ROMANIAN LOAN GUARANTEE FUND FOR PRIVATE ENTREPRENEURS RLGF

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ROMANIAN LOAN GUARANTEE FUND FOR PRIVATE
ENTREPRENEURS(RLGF)

• RLGF guarantee activity and guarantee fees level
• AECM Seminar - Vienna, March 28, 2003

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Summary Slide

• Background
• Economic environment
• Principles of RLGF guarantee activity
• Setting the guarantee fee level
• Advantages of RLGF activity

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Background - 1

• 1992 - World Bank study revealed the huge gap
  between the private sector demand for financing
  and the scarce offer of the banking sector
• Government Decision 225/10.09.1992 - National
  Agency for Privatization and Development of SMEs
  was authorized to undertake necessary formalities
  for the creation and functioning of the RLGF as
  joint-stock company.

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Background - 2

• RLGF was incorporated in 1993 and became
  operational in 1994 having as shareholders the
  State through the NAP and the four major banks
  existing at that date in Romania
• The shareholders mandated RLGF
• to cover all operating and guarantee costs,
• to show profit
• to pay taxes on profit
• to distribute dividends while making adequate
  provisions to protect its capital.

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Background - 3

• At present RLGF share capital is 100 privately
  owned by
• banks 61
• financial/insurance institutions 39

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Economic environment - 1

• Main features affecting the the credit sector
  during the last nine years
• high inflation
• high interest rates significant spread between
  active interest rate and passive interest rate
• poor contract enforcement and ability to collect
  debts
• high amounts of collateral requested 120 - 200
  of the loan principal and interests due)

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Economic environment - 2

• lack of well documented projects
• propensity of the banks for other alternatives
  for use of their funds deposits with the Central
  Bank and government T- bills.
• Consequence
• Low degree of financial intermediation (domestic
  credit accounting less than 20 of GDP)

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Interest rates
Source Monthly Bulletin no11 of the NBR
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Principles of RLGF guarantee activity - 1

• The guarantee - ancillary (subsidiary) obligation
  to the obligation of the main obligor
  ultimate loss principleincluded in the
  covenants with the banks
• Conclusion of framework covenants with the banks
  - including general terms of co-operation.
• Conclusion of guarantee contracts - signed by the
  3 parties involved (lender, guarantor, client)
  and regulating their rights and obligations.

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Principles of RLGF guarantee activity - 2

• Risk
• Risk sharing - RLGF guarantees maximum 70 of
  the loan principal
• Risk dispersion - commitments for one client ?
  20 of RLGF equity capital
• Leverage ratio max 1/5.5
• Management of the activity on commercial basis
  (see slide 4 - Background 2)

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Principles of RLGF guarantee activity - 3

• Active portfolio management
• independent analysis of each file
• close monitoring of clients until the repayment
  of loan in full
• assistance and advisory services for clients
• negotiation of reimbursement rescheduling with
  banks
• provisioning of guarantees extended according to
  the risk category

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Level of guarantee fees - 1

• Actual situation
• Analysis fee 1 of the guaranteed amount payable
  up-front at the moment of guarantee contract
  closure
• Guarantee premium 3 - 3.5 p.a. calculated to
  the outstanding of the guarantee according to the
  reimbursement schedule of the loan
• The total guarantee premium is payable up front,
  after the signing of the guarantee contract.

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Level of guarantee fees - 2

• Formula for calculating the guarantee premium
• VGP GP x (Si / 12) x mi
• VPG value of the guarantee premium
• GP guarantee premium as percentage
• Si outstanding commitment for year i ( total
  commitment for year 1 and balance of the
  commitment as at 31.12 of year i-1 for year i.
• mi number of month in year i

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Level of Guarantee fees - 3

• The level of the guarantee premium - approved
  each year by RLGF Board
• Proposal of level - substantiated by Financial
  and Guarantee Departments
• Main elements taken into account
• projected operating expenses
• projected level of guarantee activity
• projected revenues from consulting activity
  projected financial revenues

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Advantages of RLGF activity for clients and banks

• Independent professional opinion on the loan
  files
• Close monitoring of the client
  business advisory services and help in
  negotiations of reimbursement rescheduling
• Encouraging and promotion of viable business
  projects
• Avoidance of moral hazard