Credit allocation for SME issues

1. Economics
2012. 06 . 11

2. Contents
Definition of Credit allocation
Theories of Credit allocation
How Credit allocation affects to business loan
SME Financing status
Conclusion

3. Ⅰ. Definition of Credit allocation
1. An equilibrium point In a market with perfect information
P
S
Excess of Supply
p2
p*
p1
Excess of Demand
D
Q
In a market with perfect information, there exists an equilibrium point at which the demand and supply curve
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can intersect each other, that is where both demand and supply for loans are satisfied. In this market, if
prices are too low then demand will be higher than supply, that is, there are some excess of demand, the
prices will have to be raised to obtain market clearing.

4. Ⅰ. Definition of Credit allocation
2. A situation of credit rationing
r
S
r*
r1
D
L2 L1
L
When asymmetric information arises, which is common in loan market, the market failure from the price
mechanism failure occurs frequently.
In a situation of credit rationing, if the demand for loans exceeds supply in equilibrium, lenders are not willing to
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raise interest rate to clear the excess demand. Instead of doing so, they tend to prefer setting an interest rate
and ration credit In other words, credit rationing happens when lenders, in spite of having sufficient funds, do not
offer loans to all applicants who are able to pay the prevailing interest rate or the non-price element of a loan
contract such as collateral requirements.

5. Ⅰ. Definition of Credit allocation
3. three types of credit rationing
①pure credit rationing
"Pure credit rationing" refers to the situation where, within an observationally indistinguishable group, some
obtain credit, while others do not, and will not receive credit even if they are willing to pay a higher interest
rate.
②Redlining
"Redlining" refers to the situation where some specific group of borrowers, who share an identifiable trait,
cannot obtain credit with a given supply of loanable funds, but could if the supply were increased. More
importantly, they would not be able to get loans even if they were willing to pay higher interest rates.
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“Disequilibrium credit rationing”rationing
③Disequilibrium credit is less interesting type in economics. It refers to the situation which is a
temporary feature of the market, due to some friction preventing clearing.

6. Ⅱ. Theories of Credit allocation
1. Asymmetric information
Stiglitz and Weiss (1981) have proposed a model used to explain the second type of credit
rationing. According to them, when making a loan, banks used to concern about the interest rate they would
receive, as well as the riskiness of that loan. The former, nevertheless, may affect the latter in two ways under
asymmetric information:
Sorting future borrowers (the adverse selection effect) or influence their behaviours (the incentive effect), and
thus credit rationing may occur.
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7. Ⅱ. Theories of Credit allocation
2. Adverse selection
Profit
Both types Only High
Apply Risk Apply
r*
r
Stiglitz and Weiss (1981) have proposed a model used to explain the second type of credit rationing.
According to them, when making a loan, banks used to concern about the interest rate they would receive, as
well as the무
노 riskiness of that loan. The former, nevertheless, may affect the latter in two ways under
asymmetric information:
sorting future borrowers (the adverse selection effect) or influence their behaviours (the incentive effect), and
thus credit rationing may occur.

8. Ⅱ. Theories of Credit allocation
3. Adverse incentives and moral hazard
Profit
Project B Project A
(low risk) (high risk)
r
r*
Stiglitz and Weiss (1981) have proposed a model used to explain the second type of credit rationing.
According to them, when making a loan, banks used to concern about the interest rate they would receive, as
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well as the riskiness of that loan. The former, nevertheless, may affect the latter in two ways under
asymmetric information:
sorting future borrowers (the adverse selection effect) or influence their behaviours (the incentive effect), and
thus credit rationing may occur.

9. Ⅳ. SME Financing
1. SMEs in the Korean Economy
SMEs as a Ratio of Total Number, Employment
Year 2006 년 2007 년 2008 년 2009 년
Total 2,940,345 2,976,646 3,046,958 3,069,400
SMEs 2,936,114 2,974,185 3,044,169 3,066,484
Number of
[%] [99.9] [99.9] [99.9] [99.9]
Enterprises
Major company 4,231 2,461 2,789 2,916
[%] [0.1] [0.1] [0.1] [0.1]
Total 12,234,160 12,612,692 13,070,424 13,398,497
SMEs 10,677,789 11,149,134 11,467,713 11,751,022
Employment [%] [87.3] [88.4] [87.7] [87.7]
Major company 1,556,371 1,463,558 1,602,711 1,647,475
[%] [12.7] [11.6] [12.3] [12.3]

10. Ⅳ. SME Financing
2. SME Financing: Framework

11. Ⅳ. SME Financing
3. SME Financing
Sources of Financing for Korean SMEs in the Manufacturing Sector
Non-bank
Policy Corporate Private Foreign
Banks financial Equities
loans bonds debts borrowings
institutions
2011 83.3 10.6 0.9 1.1 3.2 0.4 0.6
2010 65.9 26.5 3.4 0.2 0.8 1.5 1.6
Changes
17.4 15.9 2.5 0.9 2.4 1.1 1
(%)
Source: Korea Federation of Small and Medium Business
- Most Korean SMEs heavily depend on bank loans for more than 70% of their total
funding.
- While bank loans have steadily increased, financing from the capital market has
decreased, because SMEs can hardly acquire investment-grade credit ratings that
satisfy investors' demands

12. Ⅳ. SME Financing
4. Public Support for SME Financing
SME supporting System in Korea

13. Ⅳ. SME Financing
5. Government programs that support SME financing
Credit guarantee Policy loans
- To alleviate credit risk imposed on - Provided to SMEs at interest rates
loans to SMEs lower than the market rate through
- Korea Credit Guarantee in 1976 : in banks or Small Business Corporations
order to reduce the possibility of market (SBCs)
failure in SME financing due to - Objectives
information asymmetry, high • To promote equipment investment,
transaction costs, and lack of collateral restructuring, and commercialization
- KODIT, the Korea Technology Credit of new technologies
Guarantee Fund (KIBO hereafter), and • to assist startup activities, most of
the Local Credit Guarantee which are hardly financed through
Foundations (LCGF) private market arrangements
because the anticipated returns do
not meet market expectations
- Small and Medium Business
Administration (SMBA),

14. Ⅳ. SME Financing
6. Structure of SME policy financing
Ministry of Local
Bank of Korea Central Government
Government
Funds entrusted Funds entrusted
Small & medium
Each of Central / The Korea Finance
Business Corporation
Local Government Corporation (KoFC)
(SBC)
Supported
recommendations
capital investment
Funding
Korea Venture
Financial institution Investment Corp
(K-VIC)
credit guarantee
Credit Guarantee
Agency
Direct loans loans Support Investment
Small and Medium Enterprises

15. Ⅳ. SME Financing
7. Effectiveness of SME policy financing Korea
Since SMEs suffer from lack of collateral and information asymmetry, the
credit guarantee is regarded as a pivotal infrastructure for SMEs
SMEs were able to overcome the recent financial crisis at an early date, as
the guarantees facilitated loans to reduce SME market failure, while
contributing to the reinforcement of the national economy.
The credit guarantee system is positive effects on government, bank and SME
activities.
In the case of the government, the system strengthens the public benefits of
financing functions by supporting viable technologically innovative enterprises
with growth potential despite relatively weak collateral and low credit ratings.

16. Ⅴ. Conclusion
1.Elaboration of small business credit evaluation model
As small business has insufficient amount and accuracy of the information
The lenders still prefer collateral and the guarantee. because of the reliability of
financial information of SME is low and sensitive to changes in the economic
environment
Financial Information Non – financial Information
easy to objectify as quantitative
objective judgment
information

17. Ⅴ. Conclusion
2. Improvement of market affinity credit guarantee system
Expanding the use of consignment guarantee system
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18. Ⅴ. Conclusion
3. Enhance the functionality of the main bank
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19. Ⅴ. Conclusion
4.Recognize small business finance as a core business
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