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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

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Credit Guarantee Round Table: A dialogue to explore the application of credit guarantees Khula Credit Guarantee (SOC) Ltd

  • 18. 06. 2020
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  • Corporate Profile
  • Background
  • Governance Structure
  • sefa distribution model
  • Guarantee Operational Model
  • WBG Diagnostic Assessment
  • Portfolio performance

CONTENTS

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KCG Corporate Profile

KCG Objective

  • 1. Address market

failure in financial inclusion

  • 2. Revive

entrepreneurial spirit in unserved & underserved SMEs

  • 3. Leveraging

financial sector’s skill base

  • 4. Partial credit

guarantees to SMEs that lack adequate collateral

  • 1. Shareholding 100% owned by sefa

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  • 2. Corporate

Type

  • State Owned Entity as per Co. Act
  • Insurance Act 18 of 2017 – Short Term

Insurer

  • Financial Sector Regulation Act 9 of 2017
  • 3. Reporting

Authority

  • Department
  • f

Small Business Development (DSBD) – (Executive Authority)

  • Sefa (Parent entity)
  • 4. Other

Regulatory Bodies

  • Financial

Sector Conduct Authority (FSCA)

  • Prudential Authority - SARB
  • Companies Act
  • PFMA
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Background on journey of KCG

2014 2018 2017 2012 2012 1987

Khula Credit Guarantee was established to house a fund that would operate the credit indemnity scheme Khula Credit Guarantee became a subsidiary of sefa The South African Micro-Apex Finance and Khula Enterprise Finance Agency and the Small Business Unit of Industrial Development Corporation merged to form sefa Department of Small Business Development was established

  • Executive Authority for sefa

Collaboration with National Treasury and World Bank Group to design a new a Partial Credit Guarantee Supplier Credit Guarantees added to KCG products offering

2015

Portfolio Guarantees developed and offered to commercial banks, NBFIs and Corporates

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sefa’s Distribution Model

CREDIT GUARANTEE SCHEME

Partner Financial Institutions

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KCG Products

Guarantees Individual Guarantees Through commercial banks Portfolio Guarantees

* Commercial Banks * Non Banks (NBFI) * Corporates

Supplier Credit Guarantees

* Manufacturers * Trade Credit * Retailers

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FNB, SBSA, ABSA, Nedbank, Sasol, TCBS, MrPrice, Praxis, Mercantile Bank FNB, SBSA, ABSA, Nedbank, MacSteel, Barnes Reinforcing Industries

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Guarantee Operational Model

Purpose of the Guarantee

  • Enables SME to access funding from a financial

institution

  • For the acquisition, establishment or expansion of a

business

  • Covers fixed and or moveable assets
  • Working capital

Features of the Guarantee

  • SME facility up to R5 million
  • Facility is for 5 years
  • Indemnity fees are between 1% to 3.5%
  • Insurance cover from 50% to 90%
  • Security may be requested by bank
  • 48 hours free post mentorship

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Targeted SMMEs

Marginal

SMMEs which are viable and partially bankable

PFIs & KCG Sub-marginal

SMMEs which are viable but not bankable from PFIs perspective

KCG Full Risk scheme Shared Risk Scheme

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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
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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

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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
  • 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.

The pricing matrix applicable to portfolio guarantees

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International Benchmarks: Pricing

Selected countries Fees Risk Based Korea 0.5% to 3% p.a. Fees vary according to borrowers’ credit worthiness/ rating. France 0.6% to 0.9% p.a. of loan value Fees linked to coverage ratio: 0.6% (40% coverage),0.9% (70% coverage) Canada 2% of loan amount +1.25% p.a. on loan balance No Scalability Malaysia 0.5% to 3.6% p.a. Fees depend on borrowers’ credit rating. Higher fees are charged to low rated customers United States 2% -3.5% of loan amount+0.55% p.a. on outstanding guaranteed balance Higher fees for larger loans 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

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source: world bank 2015

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International Benchmarks: Coverage

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source: world bank 2015

Depends on borrower’s

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World Bank Diagnostic Assessment : Weaknesses

Identified Weaknesses on KCG :

The Scheme offers one product whereas other PCGs have more than

  • ne (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

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Suggested areas for changes in KCG

Institutional structure Business model Product

  • ffering

Guarantee approval process Claim pay-out Monitoring and reporting

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What has been implemented

  • Increased product range
  • Different industries
  • Risk Based Pricing
  • Stop loss mechanism
  • Clearly defined claim payout process

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What has been implemented

  • Increased product range
  • Different industries
  • Risk Based Pricing
  • Stop loss mechanism
  • Clearly defined claim payout process

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Portfolio split

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Product Development

Producer: minimum 51% South African shareholding, tenure 15 yrs, maximum finance R300 m User : minimum 70% South African shareholding ,tenure 10 yrs. maximum finance R30 m Guarantee cover 60%, rebate 2% of lending rate

Green Technology Financing Scheme

Franchisor be registered with the Department of Trade and Industry and Franchise Association

  • f South Africa (FASA)

Net asset of shareholders funds R5 m, financing amount R20 m, tenure 10 years or 3 years

Franchise Financing Scheme

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

Flexi Guarantee Scheme

Improved methodology: Pricing fixed and agreed upfront, issuance of individual LG not required, turnaround time 3 days , method of submission Online, easy selling by FI sales team in view

  • f pre-fixed terms

Portfolio Guarantee

Blanket guarantee on loans already underwritten by FIs, FIs benefit from capital relief, FIs obtain additional security to unsecured or partially secured SME loans (Reduction in credit exposure) fixed guarantee fees payable yearly

Wholesale Guarantee

As part of the product development the following guarantee types will be introduced:

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Portfolio performance since inception Approvals

18 KHULA CREDIT GUARANTEE LIMITED Indemnities Authorised from inception to 31 March 2020 Product Number Indemnity Value Risk Value Authorised Bank Number Indemnity Value Risk Value ABSA Bank Individual 3372 959 969 231 882 144 574 African Bank Individual 290 65 962 179 65 362 180 Bank of Athens Individual 2 342 400 342 400 BoE Bank,the Business Division of BoE Bank Limited Individual 43 9 862 985 12 733 277 Corpcapital Bank Individual 6 1 429 340 1 429 340 Fedgen Insurance Individual 192 10 699 317 10 990 044 First National Bank Individual 1026 271 395 883 254 239 584 Fundisa Communications (Pty) Ltd. Individual 108 536 153 536 153 Meeg Bank Individual 40 12 966 769 12 421 169 Nedbank Ltd. - BBU Individual 32 32 774 205 3 394 000 Nedbank Ltd. - SBU Individual 1936 383 901 628 323 298 387 The Standard Bank of South Africa Limited Individual 2000 432 532 953 376 833 358 Uni Bank Individual 21 13 536 000 13 536 000 Mr Price Group Portfolio 30 000 000 30 000 000 FNB Business: Agriculture Portfolio 60 000 000 60 000 000 ABSA Business: Agriculture Portfolio 60 000 000 60 000 000 Real People Portfolio 20 000 000

  • Sasol Siyakha Enterprise & Development Trust

Portfolio 50 000 000 30 000 000 Transaction Capital Business Solutions (Pty) Ltd. Portfolio 50 000 000 50 000 000 Mercantile Bank Limited Portfolio 150 000 000

  • The Praxis Financial Services

Portfolio 60 000 000

  • ABSA Alternative Solutions

Portfolio 150 000 000 9 068 2 825 909 044 2 187 260 467

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Portfolio performance from 01 04 2012 - sefa

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Indemnities Authorised from inception to 31 March 2020 Product Number Indemnity Value Risk Value Authorised Bank Number Indemnity Value Risk Value ABSA Bank Individual African Bank Individual Bank of Athens Individual BoE Bank,the Business Division of BoE Bank Limited Individual Corpcapital Bank Individual Fedgen Insurance Individual First National Bank Individual 6 4 182 000

  • Fundisa Communications (Pty) Ltd.

Individual Meeg Bank Individual Nedbank Ltd. - BBU Individual 1 2 100 000

  • Nedbank Ltd. - SBU

Individual 14 3 535 559

  • The Standard Bank of South Africa Limited

Individual 29 24 697 502

  • Uni Bank

Individual Mr Price Group Portfolio 1 30 000 000 30 000 000 FNB Business: Agriculture Portfolio 1 160 000 000 160 000 000 ABSA Business: Agriculture Portfolio 1 60 000 000 60 000 000 Real People Portfolio 1 20 000 000

  • Sasol Siyakha Enterprise & Development Trust

Portfolio 2 50 000 000 30 000 000 Transaction Capital Business Solutions (Pty) Ltd. Portfolio 1 50 000 000 50 000 000 Mercantile Bank Limited Portfolio 1 150 000 000 The Praxis Financial Services Portfolio 1 60 000 000 ABSA Alternative Solutions Portfolio 1 150 000 000 60 764 515 060 330 000 000

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Portfolio performance since inception Approvals

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KHULA CREDIT GUARANTEE LIMITED Indemnities and claims from inception to 31 March 2020 Product No.SMMEs Indemnity Value Risk Value Taken-Up Bank Number Indemnity Value Risk Value ABSA Bank Individual 2806 648 175 207.89 661 078 120.01 African Bank Individual 176 41 987 277.41 42 139 615.91 Bank of Athens Individual 2 342 400.00 342 400.00 BoE Bank,the Business Division of BoE Bank Limited Individual 29 5 840 944.60 6 110 655.80 Corpcapital Bank Individual 1 800 000.00 800 000.00 Fedgen Insurance Individual 154 8 880 708.45 8 880 708.22 First National Bank Individual 895 187 194 082.22 189 068 344.09 Fundisa Communications (Pty) Ltd. Individual 108 536 153.42 536 153.42 Meeg Bank Individual 35 10 943 764.74 10 943 764.74 Nedbank Ltd. - BBU Individual 30 17 695 056.81 17 695 056.81 Nedbank Ltd. - SBU Individual 1538 270 122 001.28 273 039 256.42 The Standard Bank of South Africa Limited Individual 1517 295 153 867.27 295 530 423.08 Uni Bank Individual 21 13 536 000.00 13 536 000.00 Mr Price Group Portfolio 21 10 136 935.00 8 109 548.00 FNB Business: Agriculture Portfolio 2 36 934 000.00 29 547 200.00 Sasol Siyakha Enterprise & Development Trust Portfolio 8 56 667 244.66 45 333 795.73 Transaction Capital Business Solutions (Pty) Ltd. Portfolio 40 53 356 000.00 42 684 800.00 Absa Agri-business Sector Portfolio 2 46 065 548.00 36 852 438.40 7 385 1 704 367 191.75 1 682 228 280.63

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Portfolio performance since inception - Default

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Default

Bank Number Indemnity Amount Risk Value ABSA Bank Individual 1 360 310 686 713 271 509 574 African Bank Individual 61 18 443 941 15 245 342 BoE Bank,the Business Division of BoE Bank Limited Individual 12 1 847 867 1 502 988 Fedgen Insurance Individual 3 419 353 354 805 First National Bank Individual 363 85 769 986 69 669 515 Meeg Bank Individual 14 4 657 653 3 201 980 Nedbank Ltd. - BBU Individual 9 7 664 808 7 159 145 Nedbank Ltd. - SBU Individual 682 133 022 072 107 172 107 The Standard Bank of South Africa Limited Individual 597 122 144 899 109 454 461 Uni Bank Individual 20 12 736 000 10 612 800 Portfolio Guarantees Mr Price Group Portfolio

  • FNB Business: Agriculture

Portfolio

  • Sasol Siyakha Enterprise & Development Trust

Portfolio

  • Transaction Capital Business Solutions (Pty) Ltd.

Portfolio 1 1 000 000 1 250 000 3 122 698 393 292 597 132 717 Proportion of Taken ups defaulted 42% 45% 38%

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Portfolio performance since inception – Authorised claims paid

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Auth Claim Paid

Bank Number Indemnity Amount Risk Value ABSA Bank Individual 824 184 381 621 137 319 964 African Bank Individual 43 12 753 942 8 392 128 BoE Bank,the Business Division of BoE Bank Limited Individual 6 602 467 352 344 Fedgen Insurance Individual 2 294 327 155 520 First National Bank Individual 190 50 425 749 32 250 708 Meeg Bank Individual 3 810 554 439 226 Nedbank Ltd. - BBU Individual 6 5 466 985 3 756 918 Nedbank Ltd. - SBU Individual 304 46 805 321 29 120 871 The Standard Bank of South Africa Limited Individual 354 67 716 786 47 650 619 Uni Bank Individual 20 12 736 000 2 430 944 Portfolio Guarantees Mr Price Group Portfolio

  • FNB Business: Agriculture

Portfolio

  • Sasol Siyakha Enterprise & Development Trust

Portfolio

  • Transaction Capital Business Solutions (Pty) Ltd.

Portfolio 1 1 000 000 1 250 000 1 753 382 993 751 263 119 241 Proportion of defaults paid out 56% 55% 44% Proportion of Taken-ups paid out 24% 25% 17%

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Portfolio performance since inception - Default

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Default

Bank Number Indemnity Amount Risk Value ABSA Bank Individual 1 360 310 686 713 271 509 574 African Bank Individual 61 18 443 941 15 245 342 BoE Bank,the Business Division of BoE Bank Limited Individual 12 1 847 867 1 502 988 Fedgen Insurance Individual 3 419 353 354 805 First National Bank Individual 363 85 769 986 69 669 515 Meeg Bank Individual 14 4 657 653 3 201 980 Nedbank Ltd. - BBU Individual 9 7 664 808 7 159 145 Nedbank Ltd. - SBU Individual 682 133 022 072 107 172 107 The Standard Bank of South Africa Limited Individual 597 122 144 899 109 454 461 Uni Bank Individual 20 12 736 000 10 612 800 Portfolio Guarantees Mr Price Group Portfolio

  • FNB Business: Agriculture

Portfolio

  • Sasol Siyakha Enterprise & Development Trust

Portfolio

  • Transaction Capital Business Solutions (Pty) Ltd.

Portfolio 1 1 000 000 1 250 000 3 122 698 393 292 597 132 717 Proportion of Taken ups defaulted 42% 45% 38%

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Portfolio performance since inception - Default

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Default

Bank Number Indemnity Amount Risk Value ABSA Bank Individual 1 360 310 686 713 271 509 574 African Bank Individual 61 18 443 941 15 245 342 BoE Bank,the Business Division of BoE Bank Limited Individual 12 1 847 867 1 502 988 Fedgen Insurance Individual 3 419 353 354 805 First National Bank Individual 363 85 769 986 69 669 515 Meeg Bank Individual 14 4 657 653 3 201 980 Nedbank Ltd. - BBU Individual 9 7 664 808 7 159 145 Nedbank Ltd. - SBU Individual 682 133 022 072 107 172 107 The Standard Bank of South Africa Limited Individual 597 122 144 899 109 454 461 Uni Bank Individual 20 12 736 000 10 612 800 Portfolio Guarantees Mr Price Group Portfolio

  • FNB Business: Agriculture

Portfolio

  • Sasol Siyakha Enterprise & Development Trust

Portfolio

  • Transaction Capital Business Solutions (Pty) Ltd.

Portfolio 1 1 000 000 1 250 000 3 122 698 393 292 597 132 717 Proportion of Taken ups defaulted 42% 45% 38%

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The consequences of the Lockdown has had economic impact on the survival of enterprises and economic movement of persons. Most importantly, the lockdown has affected the small-scale enterprises which are based in the township and rural settlements.

  • DSBD has put in place programmes to formalise the informal businesses to micro

enterprises; facilitate the banking of the unbanked and build reliable database for future government planning and support.

  • DSBD has put a programme which will facilitate and support bulk buying opportunities

for spaza shops and further strengthen such spaza shops as local convenient access to basic goods.

  • DSBD intends to support possible and available opportunities for self -employment and

job-creation at entry economic level in the automotive replacement parts programme

  • High administrative costs of small-scale lending, the perception that risk is high in lending

to SMMEs (Spazas and Automotive tradesmen), and their lack of collateral and financial records are some of the main reasons for commercial banks are not tapping into this market.

  • Commercial banks are providing lending facilities to Spaza shops and to Automotive

sector at the back of portfolio guarantees

  • A Supplier Credit Guarantee is not a viable option of providing incidental credit, when

sometimes all that the SMMEs need is a line of credit.

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Covid- 19 Economic Recovery Response

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KCG current major clients

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Thank You

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