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

(lit

UNITED NATIONS

ECONOMIC AND SOCIAL COUNCIL

Distr.

LIMITED

e/cn.i4/wp.i/9i

30 September 1974

Original/ENGLISH

ECONOMIC COMMISSION FOR AFRICA

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

■'• ... : ■ A-S. Navaratnarajah.

Regional Adviser on Export Promotion

and

3c P. Gupta

Consultant on Export Credit Financing and Export Credit Insurance

E/CN.14/WP.1/91

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. 1.973. Other sectors have recorded similar growth™

2. Export development figures centrally in-all five-year plans of Korea* The leadership, and initiative fpr 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 againwith 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 encourages 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 CofSEiorcc .and Industry ic obligatory. - . ■ .-...■.

4* Import licensing is correlated \o export performance* No one can register

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

one will bs issued, .an import license, unless a, minimum performance of■ export ds

achievedo ,. ... - ■ " . • . :

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 workc 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 financingo Banks comprise of csiouercial banks,'local banks, specialised 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.

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Export credit financing

10. Ninety-five per cent of all exports are on (l/c) Letter of Credit.basis; only about 5 per cent are on (D/a) Document on Accept ance, (D/P) Documea^againsiTT'flayni^i^cpaaign- ment and medium-term basis. Emphasis on export credit financing is on preshipment

short-term financing*

11. Short-term financing covering all aspects of preshipment needs are available."

Schemes are listed-;maximum loan granted is on the basis of 350 won per US dollar v on f.o.b. value (l US dollar = 400 won) , i.e. 7/8 f.o.b. value. Interest rate

is 7 per cent. Loans have to be repaid within 90 days. Loans are given in three

-stages: . •—

(a) Import of raw"material (b.) .Purchase of. local 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 180 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 axe also given.

16O 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 exports. This is solely left to the commercial banks. There is a high degree of mutual confidence among banks, Central Bank, and ministries.

Export credit insurance and guarantees

17. The Government has been operating an export credit insurance and guarantee \

i

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 i

the Ministry of Finance. . . ' ;

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

and obtain approval from the Minister of Finance. ' ;

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19. An export credit insurance advisory council provided for in the export credit insurance law enacting the scheme advises the Minister 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 not exceed twenty times the fund.

21. The schemes in operation are:

■ . ■ -.*■•■ .

(1) General Export Insurance (2) Export Finance Insurance (3), Export bill 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)1 the insured

are banks*

i^biiity-to pay is provided for. "Ninety per of the loss a

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. Exporx 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 loss. 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- is. involved in a particular .transaction, the client is advised against the insurance. Credit information is usually obtained from Dun and Bradstreet and other reliable credit agencies in the countries

seeking credit. . .

26. The record of the insurance and guarantee schemes has been good* Of an

amount 1500 million won insuredf 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 fund. The schemes have to be operated on a no profit, no loss basis.. Premia have been reduced

twice.

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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 is 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.

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 of the small industrialists seeking the loan furnished by the bank giving the loan, letter of a guarantee is issued. The guarantee fee is

I 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 by the tank.

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. '' ■ ^

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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 cent. Her GNP which was $2*4 billion in 1961 rose to £8,6' billion in 1971 and

$9.8 billion in 1972. Per capita, income rose from S83 in 1961 to £275 in 1971

and $304 ^n 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 tungsterij 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 i96l, the weight of manufactured exports was 28 per cent.

In'1972, manufactured exports rose to 88 per cenc. The total number of export

items increased from 100 in I96I to 994 in 1972. The number of overseas markets

for Korean commodities increased from 25 countries in I96I to 111 in 1972« The export items in 1972 were: '

Plywood

Woven clothing

Electronic equipment Knitted clothing Sweaters

Fabrics

Cotton products

Iron/steel products

Fish - s"

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 increaoe 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-1961 to- 2,522 million dollars in 1972, an annual average growth rate of 23 per cent. 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 totalled 3,223 million dollars consisting of 1,199 million dollars of public loans and 2,024 million dollars of commercial loans. Direct foreign investments

by 1972 totalled 372 million dollars.

Other sectors of the economy also have' progressed between I96I to' 1972© Thus : industrial growth was 17.9 per cent, fishery 14*3 per cent, forestry 3*0 per cent and agriculture 2,9 per cent. The increase in population declined'from 3«2 ' '

per cent to 1,3 per cent.

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 comment • 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

markets*. 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 sidejttaxiaiees its efforts to <

achieve the goal, 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 tc 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 cor.^ittees 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 considera.t?.on. Governmental support for private sector organizations is a prominent feature0 All exporters and importers have to be members of the Korean Trade Association,, The Association's chief officials are members of the President's monthly conference. All traders are required to be

registered with the local Chambers of Commerce and .Indus-try- who" a^e- members' of-the _

national Korer." Chamber of Commerce- and Industry. These associations serve,

link' between the gGV.ernnierrtL.JSnd .the,business' ^cffi0JU4njirky.._: Expprjt aosoqica^pj

actively encouraged, and concessional f a^i^tvtviea su.c.h as-\group. expqr-t,--credit insurance, afforded to .£~uch associations.

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Page 7

Import licensing correlated to exports

The central place given to exports in foreign trade policy ic evidenced in:

the Trade Transaction Law whose, objective is to provaote 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 niniiiiupi of US3lO>OOO and that the applicant should have miniinuw daily capital of US£25,OOC in case of a corporate body or a

minimum daily balance of U3£25,000 in case.of a private person-for the one .

uonth neriod preceding the application. For a person to operate an import

business, he should have earned US53OG,OOO either through exports or other .

foreign exchange earning business. There are certain exceptions to these

general provisions; one noteworthy exception is for a medium industry

operating under the Medium Industry Co-operative Law when it Hay be permitted

to obtain raw materials and machinery for manufacture, if the export performance after-iiaving ■ obtained an export-- import license exceeds US£lOQ,O0O. The_decree also orovides, that the license for export-import business shall be cancelled if the licencee fails to earn an equivalent of U5£250,000 in his seini-annyal exnort or other foreign exchange earning business. These provisions have,

made Korean industry export oriemted and also facilitated 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 licence.

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 US*3XX) in the

petroleum industry per month. The Korean employee tends to look upon his eouoany 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.

Incentives 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 wakes 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,

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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 oriented1 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)

In the initial stages, selected entrepreneurs were sent on business tours

abroad with'governmental.financial assistanceo Presently most of the promotional work is centred in'KOTRA, established in 1962« KOTRA's base organization

consists of:1

(a) marketing research department;

(b) commodity research department as export information centre;

(c) export information centre; ' ■■ ■ ■

(d) exhibition department';

(e) trade library; ■■

(f) display hall; and

(g) extensive information service.

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

(a) acquaint Korean businessmen of its research studies

and analyses; ....

(b) introduce foreign businessmen to Korean exporters;

(c) provide foreign business with information on Korea's'

economy, industry, foreign trade and marketing publications;

(d) Korea. Trade, a commodities catalogue of Korean products. Korea

Business, an economic and industrial review, daily KOTRA marketing News and monthly 'Tra^e Promoiioru The last two are in Korean to furnish information on trends and changes in overseas markets and home

- -businessmen; . . . : ' .

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(e) participation -i-n- overseas fairs; foreign importer's seldom visit

Korea without KOTRA's guidance in introducing and arranging discussions 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': iri Korea are divided into two broad groups: commercial baiiks and specialized banks/ The commercial banks

offer short-term financing and.the specialized banks offer longer-term financing.

The foreign commercial banks represented in Korea extend medium-term loans in local and foreign currencies (ice? US dollars, Deutsche;mc.rksy Swiss francs). 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 depooits/and 12 per cent for 1 year. Depending on the fund,

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

for won loanso •

not es•

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

For most Korean commercial; banks, "security takes the form of mortgages over land and sometimes equipjnento As a rough rule, the value of the land

aa determined by the Korea Appraisa-1 Boardy rmist be equal to 12b-per-'

loan amount.

anU buildings, icent of the

The major portion of foreign exchange transactions is handled

by •-Hie" .Korea Exchange.-Banfc,, The Export-Import. Bank-of Korea'Act was '-•--.= ' -.»

promulgated on 28 July 1969- The purpose of th<5 Act was -to establish an

Export-Import Bank" for "handling export-and. import- transact'iorts urrdej:.-niediuni -^_:;..,r and loft'g—term-credits and ©v-ers-sas investment. 'The".bank -haj&jsot been established as yet, but- its functions are performed-presently-by"the-Korea "Exchange

Bank, = ;

"The foreign banks main purpose is to extend .medium-term-loans . .-■..,/- -...-..

in local and foreign' currencies;. They

(a) play an active role iri 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 lo^al ■■bank'credit lines for international transactions;

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

(e) provide direct export promotion ioans to export industries to finance

for the importation of machinery and equipment for export purposes;

A..

(X)O III.BANKING.SYSTEMINKOREA Monetary-Board-' BankofKorea

5 Nation wide I

CommercialBanksKoreaTrustBank NationalAgricultural\ CooperativesFederation andMemberCooperatives

Medium Industry- Bank.l

OfficeofBankSupervision andExamination 10LocalBanks

8-Foreign Banks

Citizens National Bank

Korea I

Housing BankI

Korea Exchange Bank

Korea Development Bank

i to e+ (D P

B

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Page'11

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

of fiinancial analysis and planning.

Export financing schemes in Korea

Ninety five per cent of all exports of Korea are on a confirmed irrevocable L/c basis. Only about. 5 per cent on d/a, d/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 Working Capital

ly Export financing

(a) Financing of the Production and Collection of Exports.

(l)_ 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

transactions;

(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) Exporters 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;

/ *. 0

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Pag-e-12- ..

' ; (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 credit^ ' - '

(3) Interest rate: 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 rate: 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: 35O w.osi 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 crsdit basis : In case of financing before the

shipment of exports,-borrowers must repay within 90 days. In financing after shipment, terms :r.ay noi 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.

Financing of Supplies to United Nations Forces and Agencies of Foreign'Governments (a) Eligibility

(l) Those who.have signed contracts"to provide goods' and services

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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. ■ '

Financing of Collection and Storage of Agricultural and Marine Products :

for Export

(a) Financing of Collection

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

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 cent. • ■ . . .

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

(4) Financing Period: Up to 90 days*

(b) Financing of Storage

(1) Objects: Exporters who store agricultural and marine products "

of export.

(2) Amount: Up to 70 per cent of the funds required,

(3), Interest r.ate: Fifteen point five (15.5) per cent 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

This form of financing is to facilitate supplies of industrial facilities

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

A-

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Page 14 :

(a) Objects: Manufacturers who intend- to acquire facilities for production

of exports or raw materials for export use.

(b) Financing 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) Repayment: Equal instalment repayments two or more times a year.

(d) Interest rate: Twelve percent 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 L/c .

2. 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 retires 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 350 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. ■ - '

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Page■15

The b-ank 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^treated as.prime security. - for the bank loano It i3 the third stage of the loan for value added that b,anks O would require other forms of security* These generally take the form of personal guarantees* But depending on the credit standing and status of the buyer, other collaterals ■ may be insisted on... Banks will give' loan'facilities only to1 those' licensed with the Ministry of Commerce and Industry ae 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 .:j(oi.ean Re--Insurance Corporation-. But this facility is not much utilized, by b*inksr 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:

lo Contributions to Mational 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

. (l) Liquidity and Safety..Analysis with Balance Sheet

■ ' ■■ (2) Profit Analysis with Profit:and Loss Statement -

(b) Special Financial Analysis ■ ' .:-.-■, . --. j (1) Break-Even Analysis

(2) Comparative Analysis of use and source of funds " '"'" "

' ■ . ;:" (3) Cash Flow "Analysis ■■ ■ ■ ■■■.-• - ■ ■ *

(4) Others

E/CN.14/WP.1/91

Page 16

(c) Nonfinancial Factors

(1) Management

(2) Marketing and Sales

1 Despite this what would appear to bs a rigorous analysi s exporters and' trade associations were unanimous in that loan facilities were readily available

and easily granted* This is presumably because exporters are long standing

clients and their credit worthiness is well established.

Collaterals

The1 collaterals that th

1« Current Assets

: (a) 00

(c) (d) (e)

Commodity Security Deposit

Bank guarantee Others

2» Fixed Assets

(a) Land

(b) Building and/or structure . (c) Machinery, ship and/or plane

(d) Others

3c 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 loans with suitable collaterals, a default on the export credit

loan could be met by recourse to such collaterals.

Defaults

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

1. Voluntary Settlements

E/CK.14/WF.1/91

Page 17

(a) Extension

(b) Prorata Cash Settlement "

(c) Combination Settlement ■

2." Bank Administration :

r ■ ■ (a) Dispatch Loan Administrator .. .... (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 File (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 (Korean Banking Association)

(c) Public Publications

(Newspapers, Trade Communications, Magazines, etc.)

Post shipment loans

For financing after shipment, terms may not exceed 120 days on d/p basis

or 180 days on a d/a basis or consignment on bonded warehouse basis. Such loans

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

But the prime consideration would be the local exporter's standing. Invariably such finances are secured by guarantees from the export credit insurance department of the Reinsurance corporation,, As 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 financing.

E/CN.14/WP.1/91

Page 1b . '

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 L/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 C bank.

9

TableI:Statisticaldataonexportfinancing

(in million US dollars)

1970

1971

1972 1973 1970 1971

1972

Totalebcport 835-2 1067.6 1624.1 3220 LoanfcrexportB TotalLoans% 7.9

8.9

9.1

Bankloansforexports

.139.64 200.37 ■: 267.79

555.27 Exportrefinance

Total refinance' % 40 (approx) 50 (approx) 47 (approx)

;CentralBank refinance■ 120.82

178.71 249.77

542.0 Bankloanrefinance

. for exports.% 87 89

93

TotalCentral refinance

..299.4 ■ 358*9 '

533.3;, n.a

;Totalbankloans toallsectors 1777 ..2251 2946 n.a Bankloansexperts%..=

16.7

20 I6.5 o s:

Page 20

Export credit _in3i-.rarioe and guarantees

Export credit insurance and guarantees schemes are comparatively recent.

The Government enacted the Export Credit' Insurance Law on 31 December 1968 and the schemes can^ into operation on 18 February 19&9* 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 tc 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 Minister of Finance^ In submitting its budget, it has to furnish the following documents:

(1) Plana of Business and Fund of the Export Credit Insurance 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 Account, Balance Sheet and their supplementary documents

of the year befera the preceding year«

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

Export credit- iKsmaace advisory council -

Export credit insurance advisory council comprising of one chairman and fifteen members advisee the KLniflter of Finance and Corporation in respect of export credo; insurarcec The composition of the Council is as follows,,

1« Director ■ '

Bureau of Security and Insurance Ministry :;i' Finance

2. Director " ' -

Bare.'iu of Economic Affairs '

Minii-tz-y of foreign Affairs :.

3* Director

Bureau of Domestic and Foreign Commerce Miiilc^ry of Commerce and Industry

4-s '.Oirectcr .

Bursar, 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

■ The Korea Trade Promotion Corporation ' ' ■

- 9» Vice-chairman ',., . - •

The Chamber :of Commerce, Korea

10. One of the Vice-Chairmen

The Korea Trade Association "..-■■ ■ *

llo 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 insurance contract

7« Limits of insurance liability according to the forms of insurance ..

80 Operating policy of the Export Credit Insurance Fund

9o " Budgeting and settlement of'accounts of the Export Credit Insurance Fund

100 Other matters decided by the -Minister 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 Commercec The premium rate of the export credit insurance is bo1 fixed by 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 December 1972 in onier to enable exporters to utilize

export .credit insurance facilities.

Export credit insurance fund

. .-The.-Government .has established an export"■ credit-'insurance fund. The ceiling limit of this fund is 5 billicn wen (l2#5 million dollars). The Government has made two contributions to this fund totalling 500 million won. The maximum amount

A-

E/CN.14/WP»1/?1

Page "2£

insured should not exceed twenty tines the total of the-export credit insurance fund. The 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; ... . .

3. Other manners instructed by the Minister of Finance,

Incomes of the fund can comprise of account transfer, premium, recoveries, interest and other benefits accruing from the utilization of the fund. The outgoings of the fund are payment of losses, underwriting expenses, interests, administration charges etc, A temporary or permanent loan, may be floated in

the nama of the fund. Temporary loans have to be settled within a year..

Export credit insurance and guarantee scheme

The schemes to be operated under the fund are laid down in the law, They

are

1, General Export" Insurance;

2, Export Finance Insurance;

3, Export Bill Insurance;

4» Medium-or long-t'erm Credit Insurance;

5- Consignment-Sale Export Insurance;

6. Overseas Investment Insurance.

General Ex-port Insurance

1. The restriction or prohibition of exchange transfer enforced by

overseas countries^

2. The ,restriction_,Qr prohibition ..of importation in the "buyer's country.

3. The impossibility of exchange transfer due to occurrence of war, civil war, revolution or other similar disturbances in overseas countries

concerned* -..■■.;

4- The impracticability of exportation to the country concerned due to.

occurrence of war, .civil warf revolution or'other similardi.sturbances in, the !'

buyer's country.- -' -■ ■ ' ■■ .. ■ '-

5« The impracticability of transportation to the buyer's country due to

any cause occasijaning outside the Republic of Korea,

6. Any cause,which both parties of export contract,are not held respcraible

for-and which arises from e,ve*t^up<^^riiTg^cu^-eid.e. the Republic-"of Korea, tut other

,than>those of-the preceding items, *■•...*■

E/CN.14/WP.1/91

Page 23

7. The restriction or prohibition of exportation by. virtue of.the Tra.de

Transaction Law0. . ■■■■: ..•>;. ; ■ ... ■■■.-. . . ;. ,-: ' . :' ■

8. The breach of export contract on the part of the other contract party or cancellation of export contract .."fcty the exporter due to reasonable cause for which .the. other party may be-held responsible, where a foreign Government, its local pubJic" 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 both3 The ■ 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 L/C basis - are excluded from insurance■■ Presently about 40 per cent of shipments on d/a

and D/P basis are covered* -Export credit insurance is regarded: an export.;:

promotion measure, andehould the. corporation, after enquiries.1 fee.r that no risk.:

is involved in a particular shipment, the exporter is advised accordingly.

The. amount payable is 90 per cent; of- the loss to the exporter computer as •-.,

follows: - ....

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

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

centract price which fails to be paid:

(1) amount recovered or recoverable by disposal of the export .goods, ' (2) amount unaccounted by occurence of the cause concerned,

(3) amount, of profit to be expected by exporting the relevant goods. :

Claims are. settled within three.months of the da-te' of lodging the claim*

Banks do not rate these insurance'policies in their assessment of collater als. The coverage of this insurance.is essentially for political risks* The only commercial risk coyered.is buyers insolvency or proved inability to pay.

Jfocport finance insurance . . .

The insured under this scheme ib the banking institution which finances the eiportero 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 whollyP inability to colleot the prices, of goods exported, failure .to colle.ct expenses; for. construction v/orks and .services abroad.

The insurance contract- becomes effective when the bank notifies of the iwttaaee^. of loan bill and discount -bill to help finance the following type of funds ne<jes6aiy to help exporters and. producers, ..

E/CN.14/WP-1/9 Page 24

1« Funds necessary 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.

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

3» Funds necessary for supplying goods, undertaking constructional works

and providing services to Foreign Government (including individuals supplying business on order of Foreign Government)r Korean armed forces stationed abroad,

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

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

of-the insurable value, ' ' ■ • ■

The amount of loss payable is 90 per cent of the remainder subtracting the amount recovered after due date of bill.

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 by the bank0 : .

The bank is required to continue its efforts to recover funds under the loan or discount 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. . • •. . - •-

Export 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 on the bill issued on export goods0 The 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:

(l) sums recovered on or after the due date of bill; ■ ...-■..

. (2) sums recovered by disposing of goods;

(3) sums recovered from the exporter by recourse. '

The "claim becomes due -one month after the maturity of the bill6 The claim

is settled within one month of -the: receipt of• the claim. The claim is paid in '

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

the insurance corporation. The banic iS required 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 amount settled ty the insurance claim0

E/CN.14/WP.1/91

Page 25

This is the most popular form of insurance in-Korea. Almost 90 per cent of the insurance covered is the export ..'bill insurance. Eleven banks. Have been issued comprehensive cover under this insurance* The premium note for this

insurance is »3$° "

Consignment * sale export insurance ' ■

This contract of insurance indemnifies an exporter for loss.or losses

incurred on his expense "or cost ..in the way of exporting and selling goods overseas under a consignment 'sale contract. The. insured .is required to fix the cost for exporting ai?.d celling and also the sales price to be sold during such given

period as stipulated in the export contract. The sales price should be 105 of all

expenses for selling the goods,, 100

The amount to be compensated under this insurance-is $0 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.

2O ;Sums recovered or; recoverable by disposing ^of goods, and preventing loss

otherwises • .-;; ... ■■'• .' "

kong~term insurance ... - . ■

Insurance is available for medium-or^long;.term credit and overseas invest-' ment« These are not desoribed as it may be too premature to consider them for

African developing countries. ■ ■

Administration of insurance schemes

: "As earlier mentioned'95 per. cent of al}. 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

coyer..,. .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 to 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 rate3 are fixed by the Minister of Finance and are according to the rating of credit worth? ness: country wise. - ■•_■:■■" ■ ■.. : ■ ■ . .

.A .notswoF/thy feature of the Korean insurancet is the prompt settlement of

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

and thereafter correspondence entered into for possibit; recoveriesc As 90 per

cent of the policies are export bill insurance with bank's, this may have facilitat

ed such prompt settlements. ■ ■. ' • . . "; ■'

Record ' ...

The 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 December 197 3.

E/CN-14/WP.1/91

Page. 26

.. Export credit fund .-. 5°0 million won . Account insured - lf500.million won

Claims paid out - 12 million won Noo of claims paid out - 2

Premium income - 75 million won - -

Administration costs - 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 2)/P bills transactions .

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

the schemes the percentage of exports on D/A and D/P basis has risen considerably*

Small-scale industries -guarantee sche-me

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) farmers

and agriculturistso In addition the Reserve Bark 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 cooperatires operates a similar scheme for agriculture, ; fisheriesr forestj through a network of multipurpose ■ coop^rativest. 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 enterprise.-, They 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 tedium Industry Bankr which was then operating a credit, guarantee reserve fund for loans lent by it was named as the guarantee organization for operating the comprehensive scheme. Thic is an interim arrange ment and. it is proposed to set up a full fledged guarantee organization before 3 March 1975,,

Definition nf small industries

Small and medium enterprises eligible- for the guarantee scheme are defined

as.follows: . .•■■•■

(a) natural or juridical persons engaged in the business of commercet

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 Johan 50 million won

E/CM..-14/WP.1/9T"

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

either vdth five and more, tut not more than 200 regul-ar eifiplb"yees:6rTwltH jtrotal

assets of less that 3Q million won (USS.75r000)o . . ■

Credit guarantee, council . . . . ■

A small and "rosdium industry credit guarantee council comprising,

(a) The President of the Medium Industry Bank; ■ ■ - (b) One of officials of the Ministry of finance nominated Xsy the Minister

of Finance; *

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

the Minister of Coranerce and Industry; - ■

(d) One of officers 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

credit guarantee^ ■ ■ ...

(2) -Matters pe-rtinent to the credit guarantee service schedule;

(3) Matter 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.^0 the guarantee approval on the guarantee ceiling "

prescribed the principles of Small and Medium Industry Credit Guarantee and the " "

obligation over period of the guarantee;

(7) Matters pertinent to ihe 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, .*-..■•• " -

e/cn.14/wp.1/51

Eligible institutions ... .

Eligible for guarantees under this scheme are loans extended by banking institutions which have entered into a guarantee agreement with the credit guarantee institution. Twenty banks have agreements with the guarantee

institution. . , . .

Credit guarantee fund - -

- ■ '

A credit guarantee fund has been established for this purpose comprising

of:

(l)' 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 prapare a budget every year for the administration of the fund and obtain the approval of the Minister of Finance. 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/cn.14/WP.1/91

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

by credit guarantee,, ; ' ;.-',■. ■■ .

Guarantee

The guarantee fee is 1 per cent per annum* 'Instalment payment may be effected when the period of guarantee is more than one year. .

Means of application fur credit guarantee ■ ■ ■ '

(a) The small and medium entrepreneurs who wish to receive credit

guarantee submit "Application' for'Credit Guarantee" to the administrative agency through the financing institutiont ■ ,;■- . ■.. :

.(b) The financing institution performs credit research on the applicant and submits "Application for Credit Guarantee" vdth "Credit Research Report" to the administrative agency; after the administrative agency has. made examination of the contentsE it issues "Letter of Credit Guarantee" to the financing

institution ■-,.■..

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

Guarantee"r the financing institution completes the required procedures and then furnishes the "Loan"-,

The following points ars considered and marks allotted before letter of guarantee

is issued: ■ ' ■...:■.

(1) Priority of the industry;

(2) .Hati.o of .operating capacity; . ■

(3) Export last year or contracts in hand; - ■

(4) Selling ratio to production during last six months; .■ : . - (5) Net profit to total assets;

(6) Net assets as a ratio to guarantee sum;

(7) Regularity of bank transactions; •

(8) Bills dishonoured during last two years; . • (9) Business experience in last 3 years;

(10) Name of guarantor &xi& his obligations.- : ■ ;

The financial institution informs the credit insurance agency of the grant of the loan and any recoveries made untter it. It should also keep the credit

insurance agency informed of t^ny change in credit status or loss of profitability of the borrower's "business.,

Invoking of guarantee

When a financial institution wishes to invoke the guarantee, it should seek confirmation of the default of the loan by the .'Superintendent ~bf_:banks

e/cn.i'4/wp./i/91

Page 30

of ' the Bank-of rKorea. Two-copies :ef the application if6r """ " -U- - - , T or -

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,

.The Director of the Bank' Inspection Board examines the following matters:

(a) Reasonability of compulsory execution measure " ' ' ' (b) Properness 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 thereafter 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 tank to the credit insurance 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 recoveries.

Implementation

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

II and III. 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 funding. Table VI and VII show the important

contribution that small-scale industries make to Korean economy.

Tablell: Guarantees made "by year

E/CN.14/WP.1/91

Page 31

(in million won)

End

End

End

End

End

End

of 1967 .

of 1968 of 1969 of 1970

of 1971 of 1972

30.11.1973

Guarantees made

■ Cases

1,982 lr668

2r174 2,-513

3,246

4r213

2.210

Amount

7r"026

6r914 . 10,335

12,202

14r538

14,651

14r413

Withdrawal

■ Cases-

-lr 341 1,325

1,662' ' 2rO39 2,725 2f993 2,769

• ■Amount 4:512-.

5r991

■ 7r835

9r947

12,882 12,271

13,615

. .. . . ,,..

.

1

1

2

3 3

Balance Cases

64I 984 ,496

,970-

r491 r7U :i52

Amount

2,514 3r437 5r937 . - 8,192

9f848;

12,227 -

13,025

Total . 18.006 .. 90,079 - ..,14.854.. - . 6.7..O54 . 3r 152 13-02.5

E/CN.14/WP-1/91

Page 32

Tat>le III: Trend of the credit guarantee fund ."by year

(in million Won)

"Division

Transferred

Government's Contributions MIB Bank's ■ Contritiutions Net Profit

Guarantee. Fees and

Others '

End of

1967 352 =

. 50 .

- -

- .

3°

End of

1968 .

428

- 50

-■:_

-. 23

48

End of

1969 ' 549

50,

43

End of

■ 1970

.693

50

■--■

■ 56 "

End of

1971

872

50

-■

HI

End of

1972

1.029

100"

48

97-

120

30.IX:

1973 1,296

1,000

: 231

139

-

Paymsnt to :Financing 4 -.-.■■- 14. 11 77 98 -

Institutions (/)

Balance ' 428' 549 "" 693 ' 872 lr029 1,296 2r666

TableIV:Theloansmadeavailabletoemailindustriesislistedbelow: Trendofloanstosmallindustriesbyindustrialsector

(in million won)

196719701972 Mariufacturing Mining Transportation Others■ -Total

49r812 (87.6)

2/789

(4.9) : 4,280 (7.5)

_56.881

(100.0)

194,907 (88.2) 6r6O3 19;391 (8,8)

22Of9Ol

(100.0)

'312r820

(89-9) 7,479 ( 25f943 .-C7.5) 1,675 -(0.5) 317,917 .(IOO.O)

Source:MinistryofFinanceandBankofKorea.

Footnote: The figures in parentheses represent the percentage distribution,

o

TableV:TrendofToangtosmallindustriesfrysourceoffund

( in million won)

•otjo atas -a

1967

19701972 Governmentfundloans Bankingfundloans Foreignfundloans Total

?9.5) 43.073 (84.5)

3,423

(6.0)

56.881

(100.0)

14-509

(6.6)

198,918

(90,0).

7r474

(3.4)

220.901

(100.0)

13.143

(3,8)

320;410

(92.1) 14r 364 (4.1)

347,917 (100.0)

Source:MinistryofFinanceandBankofKorea. Footnote:Thefiguresinparenthesesrepresentthepercentagedistribution.

Ta"ble VI: Relative position of small-scale mining and manufanti,Tn nF i

IhekeyroleofsmallIndustrieisibvthefn11owingtah1ftH Establishment Employees

1963

TotalSmall% Industry

19:550 19,253 98.5

1966 TotalSmall Indust:

%

22f7l81339

1971

TotalSmall .Indust;

24,963 24,138 96,7 462,068 289,157 62.5 '566.665 "■'341,422 6O.3 923,237 418,170"' 45.3 Production .(in.billion won)... 179 Value added (in billion won) ,-.-.. - . 70

10156.3

35 49.7

417

156

19045.2 6642,2

lr731

753 476' 27.5

20327.6

Source: Economic Planning Board and Korea Development Bank. Report of the Mining and Manufacturing Footnote:-The numbers'of-establishments and employees represent those at'the end of each' year. "'

survey,1963and o

0) Oft}