Public SME Financing and FILP System in Japan

Masahiko Furuya Financial Bureau

Ministry of Finance

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Contents

1 SME in Japan 2 Financial Services in Japan 3 Issues in SME Financing 4 Public SME Financing - Loans 5 Public SME Financing - Credit Supplementation 6 FILP System 7 Public and Private Fund

1.SME in Japan

SME in Japan Definition of SME and SE in SME Basic Act SME small enterprises industry capital employees employees (million yen) Manufacturing up to 300 up to 300 up to 20 Wholesale up to 100 up to 100 up to 5 Services up to 50 up to 100 up to 5 Retail up to 50 up to 50 up to 5 Definition of SME in Corporation Tax Act capital up to 100 million yen

Aspects of SME in Japan

source: METI

2. Financial Services in Japan

Financial Services in Japan

Source: BOJ

Financial Services in Japan

Source: BOJ

Financial Institutions in Japan Banks city banks regional banks, second-tier regional banks foreign banks in Japan trust & banking Cooperative financial institutions Shinkin banks, credit union Insurance companies, Security firms, Non-banks, -------------------------------------------------------------------------------------------------------------------- Public financial institutions Japan Finance Corporation Micro Business and Individual Unit, Agriculture, Forestry, Fisheries, and Food Business Unit Small and Medium Enterprise Unit JBIC, Okinawa DFC, JICA, JFOC; DBJ, ShokoChukin Bank

Aspects of Banks and Shinkin Banks in Japan March, 2013 Banks 3 major banks regional banks

second reg. banks

Shinkin banks

Numbers 140 105 270

Numbers of borrowers (million)

2.03 1.14

Total Outstanding loan (trillion yen)

441 224.5 212.5 63.7

Average outstanding loan (million yen)

84.62 35.76

source: JFC

3. Issues in SME Financing

Issues in SME Financing Larger credit risks Lower reliability of financial statements Fewer collaterals by SME Lager cost of monitoring ~ information asymmetry Especially in the situation of the shortage of saving, banks tend to prioritize lending to large enterprises. What can or should the government do for SME financing?

4. Public SME Financing - Loans

Reform of Public Financial Institutions

Japan Bank for International Cooperation International Financial Operation

The Overseas Economic Cooperation Operation (Yen Loans)

Japan Finance Corporation for Small and Medium Enterprise

Agriculture Forestry and Fisheries Finance Corporation

National Life Finance Corporation

Newly established Japan Finance Corporation

The Okinawa Development Finance Corporation

Development Bank of Japan

The Shoko Chukin Bank

Japan Finance Corporation for Municipal Enterprise

JBIC (split on April 2012)

Full privatization

Local Governments newly Established Japan Finance Organization for Municipalities

Merged with JICA

(\9.6Tr)

(\8.5Tr)

(\19.8Tr)

(\1.4Tr)

(\7.5Tr)

(\3.3Tr)

(\11.3Tr)

(\25.0Tr)

(\9.6Tr)

(\14.0Tr)

Lending Outstanding of 8 Government Financial Institutions: \90.2Trllion (FY2004)

After the PF Reform (from October, 2008)

\29.4Trillion (FY2011)

The Okinawa DFC \0.9Trillion (FY2011)

Outstanding Loan of Private Financial Institutions and Public Financial Institutions

15

812 797763 738

710 719 725 719 725694 688 690 710

179175

167158

150 141 133 126 123124 122 121

122

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0

100

200

300

400

500

600

700

800

900

1,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

政府系金融機関貸出金b

民間金融機関貸出金a

b/(a+b)（右目盛）

Public financial institutions

Private financial institutions

Share of public financial institutions

source: BOJ

Japan Financial Cooperation Organization

A policy-based public financial institution, wholly owned by the Japanese government, that aims to complement financial activities carried out by private financial institutions and contributes to the improvement in the living standards of Japanese people. Statutory Law: The Japan Finance Corporation Act Head Office: Tokyo, Japan Governor & CEO: Koichi Hosokawa Capital: 3,455.0 billion yen, Reserve fund: 2,178.4 billion yen (as of Mar. 31, 2013) Branch offices in Japan: 152, Overseas representative offices: 2 Employees: 7,361

Japan Financial Cooperation Outstanding Loans

Outstanding Loans: (as of Mar. 31, 2013) (billion yen) Micro Business and Individual Unit: 7,248.2 Agriculture, Forestry, Fisheries and Food Business Unit: 2,626.8 Small and Medium Enterprise (SME) Unit: 6,459.2 (Finance Operations) Operations to Facilitate Crisis Responses: 5,362.0 Operations to Facilitate Specific Businesses Promotion, etc.: 54.1

Feature of Operations of JFC Micro Business and Individual Unit

Small loans to a large number of micro business breakdown of borrowers by number of employees 4 or fewer 66.4%, between 5 and9 20.9%, between 10 and 19 8.4%, 20 or more 4.2% breakdown of loans by type of collateral no collateral 74.1% (no collateral, no guarantor 29.4%) secured by real estate or other collateral 25.9% (partially secured by collateral 14.0%,) Safety net financing Supporting business start-ups Supporting overseas expansion, social business, business reconstruction, etc.

Loans of JFC Micro Business and Individual Unit

Micro business

Banks

JFC MBIU

General loan up to 72 million yen (number of borrowers: 130 thousands total loan amount: 676.7 billion yen) Special loan up to 72 million yen (number of borrowers: 810 thousands total loan amount: 4873.5 billion yen)

Average outstanding loan : 6.66 million yen

Loan, Checking account

Loan

Aspects of JFC Micro Business and Individual Unit March, 2013 Banks Shinkin banks JFC(MBIU)

Numbers 140 270 1

Numbers of borrowers (million)

2.03 1.14 0.95

Total outstanding loan (trillion yen)

441 63.7 7.2

Average outstanding loan (million yen)

84.62 35.76 6.66

Loans of JFC SME Unit

SME

Banks

JFC SMEU

Loan, Checking account

Loan

Breakdown of Loan Amounts (FY2012)

Amount: 2,095.7

billion yen

Corporate Revitalization Loans 79.1 billion yen 3.8%

New Business Development Loans 98.2 billion yen 4.7%

Loans for Environment and Energy Measures 114.1 billion yen 5.4%

Loans for Enhancing Corporate Vitality 354.0 billion yen 16.9%

Great East Japan Earthquake Recovery Special Loans 295.0 billion yen 14.1%

Safety-net Loans 1,154.7 billion yen

55.1%

Others 0.6 billion yen 0.0%

source: JFC

Complementation of private sector by government-affiliated financial institutions

Growth rates of loans from public financial institutions show inverse correlation with the growth rate of loans from private financial institutions . The financing by public financial institutions work as a safety net during economic contractions, which tighten lending from private financial institutions.

-20

-10

0

10

20

30

1979 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13

(YoY %)

Japan Finance Corporation(JFC)’s SMEs Unit (former Japan Finance Corporation for SMEs)

Private banks

(FY/quarterly)

Setback of private sector in the time of tight money

(Increase in the supply of funds from JFC)

JFC’s Micro Business and Individual Unit (former People’s Finance Corporation)

Uneasiness of financial Lehman shock

BIS

Changed definition of

Growth rate of loan balances for SMEs and small enterprises

source: METI

Japa

n Fi

nanc

e Co

rpor

atio

n

The FILP Special Account (Fiscal Loan Fund Account)

General Account Special Account for Reconstruction

from the Great East Japan Earthquake

FILP Bonds Borrowings

Capital contributions

Borrowings

Capital contributions

FILP Agency Bonds

Government-guaranteed Bonds *

Fiscal Investment and Loan Program(FILP)

* Government-guaranteed bonds with a redemption period of five years or more are included in FILP.

The FILP Special Account (Investment Account)

Fina

ncia

l Mar

kets

JFC Funding Sources

Grant-in-Aid for JFC

MOF 11.8 MHLW 1.7 METI 4.0 Total 17.5 Subsidy 0.1 Grand-in-Aid and Subsidy 17.6 (billion yen, FY2013 budget)

source: JFC

5. Public SME Financing in Japan – Credit Supplementation

Overview of the Credit Supplementation System

Financial institutions

Comprehensive insurance contracts

Subrogated payment

Recovery

[Credit Guarantee System] [Credit Insurance System]

Insurance money Loan

Payments of recovered funds

Credit guarantees

SMEs and Small business operators

CGCs

(5

2 Co

rpor

atio

ns)

JFC

SME

Uni

t

6. FILP System

People, companies, communities

(FILP agencies)

FILP Plan

①Fiscal Loans

②Industrial Investments

Government affiliated financial institutions

(e.g.) ・Japan Finance Corporation ・Japan Bank for International Corporation ・Development Bank of Japan Inc. ・Japan International Corporation Agency, etc.

Local Governments

Other agencies (e.g.) ・Japan Student Services Organization ・Welfare and Medical Service Agency ・Innovation Network

Corporation of Japan ・Japan Oil, Gas and Metals National Corporation, etc.

FILP Bonds

③Governme

nt guarantees

Government-guaranteed Bonds

Loans Financial Markets

FY2014 plan 16.2 trillion yen

Dividends

11.8 trillion yen

Government-owned Stocks

(e.g. NTT, JT)

Loans Investment

s

Investments

0.3 trillion yen

○ Fiscal Investment and Loan Program (FLIP) consists of three elements, namely, ① Fiscal Loans, ② Industrial Investments, ③ Government Guarantees.

○ FILP supports policy targets by financing FILP agencies. They provide long-term, fixed, and low-interest (loan interest = government bonds interest) loans, which are difficult for the private sectors to supply.

Self fund-raising (FILP Agency bonds)

4.1 trillion yen

Mechanism of FILP

Public entities

People

Taxes Subsidies Public services National

Government (General Account)

【Fund Flow of FILP】

Financial markets FILP FILP

agencies

Issuance of FILP bonds, dividends

Loans and investments

Public services

Interest payments/ redemption

Interest payments/ redemption, payment to the national treasury

Fees/Charges

○Unlike the General Account’s subsidies which lack tracking functions for awarded funds, FILP provides loans which accompanies the redemption process of the transferred funds in the future. The redemption process includes a long-term checking function to the beneficiaries. This function facilitate the beneficiaries to use funds in a disciplined manner. ○As FILP plays the role of national lender (or investor), if the strong policy needs for a certain project with a certain degree of profitability is proposed, FILP’s financing scheme could be used.

【Fund Flow of the Subsidies of General Account】

Difference of Fund Flow between the Subsidies of General Account and FILP

People

People

”Risk Money”

・Project - with strong policy necessity - with promising return - very risky - not sufficient funds by the private sector alone

Market

Fiscal Loan Fund

FILP Special Account Fiscal Loan Account

”Secure & efficient”

（Fiscal Loan Fund Act, Article 1）

・Project with strong policy necessity, and reliable repayment ・Long term funds, at fixed low interest rates

FILP Bonds

Redemption

Loan

Collection

Interest bearing debt

Government-owned Stocks

(e.g. NTT, JT)

Dividends

Investment

Return

Loan

Collection

Industrial Investments

FILP Special Account Investment Account

Past investment returns

Fixed

interest loan

Loan

with not necessarily

fixed interest

Investment

Fiscal Loans and Industrial Investment

【 Fiscal Loans 】

【 Industrial Investment 】

Outline of FILP Plan for FY2014 December 24, 2013

Under the overall economic policy target of ending deflation and revitalizing the Japanese economy, FILP for FY2014 is planned to provide capital instruments (ex. long-term risk money) as a catalyst, to the economy, so as to appropriately address the challenges that it faces, such as (1) to activate private investments, (2) to support small and medium enterprises facilitating required efforts to improve their performances, (3) to support expanding the activities of Japanese enterprises in overseas market, and (4) to export infrastructures and secure natural resources ・ The total sum of the plan amounts to 16,180.0 billion yen (▲12.0％, compared to the FY2013 initial plan), reflecting the improvement of SME’s business conditions and the progress made so far in responding to the earthquake disaster ・ The amount of Industrial investment, which supplies long-term risk money, increases largely for two consecutive years to 317.2billion yen (＋20.2％, compared to the FY2013 initial plan)

(Note)Figures are based on the initial plans. Figures in [ ] from FY2008 to FY2013 are total amounts after revision with supplementary budgets and

follow-up funding by the flexible management clause.

(Reference)The FY2014 balance is prospected to 170.5 trillion yen (FY2013 balance is prospected to 172.4 trillion yen).

AnnualChange(%)

１．Supports to activate private investments 450.8 570.1 （＋26.5%）

115.8 84.4

109.5

50.0 30.0

240.0 321.2

35.0 15.0

10.0 10.0

２．Financial supports to enterprises 8,362.9 7,198.0 （▲13.9%）

4,070.5 3,830.5

1,632.0 1,032.0

1,260.0 831.0

650.0 650.0

384.4 482.0

13.5

３．Institutions supporting education, welfare and medical services 1,408.0 1,421.6 （＋1.0%）

860.5 859.6

420.5 398.6

31.9

４．Other institutions(expressway, urban renaissance) 3,316.9 2,907.3 （▲12.3%）

2,386.0 1,940.0

491.0 556.1

５．Local governments 4,851.0 4,083.0 （▲15.8%）

3,681.0 3,453.0

1,170.0 630.0

18,389.6 16,180.0 （▲12.0%）

Industrial investment 263.8 317.2 （＋20.2%）

　　　

Japan Finance Corporation（Small and Medium EnterpriseOperations・Micro Business and Individual Operations）

Japan Finance Corporation（Operations to Facilitate CrisisResponses）

Japan International Cooperation Agency (Finance andInvestment Account)

Local Governments

Japan Bank for International Cooperation

Development Bank of Japan Inc.

The Shoko Chukin Bank, Ltd.

Japan Student Services Organization

Welfare And Medical Service Agency

Japan Community Health care Organization

Japan Oil, Gas and Metals National Corporation

Institute which supports overseas transport and urbandevelopment projects

Cool Japan Fund Inc.

PrivateFinance Initiative Promotion Corporation of Japan

Agriculture, forestry and fisheries Fund corporation forInnovation, Value-chain and Expansion Japan

Innovation Network Corporation of Japan

Japan Finance Organization for Municipalities

Japan Expressway Holding and Debt Repayment Agency

Urban Renaissance Agency

FILP Plan

(Reference) FY2014 FILP bond issues will amount to 16.0trillion yen (FY2013 initial 11.0trilion yen), Fiscal Loan Fund security issueswill amount to 2.1trillion yen (FY2013 initial 4.6trillion yen).

-

-

-

（Unit：billion yen）

FY2013(Initial Plan)

FY2014(Initial Plan)

FILP AgenciesFILP

Postal savings

Pension

reserves

Deposit Loan

【Old FILP】 【New FILP】

FILP Agencies

Scrutiny of required amount

FILP

Financial

markets

FILP(Government)

bonds

FILP agency bonds(self procurement)

FILP Reformin FY2001

Aggregate

procurement

Postal

savingsPension

reserves

Deposit Cut off

Goverment bonds interest＋0.2％

Goverment bonds interest＋0.2％

Loan interest

rate =Goverment

bonds interest

Independent management of all deposits

・ Obligation to deposit all postal savings and pension reserves was eliminated. Instead, these funds are to be managed independently in the financial markets.

・ Only the necessary amount of funds is to be raised from FILP bonds in light of thorough scrutiny of the redemption certainty and the complementary function

to the private sector.

・ Loan interest rates are based on market rates for Japanese government bonds according to maturities.

・ FILP agencies are to issue FILP agency bonds.

・ Policy cost analysis is to be introduced and enhanced.

・ Information disclosure is to be substantially expanded to ensure the discipline of special public corporations.

○ Elimination of the mandatory deposit of all postal savings and pension reserves, and introduction of market-based

fund raising

○ Introduction of policy cost analysis and rigorous expansion of information disclosure

＜Main Points of Reform＞

Image of the FILP Reform

7. Public and Private Fund

Public and Private Sector Funds

government

government

Private sector

Fund

Sub-Fund

Business

Business

Name The amount of Investment and Loan

Government Private Sectors Government Guarantees

Innovation Network Corporation of Japan <INCJ> 286 14 1,800

Organization for Small & Medium Enterprises and Regional Innovation, JAPAN <SME Support, JAPAN> 15.7 － －

Regional Economy Vitalization Corporation of Japan <REVIC> 13 10.1 1,000

Agriculture, forestry and fisheries Fund corporation for Innovation, Value-chain and Expansion Japan <A-FIVE> 30 1.8 35

Private Finance Initiative Promotion Corporation of Japan <PFIPCJ> 10 10 300

Public-Private Innovation Program

100 University of Tokyo: 41.7

Kyoto University: 29.2 Osaka University: 16.6

Tohoku University: 12.5

－ －

Cool Japan Fund Inc. 30 8.5 － Public-private fund contributing to qualified real estate that meets earthquake resistance and green standard (Real Estate Sustainability & Energy-Efficiency Diffusion <RE-SEED>)

35 － －

The Fund for Japanese Industrial Competitiveness (Development Bank of Japan Inc. <DBJ>) 100* 50 (Own Funds of DBJ) －

Total 619.7 44.4 50 (Own Funds of DBJ)

3,135

Overview of Public-Private Sector Funds (at the end of FY2013)

＊loan for resources to provide risk money

(Unit: billion yen)