to process claim?
Proposed that this is once legal proceedings have been
initiated & foreclosure begun
Proposed that fund transfer would approved if proper risk
management followed
2-3 days envisioned
Recommended that bank is responsible for collateral claim
Claims
50/50 allocation recommended
Method of payment Sequencing of payment How many days to pay claim?
Cash transfer envisioned, as needed
Staggered process recommended
50% after 90 days; 50% after 180 recommended
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
30
Strategy: Supervisory Board (public/private)
Operation: Lean management team (private)
Fund seeded with €3 million
Guarantee application: banks
Loan appraisal: banks
Partners: 2-3 banks
Products: WC/E/I
Guarantee
Processes
Claim: foreclosure begun
Claim payment: staggered
Collateral recovery: banks
In case of default
Recovery income: 50/50
Monitoring and
evaluation
Guarantee
Product
Coverage rate: 50%
Governance and staffing
Funding and registration
Bank-focused LLC / NBFI
providing individual guarantees
Fund seeded with €10 million
Fifth, recommendations have been made on the monitoring and
evaluation aspects of the scheme
AGENDA
Sustainability elements
Additionality elements
1
2
Pricing: 1% + 1%
Eligibility: firm size +
nature; loan nature
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
31
An important part of assessing and ensuring the scheme’s sustainability
is to manage the multiple risks to which it is vulnerable
CGS Bank
is the risk of a change in value
caused by the fact that actual
losses, incurred for inadequate
or failed internal processes,
people and systems, or from
external events (including legal
risk), differ from the expected
losses
is the risk of an asset/liability
mismatch that renders the CGS
unable to meet its payment
obligations within the stipulated
timeframe
is the risk of losses in the value
of an investment due to
movements in market prices
Credit risk is the risk of
default in the event that the
borrower is unable to make
the required payments
The scheme’s credit risk will
be shared with partner
banks. The partner bank will
be responsible for mitigating
the majority of the credit risk
The CGS’s role in credit risk
mitigation will be restricted to
monitoring the performance
of its portfolio and
diversifying to the extent
possible, as well as screening
the bank’s credit appraisal
procedures
Credit
Operational
Liquidity
Market
SPECIAL FEATURE: RISK MANAGEMENT SUSTAINABILITY 1
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
32
To this end, a number of risk management tools have been designed
tailored to the CGS in Ukraine
CGS Bank
Credit
Operational
Liquidity
Market
Asset/ Liability Mismatch (ALM) tool
Accounting, tax and compliance tool
1. Screening direct counterparty (banks):
Partner bank assessment & monitoring
2. Screening indirect counterparty (SMEs):
Financial indicator & benchmark analysis
Risk Policy Manual
SPECIAL FEATURE: RISK MANAGEMENT SUSTAINABILITY 1
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
33
Which can be used by the scheme’s future staff to monitor and offset
specific risk exposures, as well as to collect data for strategy decisions
• Scores the client on key financial indicators, as well as the risk of both the loan and the client
Description Tool
Financial
indicator &
benchmark
analysis
Partner bank
assessment &
monitoring
Risk Policy
Manual
Asset/ Liability
Mismatch (ALM)
tool
Accounting, tax
and compliance
tool
• Provides analysis that the client will generate sufficient cash from operations to repay the loan
How it mitigates risk
• Scoring tool to measure bank performance on various indicators related to credit allocation, as well as HR, management and IT
• Ensures that the partner bank has sufficient systems and procedures in place to be trusted to give responsible and prudent loans
• Risk policy document describing overall risk mitigation techniques
• Puts in place a mechanism for the CGS to provide guarantees prudently and in accordance with the direction of the Board
• Analysis process to identify and mitigate risks related to possible asset/liability mismatches
• Involves development of an MIS architecture, as well as cash analysis solutions
• Ensures that risks related to possible asset/liability mismatches are tracked and mitigated
• Ensures that the CGS has a framework in place to operate in accordance with Ukrainian laws
SPECIAL FEATURE: RISK MANAGEMENT SUSTAINABILITY 1
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
34
It is recommended that the CGS adopts the COSO framework as a
comprehensive risk management system for internal control
Component 1: Control
environment
sets the “tone at the top”,
demonstrating an institution’s
commitment to integrity and
ethical values
Component 2: Risk assessment
clear objectives have been
specified and risks to the
achievement of these objectives
have been identified, along with
appropriate risk management
techniques
Component 3: Control activities
the institution develops control
activities that contribute to the
mitigation of risks enabling the
institution to operate effectively
in line with its risk tolerance
Component 4: Information
and communication
the institution uses robust
information to support the
internal control function. It
communicates this internally,
including objectives & internal
control responsibilities
Component 5: Monitoring
activities
ongoing evaluations are carried
out to determine whether
internal control components are
functioning as expected. Deficits
are assessed & identified &
communicated to parties
responsible for corrective
actions in a timely manner
1.
2.
3.
4.
5.
SPECIAL FEATURE: RISK MANAGEMENT SUSTAINABILITY 1
OECD Eurasia Competitiveness Programme 35
An important element of risk management is supervision, and to this end
the OECD will hold further capacity-building seminars
24
Feb
Supervision and management
Advanced session on CGS
Supervision and Agricultural
Lending
25
Feb
Advanced Session on CGS
Agricultural Lending
Dispute resolution (collateral) for CGS schemes
Dispute resolution (collateral) for CGS in UKR context
Date
Agricultural sector segmentation and risks
Access to finance bottlenecks
Agricultural SME credit assessment
Lending approaches and credit technologies
CGS as tool for agricultural SMEs
Recommendations to policy makers
Topic Agenda
Theme
Secondary characteristics: monitoring and evaluation SUSTAINABILITY 1
OECD Eurasia Competitiveness Programme 36
It is proposed that robust data systems are in place to monitor indicators
of the scheme’s sustainability and additionality
Secondary characteristics: monitoring and evaluation SUSTAINABILITY 1
Data warehouse system
It is estimated that the cost of such a system would be under EUR 100,000, and this is factored into the €1.5 mn. in TA funds recommended for the first 24 months of operation
For data storage, reporting and analysis (particularly as the CGS grows in size)
Sustainability indicators Additionality indicators
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
37
It is recommended that this database monitors key financial performance
indicators in order to keep track of the scheme’s sustainability
SUSTAINABILITY 1
Monitoring
Pay-out rate
Factors that could be monitored include …
Net loss rate
Recovery rate
Guarantee portfolio at risk
Transaction cost per unit of currency guaranteed, average no. of days
taken to issue a guarantee & average no. of days taken to pay a claim
Losses incurred
Net losses incurred
The capacity of CGS & lender
to recover losses
Portfolio quality
Operational efficiency
Indicator Measures …
OECD Eurasia Competitiveness Programme 38
It is recommended that these indicators, plus updated financial accounts,
are compiled & evaluated by operational committees & fed up to the
Supervisory Board for policy decisions Secondary characteristics: monitoring and evaluation SUSTAINABILITY 1
Evaluation (annual/quarterly)
• Decreasing leverage rate
• Increasing guarantee fees
• Decreasing coverage rates
• Portfolio diversification
• Increasing operational efficiency
It is recommended
that the relevant
indicators of the
scheme’s financial
performance are
reviewed at regular
intervals by the
various operational
committees, and
results fed up to
Supervisory Board
Levers to increase
sustainability
include:
• Liquidity forecast
• Portfolio report
• Profit and loss statement
• Balance sheet
Tools to assess
sustainability
include:
Decision made by Supervisory Board,
based on compiled reports & advice
Compiled and assessed by
various operational committees
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
39
It is recommended that the database monitors the nature of guarantees
provided by the scheme in order to later evaluate the CGS’s additionality
ADDITIONALITY 2
Monitoring
Growth in the volume and number of guarantees
Factors that could be monitored include …
Characteristics of guaranteed firms and the loans they receive
Characteristics of loans granted
Financial additionality
Financial and economic additionality
Financial additionality
Indicator Measures …
OECD Eurasia Competitiveness Programme
Secondary characteristics: monitoring and evaluation
40
B. Economic additionality Weight Min. target
score 1 2 3 4 5
1 Size of active ha. (1 cattle=100ha) 15% 3 1,500-2,000 1,000-1,500 400-1,000 200-400 100-200
2 Level of income applied to agro 10% 3 — — 75-90% — 90-100%
3 Annual turnover (USD) 15% 3 1,200,001-
1,500,000
700,001-
1,200,000
250,001-
700,000
110,001-
250,000 30,000-110,000
4 Collateral coverage (without G.) 5% 3 — > 100% 50-100% 31-50% 10-30%
5 Level of previous borrowings 10% 3 loan in last
2 years —
no loan in
last 2 years never had loan
6 Loan term and purpose 10% 3 — w/c w/c & equip equipment investment
7 Age of current equipment 5% 3 < 7 years — 7-12 years — 12 years
Subtotal 70% 2.10
C. Socioeconomic additionality Weight Min. target
score 1 2 3 4 5
1 Number of employees 10% 3 — 1-10 empl. 10-20 empl. > 20 empl. family farm
2 Location of borrower 15% 3 — — KHA/PO — CH/VI
3 Local roots 5% 3 — — foreign lives in city lives on farm
Subtotal 30% 0.90
Total 100% 3.00
Level of additionality Medium 2 = low 2 to 3.5 = medium > 3.5 = high
In order to later assess the performance of the scheme and partner banks
in this regard, a scoring matrix has been developed
ADDITIONALITY 2
Evaluation
OECD Eurasia Competitiveness Programme
Decision made by Supervisory Board,
based on compiled reports & advice
Compiled and assessed by
quality assurance committee
41
It is recommended that annual/bi-annual additionality targets are set in-
line with the CGS’s operational objectives, and performance against these
targets measured, with findings fed up to the SB for policy decisions Secondary characteristics: monitoring and evaluation ADDITIONALITY 2
Evaluation (annually/bi-annually)
• Increasing leverage rate
• Increasing coverage rates
• Advisory services/technical
assistance for SMEs or banks
Levers to increase
additionality include:
• Growth of guarantee portfolio
• Scoring matrix
• Study measuring the growth of
firms receiving guaranteed
loans vs. control group
Tools to assess
additionality include:
It is recommended
that the relevant
indicators of the
scheme’s financial
performance are
reviewed at regular
intervals by the
various operational
committees, and
results fed up to
Supervisory Board
OECD Eurasia Competitiveness Programme 42
As the project comes to an end, it is important to review the risks
identified and assess their relevance in the current context….
Next steps REMINDER
Type Mitigation measure
Inte
rnal
Limited funding resources
Limited funding resources can be overcome by mobilising financial resources from international donors. The elaboration of a donor strategy would allow the targeting of relevant bilateral donors and international financial institutions (IFIs) able to provide financial and technical support for the establishment of a CGS.
Lack of buy-in
The attractiveness of the scheme can be ensured through a proper risk-sharing design as well as dialogue with banks. To fully ensure take-up of guarantees, the CGS must work closely with local banks to make sure that the scheme’s terms and conditions are beneficial to all parties, especially end-users.
Limited managerial capacity
The risk of limited managerial capacity is being addressed by the project. A series of capacity-building seminars are being organised, and the training material will be made available for future reference.
Limited lending and technical capacity
A sound screening of banks eligible to participate in the CGS should be conducted based on the specific multi-stage method developed for this purpose. In addition, technical assistance could be provided to selected banks to strengthen their knowledge of the agricultural-SME business cycle.
Low financial literacy of farmers
Banks are likely to only extend loans (even with guarantees) to farmers with adequate financial literacy and the scheme may also need to be coupled with financial education programmes. The OECD has already conducted work on financial literacy amongst farmers in Ukraine and prepared a set of policy recommendations to address this barrier (OECD, 2015d).
P
+
+
+
+
OECD Eurasia Competitiveness Programme 43
… the external risks remain valid, and more needs to be done to ensure
they are properly addressed
Next steps REMINDER
Type Mitigation measure
Exte
rnal
Unstable macroeconomic environment
Such a scheme should only be established once the macroeconomic environment is stable. Risk assessment such as sensitivity analysis should be conducted frequently, and once the pilot is completed the Supervisory Board should consider different avenues for portfolio diversification – such as opening to rural enterprises or food processing companies. This process may involve identifying firms that are less vulnerable to macroeconomic shocks and encouraging their participation.
Political influence Ensuring the selection of a completely independent and skilled management team through public tender and to separate it from the political leadership would mitigate the risk of political influence.
Corruption, related-party lending, and the presence of “pocket banks”
Banks should be carefully selected. The bank selection tool mentioned previously looks not only at “positive criteria” but also at “negative criteria” – such as the strong risk of high related-party lending risk.
Limited banking sector liquidity
The application of a sound bank selection method would ensure that the most suitable partner banks for the CGS are identified and selected. In addition, it is recommended that the tendering process be limited in its pilot phase to 2 or 3 banks that have the resources to provide loans to the targeted SMEs. In addition, IFIs could provide credit lines to participating banks in order to boost their liquidity.
Challenging legal and regulatory environment
While the “Law of Ukraine on Financial Services and State Regulation of Financial Services” might initially seem sufficient for the operation of a CGS, a full in-depth legal assessment should be conducted in order to anticipate any legal barriers and any requisite legal changes.
P
O
+
+
+
OECD Eurasia Competitiveness Programme 44
To set-up the CGS in more suitable conditions and maximise its potential
for sustainability, other related policy reforms should be put in place
Next steps FOR DISCUSSION
• The lifting of the moratorium on land sales
• Stabilisation of the financial sector and the macro-economy more broadly
• Strengthening of credit rights
• Increased training for banks on agricultural credit technology
• Put in place programmes to increase financial literacy
• Definition of the regulatory body and carry out a further legal assessment in
the new context
• Set-up of the Supervisory Board with public sector representatives
It is suggested that the Credit Guarantee Scheme for Agribusiness SMEs in Ukraine is considered once Ukraine is back to political and economic stability
OECD Eurasia Competitiveness Programme 45
Conclusion of project and steps going forward …
Next steps
1 – Key directions
2 – Project management
TF Proposals to be submitted to the
OECD-Ukraine Co-ordination Council
FOR ACTION
d) Provide comments on the Presentation and the two draft project reports by 29 February 2016
e) Endorse and provide comment on next steps following project completion (appointment of parties responsible for pursuing seeking funds from donor institutions, etc.)
a) Provide comments on primary and secondary features of the CGS
b) Provide comments on identified location options to register the scheme’s funds
c) Provide comments on risk management tools (including risk policy manual; asset/liability mismatch
tool and accounting, tax and compliance tool)
Contact details
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Antonio Somma Head of Programme OECD Eurasia Competitiveness Programme Tel: + 33 1 45 24 93 90 Email: [email protected]
Gabriela Miranda Project Manager Ukraine OECD Eurasia Competitiveness Programme Tel: + 33 1 45 24 95 01 Email: [email protected]
Annie Norfolk Beadle Policy Analyst OECD Eurasia Competitiveness Programme Tel: + 33 1 85 55 64 01 Email: [email protected]
Yerim Park Project Co-ordinator OECD Eurasia Competitiveness Programme Tel: + 33 1 85 55 64 13 Email: [email protected]
46
OECD Eurasia Competitiveness Programme
BACKUP
47
OECD Eurasia Competitiveness Programme 48
Elaboration of credit risk management tools
Credit risk – Partner bank assessment tool
(3) Recommendations on risk management
Scoring category Paper Practice Paper Practice Bank
score Pass
Credit –
Marketing & selection 12 20 6.5% 9.9% 72% YES
Credit –
Application processing 23 23 12.5% 11.3% 76% YES
Credit - Prequalification 17 17 9.2% 8.4% 82% YES
Credit - Underwriting 55 55 29.9% 27.1% 93% YES
Credit - Closing & funding 24 24 13.0% 11.8% 79% YES
Credit - Monitoring 23 23 12.5% 11.3% 88% YES
HR - Employee selection 23 16 12.5% 7.9% 94% YES
Management –
Business model 13 18 0.0% 0.0% 92% YES
IT - MIS 7 25 3.8% 12.3% 89% YES
Total 197 221 100% 100% 86.4% YES
Partner bank assessment tool
Credit
OECD Eurasia Competitiveness Programme 49
Elaboration of credit risk management tools
Credit risk – Financial indicator and benchmark analysis –pt.1
(3) Design of risk management procedures
Financial indicator and benchmark analysis tool - 1
Key financial indicators
Indicator Value (in EUR)
Financial
result
Revenue from operations in P 1* 1,269,000
Revenue from operations in P 2** 1,152,000
Net profit after taxes in P 1* 200,000
Assets Working capital 250,000
Total assets 800,000
Liabilities
Short-term liabilities:
- bank loans 50,000
- other loans from financial institutions 2,000
- commodity loans 45,000
- other short-term liabilities 0
Total short-term liabilities 97,000
Total liabilities 497,000
Requested
loan
Amount of the loan 150,000
Loan maturity, months 12
Total installments during loan maturity
(max. 12 months) 160,000
Collateral value 80,000
Total installments of other loans during loan maturity (max. 12 months) 105,000
Loan repayment overdue (Y/N. If yes, additional clarification is needed) No
Credit
OECD Eurasia Competitiveness Programme 50
(3) Design of risk management procedures
Qu
an
tita
tive a
naly
sis
№ Financial ratios Weighted Calculation (formula) Options Points Result Score
1 Current ratio 5% Current assets
/ Short-term liabilities
≥1 1 2.58 0.05
<1 0
2а Turnover coverage
ratio
25%
Turnover / Loan(s)
installments
≥3 1 4.79 0.25
<3 0
2b Profit coverage ratio Net profit / Loan(s)
installments
<1 0
0.75 0.00
≥1 &
<1,2 0.3
≥1,2 &
<1,5 0.8
≥1,5 1
3 Equity share 10% (Total assets - Total
liabilities) /
Total assets
<0,5 0
0.38 0.00 ≥0,5 1
4 Ratio of equity to loan
amount 10%
(Total assets - Total
liabilities) /
Loan
<1 0
2.02 0.10 ≥1 1
5 Collateral coverage
ratio 5%
Collateral value / Loan
amount
≥0 &
<0,5 0
0.53 0.04 ≥0,5 &
<1 0.8
>1 1
6 Growth of revenue 15% (Revenues P1 /
Revenues P2) - 1
≥0 1
0.10 0.15 > -0,25
& <0 0.5
≤ -0,25 0
Subtotal (max. 70% = 0,70) 70% 0.59
Elaboration of credit risk management tools
Credit risk – Financial indicator and benchmark analysis –pt.2
Financial indicator and benchmark analysis tool - 2
Risk assessment indicators - 1 Credit
OECD Eurasia Competitiveness Programme 51
(3) Design of risk management procedures
Qu
ali
tati
ve a
naly
sis
№ Indicator Weighted Options Points Result Score
1
Does the client/
principal owner of
business own property
other than those
provided as collateral?
5%
Real estate (including non-
agricultural land), vehicles,
production equipment
1
0 0.00
No other property 0
2 Credit history 10%
overdue 0-7 days / has never had
delay 1
0.8 0.08 overdue 8-30 days 0.8
overdue 31-90 days 0.5
overdue 91-180 days 0.1
overdue over 180 days 0
3 Business experience 10%
over 5 years 1
0.3 0.03 3-5 years 0.6
1-3 years 0.3
4 Age of the client 5%
24-55 years 1
0.5 0.03 56-65 years 0.8
up to 24 years and over 65 years 0.5
Subtotal (max. 30% = 0,30) 30% 0.14
Total (max. 100% = 1,00) 100% 0.73
Elaboration of credit risk management tools
Credit risk – Financial indicator and benchmark analysis –pt.3
Financial indicator and benchmark analysis tool - 3
Risk assessment indicators - 3 Credit