Export credit financing and export credit insurance and guarantee scheme in Korea

UNITED NATIONS

ECONOMIC AND SOCIAL COUNCIL

Distr.

LIMITED

E/CIM4/WP-1/91

30 September 1974

Original/ENGLISH

ECONOMIC COMMISSION FOR AFRICA

EXPORT CREDIT FINANCING AND EXPORT CREDIT INSURANCE AHD GUARANTEE SCHEME IN KOREA

A-S, Navaratnarajah

Regional Adviser on Export Promotion

and

B. P. Gupta

Consultant on Export Credit Financing and Export Credit Insurance

SUMMARY

Korea's economic and export performance '

1. Korea is one of the fastest growing economies with an annual average growth

of 8,1 per cent in the sixties. Her export growth was 40 per cent over the sixties

and a record 98 per cent in 1973» Other sectors have recorded similar growth-

2. Export development figures,centrally in all five-year'plans of Korea. The leadership and initiative for export development stems from the President himself.

Consequently, there is a high degree of export consciousness in both government and private sector, a mutual confidence between the two sectors, a high degree of co-ordination at the Governmental level and again with the private sector^ an absence of Ministerial frictions, and an all out effort to achieve export targets.

The President regularly holds monthly conferences to review implementation of the export development programme and this has resulted in a highly efficient administra

tion and performance. .

3. Government actively enoourages trade associations and their views are given

very careful consideration. The associations have direct access via the monthly

council of the President to the President himself and also to all connected Ministries. Membership in the Korean Traders Association and Korea Chamber

ef Cenaaefce and Industry ic obligatory,

4» Import licensing is correlated to export performance. No one oan register

as an import/export business unless he has secured a minimum export order and no

one will be issued an import license, unless a minimum performance of export is

achieved. :

5. Korean labour is highly literate, skilled and productivity is high compared

with wages. Labour disputes are few.

6. Korea has a series of export incentives. These are speedily, effectively

and efficiently implemented.

7« A special organization KOTRA is entrusted with promotional work. Its major task is to introduce foreign businessmen to Korean exporters. It carries out

a series of promotional activities. ,

Banking

8. Korean corporations rely heavily on banking institutions for both, working capital and capital expansion financing.. Banks comprise of coanercial banks, local banks, speoialiBed banks and foreign banks. Average interest for loans is 15«5 , per cent* Security takes the form of mortgages over land and equipment. The

Korea- Exchange Bank, specializes in foreign exchange transactions*

9« Foreign banks have played an active role in promoting foreign investment, lending support to local banks and in medium-and long-term loans.

«.«

-Fags 2

Export credit financing

10# Ninety-five per cent of all exports are on (h/c) Letter of Credit basis}, only about 5 per oent are on (b/a) Document on Acceptance, (D/P) DocameHrtx ag&iStts*?&^e^Q9*&i@n.~

ment and medium-term basis. Emphasis on export credit financing is on preshipment

ehort-term financing© .

11. Short-term financing oqyering all aspects of preshipment needs are -available*

Schemes are listed; maximum loan granted is on the basis of 350 won per US dollar

on f.o.b. value (l U3 dollar .« 400 won) * i.e. 7/8 f.o0b0 value© Interest rate is 7 per cent. Loans have to be repaid within 90 days. Loans are given in three

stages t -..:.. ■■ ; \ 1 ■ ■

(a.) Import of raw material. .. .

(b) • Purchase of1local material (c) Other expenses. .

Security for the first two stages is the raw materials itself. ; The third stage is usually covered by a promissory note.

12. Post shipment finance is provided on a 120 day basis for d/p and l60 day for

D/A or consignment terms. .*.'•. "

13» The financing is facilitated by the Ministry licensing of export/import

business and the issue of import licenses.

14. Though a credit insurance guarantee scheme is available to banks for preshipment loans, this is rarely availed of. On the other hand, post shipment loans are

invariably covered by the credit insurance scheme*

15* The bank's criteria for credit evaluation, collaterals and action in case of

default are described. The bank's sources of credit information are also- given.

16. All export facilitation loans are refinanced from Bank of Korea at 3*5 per cent

interest. The Bank of Korea does not give guide lines for grant of commercial

loans for exports0 This is solely left to the commercial banks. There is a high degree of mutual confidence among banks,Central Bank, and ininis-tries»

Export credit insurance and guarantees -

17* The Government has been operating an export credit insurance and guarantee • scheme since February 1969* The Government is the insurer. The management of the

scheme is -entrusted to the Korean Reinsurance Corporation where the government

holds majority shares.. ...The Corporation ;has set up a separate department for

administering the scheme* -The. accounting of this department is kept distinct and separate from - other corporations- accounts* The scheme is under the direction of

the Ministry of Finance*' ...'.■■. ■ ■ . ■

r

18» The Corporation has to prepare a budget for the operations of the scheme

and obtain approval from the Minister, of Finance. "

E/CN.14/WP.1/91

Page .3

19. An export credit insurance advisory council provided for in the export credit insurance law enacting the scheme advises the Miniater and-the..Corporation on all important policy matters related to the scheme*

20* An export credit insurance fund has "been provided for by Government,

Presently it is 1*25 million dollars* Maximum amount insured should net exceed twenty times the fund*

21* The schemes in operation are:

(1) General Export Insurance (2) Export Finance Insurance

(3) Export Mil insurance ■ '

(4) Medium or long-term insurance . .

(5) Consignment sale insurance and (6) Overseas investment insurance.

Details, of the scheme are furnished* In respect of (2) and (3), the insured

are banks.

23. Export finance insurance indemnities the bank for its preshipment finance

to exporter. Ninety; per cent of loss is payable. This is not widely used.

24* Export bill insurance indemnifies the bank against loss on bills negotiated

after export. This is the most popular of all insurance schemes* Amount payable is 90 per cent of lose* Premium rate is .3 per cent*

25* The administrative procedures for settlement of claims are relatively simple*

Claims if bonafides on face value are-met and then investigations conducted* This is particularly so with banks© The usual time for settlement of claims in respect of banks insurance is one month after claim, while that for General'Export

Insurance is three months* A note worthy feature of the administration* is that if queries reveal that no risk' i*s involved in a particular transaction, fhe . client is advised against the insurance^ Credit information is usually obtained, from Bun and Bradstree! and other reliable credit agencies in the countries

seeking credit* ' :

26*. The record of the insurance and guarantee schemes has been goode Of an amount 1500 million won insured, the claims paid out is 12 million won* .The

premium income is 75 million won and the administration costs is 23 million won*

It has been possible to transfer premia income to export credit fundo The scheuws have to be operated on a no profit, no loss basis* Premia have been reduced

twice*

E/CN.14/WP.1/91

Page 4

Small, industries guarantee scheme , . , ..•-.»

27. This scheme is of special relevance to African developing countries. A credit guarantee scheme operates "for.banks lending to small industrialists* with or without collateral. The scheme ig operated by the Medium Industry Bank on behalf of

government* , ;.

28. The guarantee scheme is confined to small industrialists who are defined by

laW| and ceiling limits set on the amount of loans for working capital, plant *"

and equipment and import-export trade. No single enterprise can get more than US$125,000. The periods of guarantee are also limited for each type of loan.

i'

29. A credit guarantee fund has been established. Maximum liability to be

incurred on these guarantee is limited to 10 times the fund. The guarantee organiza tion is required to prepare a budget every year for the administration of the

fund and obtain approval of the Minister, of Finance. Statement of accounts have to be submitted within two months of the close of business.

30. A credit guarantee council advises the administrative agency on policy

matters* .,.-

■31» The procedures for obtaining the guarantee are quite simple. On the credit research report oif the small industrialists seeking the loan furnished by the bank giving the loan, letter of a guarantee is issued. The guarantee fee is

1 per cent per annum.

32. The procedure for invoking the guarantee is equally simple. If the Director of the Bank Inspection Board certifies that the debt is a bad one, the guarantee organization immediately pays.. The certificate is issued within two weeks of the

application lay the bank.

33* Since the inception of the scheme, 1800 guarantees have been issues involving 90 billion wons. Only 204 million wons have been paid out as defaults* The

guarantee fees recovered was-458 million won. The number of defaults was 85.

The scheme has enabled the banks to lend over 90 per cent of the. funds needed by

small industry.

34* The overall impression that the team gained from Korea was that once govern ment decides on a scheme, it is brought into operation within a. few weeks, The administrative procedures are worked out with as much simplicity as possible, and are designed to make it easy for eligible applicants to avail themselves of the facilities of the scheme rapidly, implementation effected efficiently and in the spirit of the scheme, rather than on the technicalities, and the various institu tions as well as the eligible applicants, repose mutual confidence in each other, so that protracted correspondence, crisscross checking and consequent delays are

obviated* "

B/CN.14/WP.1/91

Page 5

I. BACKGROUND

Korea's economic growth and export performance

Korea's economy has been one of the fastest growing among the developing countries. The average annual rate of growth during the last decade was 8.1 per

cent. Her GKP which was $2*4 billion in 196I rose to $8.8 billion in 1971 and

«9,8 billion in 1972. Per capita. income rose from $83 in 1961 to $275 in 1971

and $304 in 1972- A key factor which contributed to this growth was the phenomenal

rise in her exports* In 1961, Korea's exports were only $41 million and consisted

-mainly of tungsten, coal, iron ore, clays, silk yarns, primary agricultural and

sea food products. In 1972, exports totalled $1624 million reflecting an annual average growth rate of 40 per cent* The structure of exports also showed remarkable diversification^ In 1961, the wei#it of manufactured exports was 28 per cent*

In 1972, manufactured exports rose to 88 per cent. The total number of export itemp;increased from 100 in 1961 to 994 in 1972» The number of overseas markets

for Korean commodities increased from 25 countries in 1961 to 111 in 1972* The

export items in 1972 were:

Plywood $175 m

Woven clothing

Electronic equipment

Knitted clothing Sweaters

Fabrics . , . Cotton products

Iron/steel products

Pish . Footwear

150 m 142 m 113 m 110 m

86 m

80 m 76 m 72-m 62-m

Her export performance for 1973 was a record 98 per cent increase over 1972

exports* The USA and Japan were the principal consumer markets for export products.

In 1972, the US purchased $759 millions while Japan purchased $408 millions* . In line with the increase in exports, imports too expanded from 316 million

dollars in i96"l to 2,522 million dollars in 1972, an annual average growth rate

of 23 perscent. The deficit in visible trade was set off by a surplus in invisible trade and capital transactions. At the end of 1972, the foreign capital loans to Korea tqtalled 3,223 million dollars consisting of 1,199million dollars of public

loans and 2,024 million dollars of commercial loans. Direct foreign investments

by 1972 totalled 372 million dollars.

OtherL sectors of the economy also have progressed between 1961 to 1972» Thus

industrial growth was 17.9 per cent, fishery 14*3 per cent, forestry 8.0 per cent

and agriculture 2.9 per cent* The increase in population declined from 3»2

per cent to 1*3 per cent.

s/cit- 14/vjv, 1/9 Page 6

Export promotion in Korea

The remarkable achievement of Korea in the export field, particularly when the country is not endowed with much natural resources and has to import a high proportion of raw materials needed for- manufacture, needs - some.- continent « Two

favourable factors have influenced her high growth rate in exports namely the large capital inflow from USA and Japan and the proximity of these highly developed

marketso • But the basic factor in utilization of the opportunities provided to achieve the high growth lies in Korea's organization for her export drive.

Export planning: and implementation

Export development figures centrally in all 5~year plans of Korea*, The leader ship and-initiative for export development stems from, the President himself* Both the Governmental organizations and the business sector have a high degree of export consciousness* The co-ordination as between the various governmental organizations on the one hand, the trade associations and the .individual firms on the other hand . is remarkable. The link between the two sectors is strong as is also the mutual, confidence*. Every year government sets a goal and every organization,whether it be on the government side or on the private sector side*maximises its efforts to achieve the goalo A significant feature of the Ministries is that each Ministry views its activities from the point of view of achieving the overall common goal rather than from a restricted Ministry angle* This way Ministerial frictions, not so uncommon in many developing countries, is avoidedo This no doubt is again due to the President's personal interest. He holds regular monthly conferences of Ministries and export associations to review targets and implementation of the

targets. These conferences have facilitated simplification of procedures, effective implementation of incentives and above all a determination on all concerned, with exports to achieve the export target* Thus import licenses for raw materials needed for exports are issued within a maximum of three days of the date of application* A bank's certificates of the quantum of raw materials needed for export is accepted without further scrutiny by governmental organizations for purposes of customs duty rebate or import licenses*

Trade associations

The Trade Associations and Export Associations have direct access to the- Ministers and even to the President*

Standing committees of the Korea Trade Association as well as Export Associa tion study various aspects of export development and submit reports to Ministries which are given careful consideration. Governmental support for private sector organizations is a prominent feature^ All exporters and importers have to be ■ members of the Korean Trade Association. The Association's chief officials are members of ohe President's monthly conference* All traders are required to be registered with the local Chambers of Commerce . and Jnduartry who aa?e- members o national Korea Chamber of Commerce, and Industry. These associations serve

link' between the government^tuid -the..business- ■cyaamMnJtty^^ Export, assooJ^fc^

aotively encouraged and concessional f aci-9sjtjLea suph as-\group. expqr<- credit

afforded tQ .such associations. ;

E/CN.U/WP.1/91

Page 7

Import licensing correlated^ to exports

■the central place given to expoirts in foreign trade policy is evidenced in the Traide Transaction Law wiibse objective is to promote a sound development of foreign trade by encouraging exports and adjusting imports and in the implemen tation decree of that law. The latter prescribes that for license as an export import business the applicant should have an irrevocable letter of credit or other foreign exchange earner of a niniiiiui.i of US$10,00G and that the applicant should have^minimum daily capital of IB£25,OOG in case of a corporate body or a minimum daily balance of 113^25,000 in case of a private person for the one

month period preceding the application* For a person to operate an import business, he should Lave earned US#30G,000 either through exports or other foreign exchange earning business. There are certain exceptions to these

general provisionsj one noteworthy exception is for a medium industry

operating under the Medium Industry Co—operative Law when it may be permitted to obtain raw materials and machinery for inanufacture, if the export performance after Saving'obtained an export import license exceeds US$100,000. The decree also provides, that the license for export—import business shall be cancelled if the licencee fails to earn an equivalent of US^250,OO0 in his semi-annual export or other foreign exchange earning business. These provisions have made Korean iiidustry export orifiaited and also f acilitated the setting up of large export—import houses on the pattern of Japan's trading houses. It has also facilitated export credit financing, as banks can be reasonably certain of the credit worthiness and business standing of an applicant who has already been granted an import—export license.

Labour Productivity

The greatestasset that Korea has is her people. Ninety per cent of the people are literate. The labour force is highly skilled and the productivity is high. Wages are comparatively low. The wage earnings vary with each industry between US$46.54 for the textile industry to USS100 in the . petroleum industry per ^oonth, Tiie Korean employee tends to look upon, hie company as an extension of the family init. Labour disputes therefore tend to be few. Labour disputes have to be referred to the

office of labour affairs which is required to give a decision within thirty days.

Jhcentives for export

As in other developing countries, Korea provides a series of incentives for exports. But unlike most developing countries these are speedily,

effectively and efficiently implemented. There is no export tax on any

export. Raw materials for exports are mostly allowed duty free. The procedure for such duty free concession is simple and typical of administrative simplicity that is a feature of Korea's governmental administration. The exporter makes a declaration that the raw materials are reuired' for exports, OnCe

manufacture is complete and products are exported, the exporter files his customs return with a bank certificate of the quantum of import of raw material that would have been utilized for the exports. The customs

thereafter cross checks on the import declaration* export declaration and bank certificate and if satisfied, exempts the exporter from any duty payment on the particular import. In case there are serious deficiencies,

E/OT.14/WM/91

Page 8

the customs levies suitable penalties^ As malafides may result in the cancellation of the export-import license, cases of malafides are very rare* Where duties have

been levied, drawback on customs duties is allowed. The procedure follows the same pattern as for duty free imports. Exports are also exempted from the business turnover tax and commodity tax. A special depreciation of an additional 20 per cent, besides the usual 10 per cent is. allowed for most export oriented industries.

Export oriented industries under the Foreign Capital Inducement law are also

allowed a tax holiday for five years followed by a 50 per cent reduction of tax

payable for the next three years. Foreign employees salary and dividend income of foreign investors enjoy a similar concession. . . . : -

KOTRA (Korea Trade Promotion Corporation)

(a) marketing research department;

(b) commodity research department as export information centre;

(c) export information centre;

(d) exhibition department;

(e) trade library;

(**) display hall; and

(g) extensive information service,

KOTRA has 68 overseas branch offices. Its major activities are:

U) aMUa^lysKe°sr-ean bUSineSsmen of its research studies

(b) introduce foreign businessmen to Korean exporters;

(0) HZt^r f°r!iS? busines8 *«* information on Korea's economy, industry, foreign trade and marketing publications;

S2=s£-

^^,v*,, *y:*~ f.~----.~. ■-:-■-'■■ ■. * -. , - - — ■ . w - , -*,^._i

(e) participation in oversea? fairsj foreign importers seldom visit

Korea without KOERA's guidance in introducing and arranging discuseions with Korean manufacturers»

II. BANKING

The structure of the financial sector is characterized by its simplicity, the dominance of banking institutions,-and close co-operation with governmental administrative agencies*.- Korean corporations rely primarily on banks to supply

operating and capital expansion financing. Banks; in Korea are divided into two broad groups: commercial banks and specialized banks. The commercial banks

offer short-term financing and the specialized banks offer j.onger-term financing.

The foreign commercial banks represented in Korea extend medium-term loans in local

and foreign currencies (i.e. JJp dollars, Deuteche: marks, Swiss franos). All

foreign loan transactions,-whether guaranteedor not, require government authorization Commercial banks are required to pay 6 per cent for 3-month deposits; 8»4

per -cent for 6-month deposits and 12 per cent for 1 year. Depending on the fund,

sources and the type of usej interest rates range up to 15.5 per cent per annum

for won loans. , f

In general, Korean commercial banks grant short-term loans against promissory notes. In a great many cases the notes are^renewed time after Itime.'

For most Korean commercial banks, security takes the form of mortgages over land and sometimes equipment. Ab a rough rule, the value of the land and buildings, as determined by the Korea Appraisal Board, must be equal %o 120-per oent of the

loan amount* . ' '

The major portion of foreign exchange transactions is handled " •

by-+heXorea Exchange -Bank* ' The Ex^oft-ImDort Bank "of Korea Act was ~ ^ promulgated on 28 July 1969. The purpose of the Acrtr was "to establish an

Export-Import Bank'for handling export and import transaction's under jnnri.fwnr *^ ,_r and lofig-term-'credit and overseas investment. "The" bank-hattCDot been estahJdshed as yet, but- its functions are perfor»edAprese^tly..by"the-Korea Exchange

Bank* ■ » _ ■ , "

— ~"— - - - -- -.t. ^}uL_t

""'The foreign banks main purpose is to extend-m<fidium-term^loans . .--~\^j*- -..-■:■„

in local and foreign currencies© They '

(a) play an active role in introducing Korea's overall economic condition

to overseas investors and in inducing foreign capital.

(b) provide overseas investors and buyers of Korean made goods with credit

information and market information;

(c) support local bank credit lines for international transactions}

(d) arrange off-shore long-term loans to Korean industries;

(e) provide diredt export promotion loans to export industries to finance

for the importation of machinery and epiiipment for export purposes;

Ill,BAKKINGSYSTEMIKKOREA 5Nationwide CommercialBanks

■:Board-' BankofKorea KoreaTrustBank NationalJgricultural CooperativesFederation andMemberCooperatives

Medium Industry- Bank

OfficeofBankSupervision andExamination 10LocalBanks:8ForeignBanks) Citizens National Bank

KoreaI Housing Bank

Korea Exchange Bank

Korea Development Bank

•— O

3 5

o a

Page 11.

(f) train local bank personnel and business community in modern techniques

of financial analysis and planning.

Export financing schemes in Korea

Hinety five per cent of all exports of Korea are on a confirmed irrevocable l/c basis. Only about 5 Per cent on d/a, 3)/p and medium-term basis* Consequently

the emphasis is on preshipment financing. The schemes in force for short term financing are listed below:

A. Short-term financing

- Financing of forking Capital-

It Export financing

(a) Financing of the Production and Collection of Exports (1) 'Eligibility

(a) Exporters who have received irrevocable export letters

of credit;

(b) Exporters who have,concluded contracts to export goods on a D/p, d/a or consignment basis or through bonded warehouse

transactiQns;

(c) Producers of export commodities or raw materials for exports.

■ (2) Amount: 350 won per US dollar ('" f.o.b. basis).

(3) Interest rate: Seven per cent per annum.

(b) Financing of Export Goods Purchases (1) Eligibility

(a) Exporters who have received irrevocable letters of credit;

(b) importers who have agreed to export goods on a d/p, d/a or

consignment basis or through bonded warehouse transactions*

(2) Amount: 350 w.on per US dollar (f.o.b* basis).

(3) Interest rate: Seven per cent per annum*

(c) Financing of Raw Material Purchases for Processing or Manufacturing

. Export Goods

(1) Eligibility

(a) Exporters who have received export letters of credit;

B/CN.14/WIM/91

Fag* 1?

. (b) Exporters who have signed contracts to export goods; = (c) Producers of exports or raw materials for export;

(d) Buyers of raw materials for reserve.

(2) Amount: Up to the amounts of drafts issued with local letters

of oredit* .

(3) Interest itate: Seven per cent per annum.

(d) Financing of Raw Material Imports for Export (1) Eligibility

(a) Exporters who have received irrevocable export letters

of credit; . . ■ ■

(b) Exporters who have concluded contracts for non-letter of

of credit exports;

(c) Producers of export goods or raw materials for export.

(2) Amount: 350-won per US dollar.

(3) Interest Kate: Seven per cent per annum.

(e) Financing of Imports of Raw Materials for Reserve

(1) Eligibility: Traders who import raw materials for reserve.

(2) Amount: 350w.on per US dollar within 90 per cent of import value.

(3) Interest rate: Ten per cent per annum.

(f) Repayment Terms of Export Finance

(1) L/C basis: Financing of exports on an L/C basis must be repaid

within 90 days from the date of financing,

(2) Non-letter of credit basis : In case of financing before the

shipment of exports, borrowers must repay within 90 days. In financing after shipment, terms aay tot exceed 120 days on a D/P basis or 180 days on a d/a, consignment or bonded warehouse transaction basis including the period before shipment,

2. Financing of Supplies to United Nations Forces and Agencies of F6reign Governments

(a) Eligibility

(1) Those who have signed contracts to provide goods and services

•

Page 13

-to the UN forces, the agencies of foreign governments and Korean

forces abroad; .

(2) Producers of goods to be supplied to the UN forces and agencies

of foreign governments.

(b) Amount: 350 won per US dollar within 90 per cent of the foreign

exchange earnings©

(c) Interest rate: Seven per cent per annum*

(d) Financing period: Up to 90, days.

3« Financing of Collection and Storage of Agricultural and Marine Products

for Erport

(a) Financing of Collection

(1) Eligibility: Those who collect agricultural and marine produots

for export* :

(2) Amount; In .principle, up to 70 per cent of the funds required,-

but in cases specified by the Governor of the Bank of Korea, up

to 80 per cento .

(3) Interest r.ate: Seven per cent per annum.

(4) Financing Period: Up to 90 days*

(b) Financing of Storage

(1) Objects: Exporters who store agricultural and marine produots

of export*

(2) Amount: Up to 70 per oent of the funds required.

(3) Interest r^,te; Fifteen point five.(15*5) P©* ceat per annum

but seven per cent when the borrowers receive letters of credit.

(4) Financing period: From 90 days to 180 days*

■.'..-<■'• ■ ' ■ ■' ' ■■ ■

B. Medium-term Financing , . ■■.-.-. ■ .

- Financing of Facilities for Export Industries - 1« Local Currency Loans

Ibis form of financing is to facilitate supplies of industrial facilities

to export industries, thus to support the achievement of the long-term export target.

(at) Objects MamtfactuPer& who, intend, to acquire facilities for production

of exports or raw materials for export use. .

(b) , Pinanpijig period: Up to: eight years. Grace period of two years

in lending periods less than five years and. of three years in lending periods more than five years*

(c) Repayinent: Eqpial instalment repayments two or more times a year.

(d) Interest rate: Twelve per cent per annum.

Schemes for medium-term financing in foreign currency, deferred payment export financing, and loans to foreigners and foreign government for the purchase of Korean capital goods are also available.

Export financing practices of commercial banks

An outline of the steps for bank financing of preshipment is as follows:

1. Exporter receives export i/c .

Zp Exporter gets export license from banks or government*

3« Exporter gets export finance from banks:

(1) For local raw materials , (2) For imported raw materials»

(3) For other expenses*

4* Financing banks get refinance from central bank*

5« Exporter makes shipment and presents shipping documents to banks

for negotiation*

6. Exporter,re^irea export finance (@ W 350) and has the difference

between export amount and export finance (@ W 50) paid.

7» Financing banks retire refinance from central bank* ;

The rate of exchange for 1 US dollar is 400 won. The f.o.b. value of the

export order is computed and loan facilities up to 35O won per US dollar,

is made available* The loan is given in three stages.

(1) For purchase of imported raw materials.

(2) For purchase of local materials. ' ;

(3) For value added.

E/CN.14/WPO1/91

Page 15

The bank computes the quantum and value of both imported raw materials and local raw materials* In case of imported raw materials, bank opens an

L/C in favour of the overseas seller and the L/C margin is decided depending

on the nature of goods to be imported.

The raw materials received under this L/C are hypothecated or pledged as

prime security for the bank's loan. Similarly,in the case of most purchases of

local materials, inland l/c are opened by the bank in favour of the local

supplier and the bills are negotiated on the basis of exporters certificate of

receipt of goods> Here again the goods supplied are treat ed as prime security

for the bank loano It is the third stage of the loan for value added that DAnks would require other forms of security* These generally take the form of personal guarantees* But depending on the oredit standing and status of the buyer, other collaterals' may be insisted on. Banks will give loan facilities only to those licensed with the Ministry of Commerce and Industry as export-import business*

Under the export credit insurance and guarantee scheme, bank financing to exporters

can be issued with the export credit insurance section of the x<^rBsn Re-Insurance

Corporation- But this facility is not much utilized by banks, as exporters are long standing clients of the bank and their credit worthiness is well established with it*

Credit evaluation

The criteria for credit evaluation of an export transaction was listed by the Korea Exchange Bank as follows:

1. Contributions to National Economic Development

(a) Additive Value Effect (b) Employment Effect

(c) Balance of Payment Effect (d) Others

2« Collateral

3« Credit Analysis

(a) Regular Financial Techniques

(1) Liquidity and Safety Analysis with Balance Sheet (2) Profit Analysis with Profit and Lobb Statement (b) Special Financial Analysis

(1) Break-Even Analysis

(2) Comparative Analysis of use and source of funds (3) Cash Flow Analysis

(4) Others

B/C».14A?*1/91

Page 16

(c) Npnfinancial Factors

(1) Management . ^.

(2) Marketing and Sales '

Despite this what would appear to ba a rigorous analysis exporters and

trade associations were unanimous in that loan facilities were readily available7 and easily granted- This is presumably because exporters are long standing clients and their credit worthiness is well established* ■ : Collaterals■

The collaterals tiaat the bank seeks may be any one or more of the following:

. 1*' Current Assets ;: . ■

(a) Commodity

(fc) Security . ■

(c) Deposit

(d) Bank guarantee (e) Others

2« Fixed Assets " . .

(a) Iiajid

(b) Bulldirg and/or structure (c) Machinerj1-, ship and/or plane (d) Others

3* Intangible Fixed Asset

(a) Mining right (b) Fishery right (c) Leaseholds right

4* Personal guarantee

As earlier mentioned for most export credit finance, raw materials serve as prime security for the first two stages of the loan and for the third stages namely value added, a promissory note would suffice*. Since the bank has made available other loanp with suitable collaterals, a default on the export credit

loan could be met by recourse to such collaterals*;

Defaults

In the extras case of default, the Bank would take the following steps:

1* Voluntary Settlements

E/CN. 14/1^-

Page 17

(a) Extension ; .. . ,.. ^

(b) Prorata Cash Settlement

(c) Combination Settlement *;-■." •. ;

2o , Bank'Administration ■ _; . -.■■■•■ ..-•■

(a) Dispatch Loan. Administrator . 7 ...

(b) Additional Financial Support

3« Disposition of Collateral

4» Disposition of Property of Personal Guarantor 5« Collection of Insurance Policy.

But such defaults are rare, as there are other penalties attached to default like cancellation of trade license,advice to other banks not to extend further facilities and withdrawal of tax concessions. >

Credit information

The bank's sources of credit information was listed as follows:

1* Internal Sources:

(a) Credit Pile (by Credit Analysis Office)

(b) Exchange of Credit Information (Inter-branch Offices)

2» External Sources:

(a) Credit Reporting Agencies (Korea Appraisal Board)

(b) Inter-Bank Credit Information Centre (K- rean Banking Association)

(c) Public Publications

(Newspapers, Trade Communications, Magazines, etc.)

Post shipment loans

For financing after shipment, terms may not exceed 120 days on J)/p basis or 180 days on a d/a basis or consignment on bonded warehouse basis* Such loans

are guaranteed after enqpiiries from correspondent banks on buyer's credit worthiness.

But the prime consideration would be the local exporter's standing. Invariably such finanoee are secured by guarantees from the export credit insurance department of the Reinsurance corporation* Aa earlier mentioned, D/p and d/a terms form

only a very small portion of Korea's exports and the major emphasis is on preship-

ment financings

V4

Page 18

Refinance facility from the Bank of Korea

All short-term export credit finance is eligible for full refinancing from the Bank of Korea. The refinancing is immediate. The bank makes an-application

with copy of i/c, its computation of raw materials required and value added

together with a Promissory Note from the bank. The refinancing rate is 3.5 per

cent against the commercial bank loan interest of 7 per cent. The Bank of Korea

does not give any guideline regarding the grant of credit facilities to exporters

and the grant of the loan facility is entirely at the discretion of the commercial

bank*

TableI:Statistical3ataonexportfinancing (inmillidn.USdollars) TotalexportBankleansforexportsCentralBank refinanceTotalCentral. refinanceTotalbankloans toallsectors 1970 1971 1972 1973 1970 1971 1972

835«2 1067.6 1624.1 3220 Loanfcrexports TotalLoans% 7.9

8.9

9.1

139.64

200,37

267.79

555.27 Exportrefinance

Total refinance' $o

Bank for

120.82

178.71 .

249.77 542.0 loanrefinance exports%

.299 358 533 n. Bank

•4 .9

•3

a loansexperts)

1777 2251

2946

n.a 40(approx) 50(approx)

47 (approx)

87

89

93

I6.7 20 I6.5 o 55

E/CN.14/WP-1/91

Page 20

credit insurance and guarant ess

Export credit insurance and guarantees schemes are comparatively recent.

Ihe Government enacted the Export Credit Insurance Law on 31 December 1968 and the schemes came into operation on IS February 1969* Under the law. Government

is the insurer* The scheme is under the direction of the Minister of Finance.

The management of the scheme is entrusted to the Korean Reinsurance Corporation a government invested company. The Government share holdings in the company is 51 per cent, and banks hold 20 per cent* Insurance companies-29 per cent. This main business is reinsurance of various types of insurance. For the purpose of operating export credit insurance schemes, a separate department, the export credit insurance department was started. The, accounting'of this department is separate and distinct from that of the Reinsurance Corporation. The Corporation is required to prepare the budget of the Export Credit Insurance Fund, before one month of the commencement of the fiscal year and obtain the approval of the i&nister of Finance. In submitting its budget, it has to furnish the following documents:

(1) Plans of Business and Fund of the Eicport Credit Insmrajice for the

given year.

(2) Estimated profit and loss accounts and Balance sheets for the preced

ing year and the given year.

(3) Profit and Loss Accountf Balance Sheet and their supplementary documents

of the year before the preceding year.

The Minister of Finance is required to prepare an audited statement of accounts of the export credit insurance fund.

Export credit insurance advisory council

Export credit insurance advisory council comprising of one chairman and fifteen members advises the Minister of Finance and Corporation in respect of export credit insurance. The composition of the Council is as follows.

1© Director

Bureau of Security and Insurance Ministry of Finance

2O Director

Bureau of Economic Affairs Ministry of Foreign Affairs 3« Director

Bureau of Domestic and Foreign Commerce Ministry of Commerce and Industry

4« Director

Bureau of Current Economy

Ministry of Agriculture and Fishery ;

E/CN.14/WP.1/91

Page 21

5» . One of the Directors The Bank of Korea

6, One of the Directors Korea Exchange Bank

7« President of the Korean Reinsurance Corporation 8. One of the Directors

Korea Trade Promotion Corporation

9t Vioe-Chairman

The Chamber of Commerce r Korea

10. One of the Vice-Chairmen The Korea Trade Association

11. Persons who have a knowledge and an experience on the Export Credit Insurance

The Council is required to approve the Corporations proposal for the follow ing items.

1* Premium rate 2. Insurance clauses

3. Restriction on the function of providing insurance 4* Restriction on insurance period

5» Restriction on the commencement of insurance liability

6. Enforcement of the comprehensive insuranoe contract

7« limits of insuranoe liability according to the forme of insurance

8, Operating policy of the Export Credit Insurance Fund

9* Budgeting and settlement of accounts of the Export Credit Insurance Fund 10, Other matters decided by the J&nister of Finance,

In respect of items 1 to 3 and 6 to 9r the approval of the Ministry of finance is necessary* In case of item 6. the Minister is obliged to consult the Minister of Commerce. The premium rate of the export credit insuranoe is so

fixed tor the Government that overall incomes can balance outgoings in the export

credit insurance account. The Governments reduced the premium rates sharply on

23 June 1969 and again on 29 Deoember 1972 in order to enable exporters to utilise

export oredit insurance facilities*

Eruort credit insurance fund

_ Government has established an export oredit insurance fund. Hie ceiling

linlV of "this fund is 5 billion wca (12.5 million dollars). The Government has

made two contributions to this fund totalling 500 million won. The maximum amount

Page 22.

insured should not exceed twenty -tines the total of the export credit insurance fund* TTno fund has to be utilized in the following manner;

1* Deposit in bank; . .

2» Acquisition of national or municipal bond or other securities listed

in the stock exchange j

3* Other -.annere instructed by tfc.3 Minister of Finance.

Incomes of the fund can comprise of .account transfer, premiumr recoveries, interest and other benefits acor-rns from the utilization of the fund* Ihe outgoings of -she fund, are payment of losses, underwriting expenses, interests, administration chafes e-bco &. temporary or permanent loan;- may be floated in the naffis of the fonde Temporary loans have to be settled within a year.

The eohemas to "bs operated under the fund are laid down in the law. They

are:

lo General • li.'xport 2O Export Finance

3« Export 3111 Insurance;

4» Mediitm-or long-ferm Credit Insurance;

5o Consignment-£ale Expdrl: Iiistiranoe;

6. Overseas Investment Insurarce?

general,

rer/tr.i.c-fc.U.n or proiiibiUon ,of exchange transfer enforced by

overseas countrieo,,

2o The restriction or pi-oliibitipn.. of .importation in the buyer's oountiy, 3« The impossibility :of crtcha^e transfer due to 'occurrence of war, civil war, revolution ox other similar disturbances in overseas countries

concerned*. ; . .

4*. The impraciioaUlity1 cf exportation to the oountry concerned due to oocurrence of warf civil. warv. Tevolufcion'or other similardisturttances in the

buyer's country* . • . ■ - ■. ■

5o The impracticaoility cf traiisportation-to the buyer's country due <fco

any ca*ise occjcslii-.Uv; outside the Republic of K

6- Any cause (which both parties cf export contractors not held resTwuaainle

for^arid whitsh arises irom e^n^upci!raKii5g^niteWft the BepuiJLio-cf Itorea, but other

them thoee-..of the preceding itemri^ ' • " ■

Page

7. Ifte restriction or prohibition of exportation "by virtue of the Trade Transaction Law.

8. The "breach of export contract on the part of the other contract party or cancellation of export contract. ly the exporter due to reasonable cause for

which the other party may "be held responsible, where a Foreign Government, its

local public organization or other similar organizations in overseas country is the other party of the export contract.

- ' ' ' ■ ' ' ■ ■' ■

9. The insolvency or similar reason of failure of payment on the part of the other party of the export contract.

The insurance covers both the exporter and supplier. The insurer has the

^option of covering either political risks or commercial risks or botho Bie insurer has the right of taking a comprehensive policy in respect of one single"

commodity or for individual shipments* Comprehensive policies are also issued in respect of trade association. A list of members to be covered under this

policy with details of export contracts are furnished. Shipments on Ii/c basis ' are exoluded from insurance,, Presently about 40 per cent of shipments on D/A and $/P basis are covered. Export Credit insurance is regarded an export

promotion measure, and should the corporation after enquiries feel that no risk' is involved in a particular shipmentr the exporter is advised accordingly.

The amount payable is 90 per cent of the loss to the exporter computer ar*- follows:

(a) price of goods failed to "be exported, or

(b) the balance after deducting the following items from the export

contract price which fails to be paid:

(1) amount recovered or recoverable tjy disposal of the export goods*

(2) amount unaccounted by occurence of the cause ooncernedt

(3) amount of profit to "be expected ty exporting the relevant goods*

Claims are settled within three months of the date of lodging the claim*

£anks do not rate these insurance policies in their assessment of collater als* The coverage of this insurance is essentially for political risks* !Hie ■•

only commercial risk covered is buyers insolvency or prcved inability to pay*

I&rport finance insurance

The insured under this scheme is the banking institution rtiich finances the exporter. Under this policy the bank is indemnified for losses incurred in respect of its loan bill or discount bill due to failure of exporting and delivering goods partially or wholly, inability to collect the places of goods exportedf failure to collect expenses for oons-fcruerbion works and services abroad*

The insurance contract becomes effective when the bank notifies of the U of,loan bill and discount bill to help finance the following type of :

t hl t

. lp

funds necessary to help exporters and. producers.

/WP.1/91

Page .24

1. Funds necessaiy for an exporter to export goods in conformity with his relevant export contract or for a producer to produce, process and collect goods after concluding export contract.

2# Funds necessary for a producer to produce, process and collect such goods as provided in Presidential Decree» subject to the Bank's recognition of his contract "being duly made.

3» Funds necessary for supplying goodsf undertaking constructional works

and providing services to Foreign Government (including individuals supplying

"business on order of Foreign Government), Korean armed forces stationed abroad,

or foreign armed forces or other similar institutions stationed in Korea.

The insurable value ie the amount of the bills and the insured sum is 90 per cent of the insurable value.

H5ie amount of loss payable is 90 per cent of the remainder subtracting the

amount recovered after due date of till.

The bank advises of the default after one month of the date of maturity and the claim is paid within one month of the date of the claim "toy the barik0

The bank is required to oontinue its efforts to recover funds under the

loan or disoount bill, and any amounts so recovered are shared proportionally

between the bank and the corporation. ":

Banks do not seem to have availed of this insurance in any appreciable

manner* Banks rely on the credit standing of the borrower, than on the insurance

for security of its lending. •. *■

bill insurance ' ...

The insurance is made either on a fiscal year or quarterly year basis. The

insured is the foreign exchange Bank. The insurance indemnifies the bank for

failure of payment at the due date of the bill or claim in respect of a loss

incurred "by the recourse exercised en the bill issued on export goods 0 Kie insurance contract becomes effective when the bank notifies the purchase of such

documentary bill. The insurable value is the amount of the bill and the insured sum is 90 per cent of the insurable value. The amount payable is 90 per cent of the bill discounted at the due date of bill after deducting:

(1) sums recovered on or after the due date of bill; "• ■ (2) sums recovered.ty disposing of goods; . -

(3) sums recovered from the exporter by recourse.

The claim becomes due one month after the maturity of the billo The claim

is settled within one" month :of the receipt of the olaim. The claim is paid in

the first instance and the amount subsequently recovered are then paid back to

the insurance corporation. The bank is re<$uired to pursue its efforts and rights

to recover its dues on the documentary bill and is also entitled to recourse on

the issuer for the sum less the amotint settled ty the insurance claim*

Page 25

This is the most popular form of insurance in Korea, Almost 9° P©* cent of the insurance covered is the export bill insurance. Eleven "banks have been issued comprehensive oover under this insurance. The premium note for this

insurance is »3$n

Consignment - sale export insurance

This contract of insurance indemnifies an exporter for loss or losses

incurred on his expense'or. oO3t in the way of exporting and selling goods overseas

under a consignment s-ale contract, The insured is required to fix the cost for exporting and belling and also the Bales price to be sold during such given

•period as stipulated in the export contract. The sales price should be IPS of all

expenses for selling the goods. 100

The amount to be compensated under this insurance is 90 per cent of the remainder obtained by subtracting the items listed below from the amount of costs spent for the exportation and sales of goods.

■ ■.**■ ' ' ■■'

1. Sums accounted on the sale of goods during the stipulated period.

2. Sums recovered or recoverable Ipy disposing taof goods and preventing loss' otherwise*

insurance :

Insurance is available for medium-op-long term credit and overseas invest ment. These are not described as it may be too premature to consider them for

African developing countries. ' ;

of insurance schemes

As earlier mentioned 95 P6*1 cent of all exports go on a L/C basis. It is only those which are sold On D/P, D/A or consignment basis which would require

cover* For these insurances, credit information on the buyer is obtained from Dun and Bradstreet, overseas trade offices and other credit investigating agencies in Hongkong, United Kingdom and Japan. No limit is fixed for each buyer. This is solely left feo. the discretion of the exporter. However ^.banks are confidential ly advised of the rating for each buyer and the buyers who have been black listed.

Premium rates are fixed by the Minister of Finance and are according to the.rating of credit worthiness, country wise. ..."

A .noteworthy feature of the Korean insuranceP is the prompt settlement of

claims. Straightforward claims are first settled prima facie on the face value

and thereafter correspondence entered into for possible recoveries,. As 90 per cent of the policies are export bill insurance with banksr this may have facilitat ed such prompt settlements.

Record

She record of the corporation has been encouraging. Up to date statistics have been requested; but pending this information the Ministry of Finance gave these figures as at 31 Deoember 1973*

Erport credit fund Account insured .. . Claims paid out

No* of claims paid out Premium income

Administration costs

500 million won 1,500 million won 12 million won

2

75 million won 23 million won

It had "been possible to transfer net income from the premia after meeting administration costs and losses to the export credit insurance fund. The

corporation also claimed that 40 per cent of D/A and D/p tills transactions .

were covered under the insurance schemes and consequent to the introduction of

the schemes the percentage of exports on p/A and D/P "baste has risen considerably.

Small-scale industries guarantee scheme

Guarantee schemes of great relevance to African developing countries have

"been introduced both in India and Korea. India under the credit guarantee

corporation has guarantee schemes covering (l) transport organizations (2) traders (3) professionals and self employed persons (4) business enterprises (5) fanners

and agriculturists* In addition the Reserve Bank of India operates a credit guarantee scheme for small industrialists. In Korea the Medium Industry Bank operates a credit guarantee scheme for small industrialists and the Federation ■ of Agricultural cooperatives operates a similar scheme for agriculturef

fisheries, foresty through a network of multipurpose 1 cooperatives^ Large scale farmers who obtain loans from the National Federation of Agricultural cooperatives are also eligible to be covered under the guarantee scheme.

In developing countries, small entrepreneurs cannot themselves provide the ■ necessary capital for initiating an enterprise or once initiated to carry on the business of the enterprisee Ihey also do not have access to commercial banks for.

loan facilities, as they cannot provide adequate collaterals* In order to over come these difficulties, the Government of Korea promulgated a small and medium

industry guarantee act on 3 March 1967 and a comprehensive guarantee scheme was introduced from 1 April 1967* The Jfedium Industry Bank, which was then operating-

a credit guarantee reserve fund for loans lezri; by it was named as the guarantee organization for operating the comprehensive, scheme, Ihis is an interim arrange

ment and it is proposed to set up a full fledged guarantee organization before

3 March 1975* " -

Definition of industries

Small and medium enterprises eligible for the guarantee scheme are defined

as follows; .

(a) natural or juridical persens engaged in the business of commerce,

mining or transportation or other services to industry with five or more but not more than 300 regular employed or with total assets of no more than 50 million won

'(US$.25,000} s .. . .

Page 27

(b) Natural or juridical persons engaged in the business of manufacturing •

either with five and more, "but not more than 200^ regular ejflptoyees^oriTfritftotoftal

assets of less that 30 million won (US$.75tOOO)«

Credit guarantee council

A small and medium industry credit guarantee council comprising,

(a) 3ke President of the Medium Industry Bank;

(b) pne of officials;, of the Ministry of Finance nominated tjy the Minister

of Blnanoe;

(c) One of officials of the Ministry of Commerce and Industry nominated ty

the Minister of Commerce and Industry;

(d) One of offioere of the Bank of Korea nominated ty the Governor of the

Bank of Korea;

(e) The Chairman of the National Federation of and Medium Industry Co

operatives; •

(f) Two representatives of Small and Medium entrepreneurs;

advises the administrative agency'.

The Council resolve the following matters:

(1) Matters pertinent to establishment and amendment of principles of the

eredit guaranteef

(2) Matters pertinent to the credit guarantee service schedule;

(3) Matters pertinent to compilation of the budget*

(4) Matters pertinent to approval of settlement of accounts;

(5) Matters pertinent to conclusion of credit guarantee agreement with

the financial institution;

(6) Matters pertinent to the guarantee approval on the guarantee ceiling

presoribed the principles of Small and Medium Industry Credit Guarantee and the Obligation over period of the guarantee;

(7) Matters pertinent to the deposit into the financial institution of the

credit guarantee fund;

(8) Matters pertinent to decision of the rate of guarantee fees;

(9) Matters pertinent to redemption of claim;

(10) Other matters which are deemed important ty the chief of the

administrative agency.

institutions

Eligible for guarantees under ttiis scheme are loans extended ty banking institutions which have entered into a guarantee agreement with the credit

guarantee institution. Twenty tanks have agreements with the guarantee institution.

Credit guarantee fund

A credit guarantee fund has been established for this purpose comprising

of:

(1) The subsidies or contributions from the Government or autonomous

local governments;

(2) Guarantee fees received;

(3) Credit guarantee reserve accumulated in the Medium Industry Bank;

(4) The recovery credited to the administrative agency in respect of the

payment it has made from the Fund; and

(5) Profits derived from the operation of the Fund.

The guarantee organization is required to prepare a budget every year for the administration of the fund and obtain the approval of the Minister of linance. It is required to submit a statement of accounts, profit and loss statement within two months of the close of the business year.

Maximum liabilities

The total amount of liabilities under the guarantees should not exceed ten

times the guarantee fund.

The guarantee ceiling for any one person or enterprise should not exceed 50 million won ^US$125rOOO). Subject to this limitation guarantees can be issued

as follows;

Working capital loan - W 20 million Plan and equipment loan - w 30 million Loans for export and import traie - W 30 million

Small and Medium Industry

Cooperative business loan . - less than ten times the capital sub

scription

The periods of guarantees are limited as follows:

Plant and equipment loan - 8 years

Working capital loan - 3 years

Small and medium industry - 1 year

Co—operative loan

E/CH.14/¥P.1/91

29

The entire loan may "be covered "by the guarantee or part "by collateral and part Igr credit

Guarantee

The guarantee fee is 1 per cent per annum» Instalaent payment may be effected when ths period of guarantee is more than one year. '

Means off, awli cation for orauit .gqarant.ee.

(a) The small and medium s:rV".ieiiteneurs who wish to receive credit

guarantee submit "Application for Credit Guarantee" to the administrative agency through the financing institutions

(b) The financing institution performs credit research on the applicant

and submits "Application for Credit Guarantee" with "Credit Researoh Report" to the administraxive agency; a-iM;er *nQ administrative agency has made examination of the contents, i-^ iagues "tetter Q* Credit Guarantee" to the financing

institution.,

(c) When the financing.institution receives the "Letter of Credit

Guarantee", the financing1 institution oompletes the required procedures and

then furnishes the "Loan"* , ■ ■■— _ > -■

The following points art considered and marks allotted before letter of guarantee is issued:

(1) Priority of the industry;

(2) Ratio of1 o^-'M.xiig capacity;

(3) Export laot year ov contracts in hand; ■ (4) Soiling ra-'.;3 : to p;podaci;ion diiring last six months;

(5) Net profit to total assets;

(6) Net assebr. as a rab:io to guarantee sumj (7) Rega'.arity of "bazifc cransacki -i>s;

(8) Bills dishciccrxr^d during last two years;

(9) Bu^Tnegs experieacy in .last. 3 years;

(10) Narre of ^tiAraiTto;? and his obligations. . . .

The financial institution informs tlie credit insurance agency of the grant of the loan and any reooveriat* made vndsr its It should also keep the oredit

insurance agency informed of ai>y change in credit status or loss of profitability of the borrower's business.

Invoking of guarantee

When a financial institution wishes to invefce the guaranteef it should seek confirmation of tius default of the loan V *&<* Su^eviirterident "bfj-fcanks

Page 30

of fhfe Bank of rKor£a« Two-eopies '6f the application^dr " " -1- - rcx

confirmation of the default of the loan have to be submitted with the following documents:

(a) Copy of the letter of credit guarantee;

(b) Copy of document of obligation;

(c) Statement of enforced execution;

(d) Date of the amount collected and break-down of credit appropriation;

(e) Copy of the pertinent claim documentary evidence;

(f) Statement of disposition as loss of the loan*

!Hie Director of the Bank Inspection Board examines the following matters:

(a) Reasonability of compulsory execution measure

(b) Propemess of claim appropriation of the amount collected (c) Reasonability of calculation of the default amount of the loan (d) limitation of the loss amount of the loan to be covered

and ther«after issues a certificate of confirmation of default* This certificate is issued to the applicant financial institution and the credit insurance agency,.

Such letters of confirmation are issued within two weeks of the application.

The letter of confirmation is conclusive evidence of default and the insurance agency's liability to pay the financial institution* On application

by the bank to the cx\*dit iutiurance agency* with the letter of confirmation,

payment is effected immediately. The credit insurance agency subsequently enters into an agreement with the borrower for suitable remedial measures and for possible recoverieso

Implementation

The scheme seems to have worked admirably as is evidenced by the tables*

II and Ilia The number of defaults since operation of the scheme was reported

as 85, In 1973 alone there were 35 cases* Tables IV and V give the volume of

credit extended to the small-scale industries and the major contribution that banking sector makes to the funding6 Table 71 and VII 3how the important contribution that small-scale industries make to Korean economy*

Table II: Guarantees made bv year

(in million won)

.., End of 1567 - End of 1968 2nd of 1969

1 End of 1970

End of mi.

End of 1972

30*11,1973

■ ■

Total

Guarantees made Cases

1,982 . 1,668 2,174

2,513

3,246

4,213 2f210

Id.006 •

Amount

7,o?6 6,914 10,335

12,202

14,538 14,651 14*413

-90.079

Withdrawal Cases

It 341

1,325 lr662

2,039 2,72S 2,993 2J69

14.854-

Amount

.4,512 5r991 7tS35 9> 947 12,882 .

12,271

13f6l5

- 67,O54~

- '

Balance Cases

641

984 1,496

1,970

2,491 3,711 3,152

3,152

Amount

?,5i4 3,437 5r»7

8,192

9,348 12,227 13,025

13.025

lg^:^Y-\^Qir.

# A Page 32

Table III; Trend of the credit guarantee fund tar ..year.

(tn -million wan)

Division

Transferred

Governments Contributions HEB Bank's Contributions Net Profit

Guarantee Fees and

Others - ■

Payment to Financing

Institutions (/)

Balance "

End of

1967 352

.50 ..

-■

-

30 .

4

428

End of

1968

428

... 5?

- — ■ •■■

' 23

48

.. - .

549

End of

1969 • 549

50

- ■

43

.14

693

End of

- 1970

693

50

■ ■ •*.

56

84

- 11

872"

End of

1971

872

50

"73 "

111

77

If 029

End -of 1972 lr029

100

- 48 ■

"97

120

- 98-

30.11#

, 1973 lr*96

■ifooo

-■ 231"

139

- . „

2,666'

TablelV:Theloansmadeavailabletosmallindustriesislistedbelow: Trendofloanstosmallindustries"tarindustrialsector Manufacturing Mining Transportation Others Total

1967

(in ndllion won)

1970"1972 49f8l2

(87.6) 2,789 (4.9)

4r28o

(7.5) 56', 881

(100,0)

i94r9O7

(88.2) -6T6O3

(3.0)

:19V391 (8.8) 220,901 (100.0)

■.312,820

(89.9)

7,479

(2.1)

25,943

(7.5) lf'675 (0.5)

317,917

(100,0)

Source:MinistryofFinanceandBankofKorea* Footnote:Thefiguresinparenthesesrepresentthepercentagedistribution.

o ens a>

*jjfd

Table V: Trend <3f ioangto email industries "by source of fund ' ° ^ (in~million won) ^ 1967 . 1970 1972 -

Governmentfundloans5r38514,50913,143

(9.5) {6.6) (3,8)

Bankingfundloans48.O73198,91832Of41O.

(84.5) (9O«o) (92.1)

Foreignfundloans3f4237r47414f364

(6.0) (3.4) (4-1)

Total.56,881220f901347,917

... . . (100.0) (100.0) (100.0)

Source:MinistryofFinanceandBankofKorea. Footnote:Thefiguresinparenthesesrepresentthepercentagedistribution.

ffableVisRelativepositionofemail-scaleminingandmanufacturingindustries Thekeyroleofsmallindustriesisillustrated"bythefollowingtables

1963

19661971 BatabliBhment Employees

Production (in billion won) taiue added (in billion won)

Total 19r55O 462,068 179 70

Small Industry 19.253

289,157

101 35

% 98.5

62.5

56.3

49.7

Total 22r7l8

566,665

417 156

Small Industry

22,339

341.422 190 66

$ 98.3

60.3 45.2 42.2

Total

24r963 923,237

lr731 733

Small Industry 24,138 4l8f170 476 203

96.7

45.3

27.5

27.6 Source:EconomicPlanningBoardandKoreaDevelopmentBank.ReportoftheMiningandManufacturingsurvey,l96Xand Footnote:Thenumbersofestablishmentsandemployeesrepresentthoseattheendofeach-year.*■ .J-h

TableTrendofexportofamallmanufacturingindustries

(in US$ million)

ft

Total

1963

1966

1969' 19T2

Totalexports(a) Exportsofindustrialproducts(b) Exportsofsmallindustryproducts(c)

84*4

43.6

15.7

255.8

159.7

71.2

702.8 551.1 255.8

l;8O7.O

lr584.3

652,9 18.6 36.0

27.8 44.6

36.4

46.I

36.1 41.2 Source:Ministryof.Comme-rceandIndustry."

■Footnote; (c) Represent exports made bX the members of small industry co-operatives alone.