Insurance, guarantees for R&D; more financing programs

(Last of five parts)

Insurance for encouragement of R&D In order to promote creative business activities among small and medium enterprises (SMEs), insurance for encouragement of research and development (R&D) was established in April 1996. In this insurance system, authorized support organizations or "venture foundations", provide venture capitalists with guarantees for their underwriting of corporate bonds issued by SMEs. The Small Business Credit Insurance Corp. (Jasmec) reinsures the guarantee liabilities of the venture foundations to help promote their guarantee activities.

This insurance system makes it possible for SMEs to raise funds smoothly for their creative business activities through issuances of corporate bonds. Meanwhile, the venture foundations can aggressively expand their guarantee services owing to reduction of guarantee risks.

The authorized support organizations or venture foundations are contractors of the insurance. They must be authorized by the Minister of Economy, Trade and Industry to have the ability to perform the following operations appropriately. These are: extending guarantees to liabilities that arise when SMEs issue corporate bonds in order to raise funds needed for R&D; and giving low interest loans to venture capitalists (or SMEs) that underwrite stocks and/or corporate bonds issued by SMEs.

Jasmec concludes a comprehensive insurance contract and an authorized support organization every six months. As long as guarantee provided by the organization satisfies the insurance requirements, the guarantee is automatically insured under the insurance system.

With respect to the insured guarantees, if the venture foundation fulfills the obligation on corporate bonds in place of the SME, Jasmec will pay insurance money equivalent to 50 percent of the amount of the subrogated payment to the authorized support organization. After receiving the insurance money, the organization is required to refund 50 percent of the amount of recovered money to Jasmec is any money is recovered.

Financial assistance to CGCs

To promote credit guarantee corporations (CGCs) activities, Jasmec extends two kinds of long-term and low-interest loans to CGCs. One is the ordinary loan to increase CGCs capacity to provide guarantees. The other is the special loan to help promote special guarantees with specific policy goals, such as no-collateral guarantees and guarantees for development of new businesses.

CGCs deposit the loans from Jasmec in the financial institutions along with their funds on hand and loans from local governments. The deposited funds have brought about guaranteed loans worth about seven times the total deposits from the financial institutions to small and medium enterprises (SMEs). This is called pump-priming effects of the deposits.

CGCs also take advantage of the deposited funds to request financial institutions to reduce interest rates on the guaranteed loans in order to ease the financial burden of SMEs. In addition, the interest income derived from the deposits with financial institutions has contributed greatly to strengthening the financial foundations of CGCs.

As of end March 2003, outstanding loans of Jasmec to CGCs totaled Y511 billion. The outstanding amount of ordinary loans, having the main purpose of promoting specific policy measures, accounted for 32.5 percent of total outstanding loans, while outstanding special loans accounted for 67.5 percent.

Special insurance system for midsize enterprises. The special insurance system aims at preventing occurrence of a credit contraction toward midsize enterprises through functioning in combination with the special guarantee system for midsize enterprises. Through the operation of the special guarantee system, CGCs provide guarantees for midsize enterprises facing difficulty in fund-raising due to the failure of their banks.

These guarantees can be insured under the special insurance system, which covers 90 percent of the amount of the guarantee liabilities of CGCs. Thus, the special insurance system plays a vital role in promoting special guarantees needed to ensure the smooth flow of funds for midsize enterprises.

Enterprises that utilize guarantees for their loans are required to meet two basic criteria, which are: enterprises with capital of less than Y500 million in the industries specified by the relevant Cabinet or government order, except for an SME, and enterprises authorized by the prefectural governor in case it has difficulties in continuing financial transactions due to the failure of the financial institution with which it has had financial dealings.

Guaranteed loans to midsize enterprises should be used as operating funds or equipment funds needed to run businesses.

In the special insurance system, there are two types of insurance: general and no-collateral insurance. Guarantees of midsize enterprises‚ obligations that arise from their borrowings from financial institutions can be insured under the insurance system. In particular, with respect to non-collateral insurance, midsize enterprises are not required to offer collateral on the guarantees.

The amount of insurance applications reached Y397 million, or Y135 million for general insurance and Y262 million for no-collateral insurance in fiscal year 2002.