## _sdn1504

## Source details

**Canonical URL:** [_sdn1504](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1504.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1504.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1504.pdf.json)

---

### Executive summary — key findings and context
- Global financial crisis left a large private sector debt overhang and high levels of nonperforming loans (NPLs) in several European countries.
- SMEs are a significant and weak segment of the nonfinancial corporate sector and face SME-specific restructuring impediments:
  - a rigid and costly insolvency regime;
  - a higher fixed cost to loan restructuring;
  - lack of alternative sources of financing.
- SMEs’ large presence and close links to the banking system mean addressing SME loan problems is critical for strengthening bank and corporate balance sheets and supporting a more robust and sustained recovery.
- The EU and member states have taken steps—insolvency reforms, strengthened banking supervision, financial support—but more is needed to accelerate resolution of problem loans and assist viable but distressed SMEs.

### Recommended comprehensive strategy
- Core elements:
  - tighter regulation and supervision of banks’ NPL management;
  - insolvency reform targeted at SMEs;
  - a greater push for out-of-court workouts;
  - supportive macro and financial policies.
- Objective: provide cost-effective, efficient tools and strengthen incentives for restructuring and resolution while addressing moral hazard by ensuring speedy exit of nonviable SMEs.

### Specific policy measures and priorities
- Insolvency reform for SMEs:
  - establish simplified procedures for SMEs to reduce cost and inefficiencies of SME restructuring;
  - close gap with international best practices for rapid pre-pack approvals, “fresh start”/debt discharge, and debtor-in-possession financing;
  - actively involve public creditors to support restructuring of viable SMEs;
  - enhance enforcement and foreclosure systems to be effective;
  - issue guidelines on loan workouts and increase use of mediation to support out-of-court debt restructuring.
- Banking supervision and capital provisions:
  - supervisors should ensure banks are adequately capitalized and provisioned in a forward-looking manner post-ECB comprehensive assessment;
  - proper collateral valuation for SMEs is critical;
  - where assessing SME viability is challenging, adopt a “triage” approach to separate nonviable SMEs for speedy liquidation from viable but distressed ones for standardized loan restructuring and force loss recognition through time-bound write-offs.
- Other supportive measures:
  - remove tax and regulatory impediments to NPL resolution;
  - improve SME financial reporting and disclosure;
  - expand SME access to financing, including through securitization and active use of government support schemes.

### Insolvency reforms — Europe experience and features
- Most regimes already carry main features of effective insolvency law: clear filing criteria, support to rehabilitate viable firms, a stay on enforcement action, inclusion of secured creditors, majority/class voting, priority for post-commencement financing, and speedy liquidation of nonviable firms.
- Recent reforms focused on pre-insolvency procedures and stronger instruments for restructuring.
- Pre-insolvency regimes introduced in: Croatia (2012), Estonia (2010), Greece (2010), Latvia (2010), Portugal (2012), Slovenia (2013).
- Pre-packs adopted in: Germany (2012), Greece (2010), Italy (2012), Latvia (2010), Portugal (2012), Romania (2014).
- Financing and restructuring features strengthened in: Italy (2012), Latvia (2010), Portugal (2012), Spain (2014).
- Simplified SME procedures or special processes in: Germany, Greece, Slovenia, Spain, Italy (including Italian concordato preventivo for micro and small SMEs with a 60 percent creditor-in-value majority voting rule).

### Out-of-court restructuring and SME-specific schemes
- Nonbinding out-of-court guidelines adopted in: Albania (2013), Austria (2013), Latvia (2010), Portugal (2011), Romania (2012), Serbia (2010), Slovenia (2014).
- Iceland (2010) supervised bank adoption of out-of-court restructuring guidelines; mediators used in France.
- Notable SME schemes:
  - Portugal (2012): formal out-of-court SME regime with mediation by a government agency, creditor standstill, required participation of tax and social security authorities; agreement binds only participating creditors.
  - Spain (2013, reformed 2015): time-bound out-of-court agreement for micro and small SMEs; mediator-led negotiations; stay on enforcement for three months (except public creditors); payments cannot be postponed for more than ten years; debts may be written down or converted into equity; majority thresholds: 60 percent or 75 percent (varies by stay length) and increased majorities for secured creditors up to 65 percent and 80 percent for guaranteed portions.
  - Italy (2012): out-of-court SME procedure with independent expert appointed by the debtor; binds only participating creditors.
  - Greece (2014, in force March 2015): out-of-court SME framework enabling debt reduction according to economic indicators, tax credit for creditors, and public creditor restructuring with installment schemes plus an extra 20 percent benefit.
  - Ireland: lender-specific workout targets; two main SME lenders expected to have completed workout plans of almost all SME loans by end-2014.
- Iceland standardized regime for SMEs with liabilities less than ISK 1 billion: write-down to SME value, viability criterion (liquidation value less than going concern value), debt-to-equity ratio thresholds determining restructuring tools, deferred loans, arbitration committee, government tax incentives, and bank monthly restructuring targets.

### Banking supervision and resolution practices
- EU bank regulators conducted asset quality reviews, including the ECB comprehensive assessment, to harmonize loss recognition and inform workouts.
- Supervisors strengthened oversight and required banks to enhance workout capabilities.
  - Ireland, Cyprus, Greece introduced specialist functions and required banks to develop strategies and NPL resolution plans.
  - Ireland set debt resolution targets per bank.
- Codes of conduct adopted for mortgage arrears or NPL engagement: Central Bank of Cyprus (2013 mortgages only), Central Bank of Ireland (2012 mortgages only), Bank of Greece (2014).

### Institutional support and data
- SME information gap narrowed but remains substantial; third-party credit assessments exist; ECB started surveys on access to finance for SMEs (ECB 2014b).
- Tax and institutional changes:
  - Iceland (2010), Latvia (2010), Portugal (2012) amended tax codes to remove restructuring disincentives.
  - Italy (2013) relaxed limits on tax deductions for loan loss provisioning to encourage faster write-offs.
  - Portugal (2013) created a new legal regime and supervisory authority for insolvency administrators.
  - Ireland (2012) established the Insolvency Service of Ireland.
  - Portugal (2013) and Italy (2013) pursued judicial reforms to improve court performance and specialization.
  - Latvia (2010), Portugal (2012), Serbia (2014) strengthened debt enforcement frameworks.

### Government support and EU initiatives
- Government interventions mostly legal reforms, supervisory action, temporary moratoria on mortgage foreclosures, and targeted household schemes; limited direct intervention into market-driven SME restructurings.
- EU-level: SME policy platform under Enterprise and Industry Department (based on 2008 Small Business Act); EU structural funds, European Investment Bank, European Investment Fund provide financing; Late Payments Directive protects SMEs; April 2014 European Commission recommendation on business failure and insolvency for SMEs.
- National schemes include SME credit guarantees (Austria, Belgium, France, Greece, Hungary, Italy, Luxembourg, Netherlands, Spain), financing funds (Belgium, Germany, Greece, Ireland, Portugal), credit mediation (Belgium, France), debt counseling (Italy), postponement of tax/social security payments (Belgium, Denmark, Greece, Italy).

### Early assessment and outcomes
- Reported outcomes:
  - Portugal: by end-August 2014, about 530 successful business restructurings (including SMEs) under new pre-insolvency and pre-pack process.
  - Iceland: 870 restructuring proposals recorded since May 2011 under SME standardized regime.
  - Portuguese formal regime: about 100 successful restructurings of SMEs as of end-June 2014.
  - Greek out-of-court mechanism entered into force in March 2015; assessment premature.
- Limitations observed:
  - SME-specific processes sometimes abused and did not always rehabilitate SMEs.
  - Data on informal out-of-court mechanisms are difficult to collect.
  - Example: Only 13 percent of SMEs that presented concordato preventivo petitions between 2008 and 2011 were still operating after three years; 53 percent were no longer operating. Of concordato in bianco petitions between 2012 and 2013, 36 percent ended in bankruptcy proceedings.
- Overall: pace of resolution remains slow; reforms have not fully addressed cost and complexity for SMEs; backlog of insolvency cases and limited court capacity hinder foreclosure and out-of-court restructuring; banks often lack incentives to proactively resolve problem loans; loan guarantees and financing schemes stabilized weak SMEs but did not produce broad sectoral restructuring.

### International lessons and crisis experiences
- Past crisis responses combined insolvency reform, out-of-court mechanisms, and centralized approaches.
- Typical reform measures: speedy liquidation of nonviable debtors, change in management control, pre-pack procedures, specialized courts, reform of insolvency administrators, removal of tax/regulatory impediments.
- Out-of-court schemes effective when voluntary with coordination, lead bank, regulatory/tax incentives, monitoring committees, and mediation/arbitration; generally more effective for larger corporates.
- Risks of across-the-board approaches: fiscal cost and moral hazard (examples: Chile 33 percent of GDP fiscal cost; Mexico 2 percent of GDP fiscal cost).
- Policy takeaway: concentrate resolution framework on viability, prioritize simple SME-tailored instruments, support out-of-court workouts with appropriate features, and combine NPL resolution with a comprehensive diagnosis of SME sector weaknesses.

### Chapter 11 in the United States — SME provisions and related regimes
- US introduced SME-specific provisions in 2005 within Chapter 11: standardized forms, simplified procedures, and no requirement of a creditor committee or trustee oversight; studies found limited increase in SME use of Chapter 11 due to cost, secured creditor influence, monitoring difficulties, and other obstacles.
- Box 3 — Main features (exactly as presented):
  - Chapter 11 for Small Business Debtors: eligibility defined as businesses engaged in non–real estate activity with total fixed debts of $2,490,925 or less. Features: simplified plan preparation and voting; plan filing period where only the debtor may file a plan is 180 days versus 120 days; reorganization plan must be filed within 300 days of commencing the case and confirmed within 45 days after filing; increased oversight by the U.S. Trustee; increased reporting requirements including most recent balance sheet, statements of operations, cash-flow statement, and federal income tax return to the petition; disincentive for quick infeasible plans via loss of automatic stay if another case is filed.
  - Chapter 12 for Family Farmers and Fishermen: eligibility limits of $4,031,575 for family farmers and $1,868,200 for family fishermen; repayment plans to unsecured creditors over three to five years and to secured creditors over a longer time; standing trustee appointed in every case; strict deadlines—plan within 90 days and confirmation or rejection within 45 days; repayment flexibility preserving ownership if secured creditors are paid in full and unsecured creditors receive disposable income up to five years; more flexible procedures for administrative expenses and delinquent taxes.
  - Chapter 13 for Smaller Sole Proprietors: available to individual debtors with unsecured debts of less than $383,175 and secured debts of less than $1,149,525 (as of 2014); similar procedure to Chapter 12 with notable exceptions on mortgage/security interest modification, five-year payment requirement for modified debts, and relaxed requirements for filing a plan.

### EU-level harmonization and priority issues
- Different insolvency and foreclosure regimes across EU countries hinder cross-border comparability and debt resolution; more harmonization in targeted areas could improve outcomes.
- Recommended data collection on SME insolvency and foreclosure recovery rates, number of cases, and lengths of proceedings across EU on a unified basis.
- Priority and protection of post-commencement (fresh) financing:
  - Best practice: post-commencement financing granted priority at least ahead of unsecured creditors; priority may carry into liquidation if rehabilitation fails.
  - Consider U.S. Bankruptcy Code–style “super-priority” subject to judicial safeguards.
  - Pre-insolvency fresh money should largely be protected against avoidance if furnished in good faith; March 2014 EC Recommendation provides similar protection.
  - If regulatory frameworks prohibit extending credit to insolvent/pre-insolvent firms or require full provisioning, consider calibrated loosening with safeguards.
  - Consider EU-wide operating funds to facilitate pre-insolvency or post-commencement financing where national vehicles do not exist.

### More efficient out-of-court workouts and bank incentives
- Promote hybrid out-of-court frameworks incorporating in-court features (stay, majority voting), arbitration, government agency facilitation, principles/templates aligned with INSOL, and mediator involvement.
- Supervisory actions to incentivize bank restructuring:
  - Ensure adequate capital and provisioning post-assessment; avoid regulatory forbearance.
  - Collateral: ensure valuations reflect economic reality; consider fiduciary loan contracts to ease enforcement.
  - Provisioning rules: conservative but flexible to allow restructuring while ensuring reserves for liquidation.
  - Strengthen bank operational capacity for in-house restructuring; segregate NPL management where systemic; require detailed resolution strategies with operational targets.
  - Data reporting: detailed NPL status, operational management reports, public financial statement annexes, and tracking of debt recidivism.

### Supervisory follow-up, diagnostics, and systemic standardized approaches
- Complement ECB comprehensive assessment with:
  - assessment of smaller banks;
  - macro-financial analysis linking NPLs to asset prices, credit growth, and economic performance;
  - micro-level diagnosis of obstacles to debt resolution.
- Government involvement:
  - Public creditors should participate on equitable terms; consider safe harbor guidance for officials participating in restructurings.
  - Remove tax, regulatory, labor, competition/state aid, and data protection obstacles to workouts.
  - Financing options: temporary government funds, guarantee schemes, securitizations, collaboration with development banks, and European funding sources—administered cautiously to avoid propping up nonviable SMEs and moral hazard.
  - Support centers for legal and financial advice to micro and small SMEs (Japan example).

- Standardized approach in systemic crises (Box 5) — features to consider:
  - government-led facilitation while keeping creditor-driven solutions;
  - agency/committee led by largest creditor with key ministries and supervisor representation;
  - public creditor participation on equitable terms;
  - application- and creditor-approved schemes to limit moral hazard;
  - arbitration/mediation for disputes;
  - viability filters (for example, going-concern value exceeds liquidation value);
  - contractual standstills preferred; simple notification-based court stays where needed;
  - backstop via pre-pack in-court approval and cram-down to bind minority creditors when pre-agreed.

### Conclusion
- Debt-distressed SMEs in Europe face large numbers, small size, weak balance sheets, and high fixed costs that impair restructuring and slow NPL resolution.
- Despite reforms, insolvency systems and workout frameworks remain ill-suited to SMEs; inefficient foreclosure contributes to NPL backlogs and debt overhang.
- A comprehensive strategy is required: tighter NPL regulation, SME-targeted insolvency reform, stronger out-of-court workouts, and supportive macro/financial policies — together providing a range of cost-effective tools while guarding against moral hazard and ensuring exit of nonviable firms and support for viable but distressed SMEs.

### Annex — selected international experiences with SME-targeted measures
- Indonesia (1998): Jakarta Initiative TASK Force for out-of-court workouts; more than 100,000 SME NPLs transferred to Indonesian Bank Restructuring Agency; across-the-board approach included cash settlements and open tender auctions.
- Japan:
  - Civil Rehabilitation Act (2000): simplified prepackaged procedures; key features include protection of secured creditor rights without change without consent, unsecured creditor impairment by simple majority, no automatic stay but court-imposed temporary stays, post-petition financing priority in a class, and debtor-in-possession with court permissions for key actions.
  - 47 support centers established; over 17,000 SMEs used centers and more than 2,000 restructuring plans formulated.
  - 17 SME restructuring funds raised 51.5 billion yen (underutilized).
  - SME Act (2009) obliged banks to use best efforts to amend distressed loan terms; supervisory guidelines relaxed so restructured SME loans were not required to be treated as NPLs; SME Act expired in 2013.
- Korea:
  - 1999 segmentation of distressed corporate sector; banks evaluated about 22,000 SMEs and classified 40 percent as viable.
  - Restructuring measures: rollovers, grace periods, interest reductions, fresh money for larger banks, government-sponsored credit guarantee funds, Corporate Restructuring Funds.
  - 2004 creditor-led restructuring under revised Corporate Restructuring Promotion Act: about 7,300 SMEs underwent program; half restructured, one-quarter liquidated; assessments suggested implementation was too lenient, sometimes rescuing nonviable SMEs.
- Malaysia (1999): bridge financing up to RM 50 million from central bank loan monitoring unit during restructuring.
- Thailand (1999): Corporate Debt Restructuring Advisory Committee simplified SME agreements; Bank of Thailand set monthly resolution targets and led a consortium to purchase SME promissory notes at a discount.
- Turkey (2006): “Anatolia Approach” and SME Law aimed to rehabilitate 70,000 SMEs with debts in excess of YTL 1.7 billion; framework agreements signed by 21 banks but only 97 restructuring agreements signed by 2008 due to limited bank participation.

*Chapter 11 in the United States. — Source: _sdn1504_*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Key findings and context
- The global financial crisis left a large private sector debt overhang and high levels of nonperforming loans (NPLs) in several European countries.
- SMEs represent a significant and weak segment of the nonfinancial corporate sector and face legal, financial, and regulatory challenges to restructuring that differ from larger corporates, including:
  - a rigid and costly insolvency regime,
  - a higher fixed cost to loan restructuring,
  - lack of alternative sources of financing.
- SMEs’ large presence and close links to the banking system mean addressing SME loan problems is critical for strengthening bank and corporate balance sheets and supporting a more robust and sustained recovery.
- The EU and member states have taken steps—insolvency reforms, strengthened banking supervision, financial support—but more is needed to accelerate resolution of problem loans and assist viable but distressed SMEs.

### Recommended comprehensive strategy
- A comprehensive strategy, based on cross-country experience, should include:
  - tighter regulation and supervision of banks’ NPL management;
  - insolvency reform targeted at SMEs;
  - a greater push for out-of-court workouts; and
  - supportive macro policies.
- The aim: provide more cost-effective, efficient tools and strengthen incentives for restructuring and resolution, while addressing moral hazard by ensuring speedy exit of nonviable SMEs.

### Specific policy measures and priorities
- Insolvency reform for SMEs:
  - establish simplified procedures for SMEs to reduce cost and inefficiencies of SME restructuring;
  - close the gap with international best practices for rapid pre-pack approvals, “fresh start”/debt discharge, and debtor-in-possession financing;
  - actively involve public creditors to support restructuring of viable SMEs;
  - enhance enforcement and foreclosure systems to be effective;
  - issue guidelines on loan workouts and increase use of mediation to support out-of-court debt restructuring.
- Banking supervision and capital provisions:
  - following the European Central Bank’s comprehensive assessment, supervisors should ensure banks are adequately capitalized and provisioned in a forward-looking manner to provide resources for case-specific resolution or restructuring;
  - for SMEs in particular, proper collateral valuation is critical;
  - for systemic cases where assessing SME viability is challenging, regulators may need a “triage” approach to separate nonviable SMEs for speedy liquidation from viable but distressed ones for standardized loan restructuring and to force loss recognition through time-bound write-offs.
- Other supportive measures:
  - remove tax and regulatory impediments to NPL resolution;
  - improve SME financial reporting and disclosure;
  - expand SMEs’ access to financing, including through securitization and active use of government support schemes.

---
*Source: EXECUTIVE SUMMARY, TACKLING SMALL AND MEDIUM SIZED ENTERPRISE PROBLEM LOANS IN EUROPE (INTERNATIONAL MONETARY FUND).*

### Chapter 11 in the United States.

### Chapter 11 in the United States.

### Recent policy support for SMEs
- European countries, the EU, and its member states have taken steps in the area of insolvency reforms, banking supervision, debt restructuring, and direct government support to assist debt-distressed SMEs.
- The lack of reliable SME financial data makes it difficult to assess their viability and the feasibility of restructuring plans.

### Insolvency reforms
- Most regimes already carry main features of an effective insolvency law: clear filing criteria, support to rehabilitate viable firms, a stay on enforcement action, inclusion of secured creditors in the insolvency process, majority/class voting, priority status for post-commencement financing, and speedy liquidation of nonviable firms.
- Recent reforms focused on pre-insolvency procedures and stronger instruments for restructuring.
- Pre-insolvency regimes:
  - Croatia (2012), Estonia (2010), Greece (2010), Latvia (2010), Portugal (2012), and Slovenia (2013) introduced pre-insolvency regimes.
  - Germany (2012), Greece (2010), Italy (2012), Latvia (2010), Portugal (2012), and Romania (2014) adopted pre-packs.
- Financing and other features:
  - Italy (2012), Latvia (2010), Portugal (2012), and Spain (2014) strengthened incentives for fresh post-commencement financing.
  - Reforms include simplified debt/equity swaps (Germany 2012, Latvia 2010, Slovenia 2013, Spain 2014) and spin-offs (Slovenia 2013).
- Expanded coverage:
  - Slovenia expanded insolvency law to cover all creditors, including secured creditors (but only for large corporates and not SMEs).
  - Ireland (2013) introduced three new restructuring processes that also cover individuals’ business debt.
- Special in-court procedures for SME:
  - Simplified procedures introduced for SMEs in Germany, Greece, Slovenia, Spain, or special processes in Italy.
  - The Italian over-indebtedness agreement (concordato preventivo) is specifically designed for micro and small SMEs and involves a stay and a majority voting process (60 percent of creditors in value).

### Out-of-court restructuring and SME-specific schemes
- Out-of-court regimes:
  - Albania (2013), Austria (2013), Latvia (2010), Portugal (2011), Romania (2012), Serbia (2010), and Slovenia (2014) adopted nonbinding guidelines for out-of-court debt restructuring.
  - Iceland (2010) supervised adoption by individual commercial banks of out-of-court restructuring guidelines.
  - Mediators used outside crisis contexts (for example, France).
- Special SME workouts:
  - Portugal (2012) adopted a formal out-of-court restructuring regime tailored to SMEs through mediation by a government agency; features include a creditor standstill and required participation of tax and social security authorities; agreement binds only participating creditors.
  - Spain (2013) introduced a time-bound, out-of-court agreement for micro and small SMEs; reformed in 2015 so Chamber of Commerce or appointed mediator leads negotiations; stay on enforcement actions is in effect for three months (except for public creditors); payments cannot be postponed for more than ten years; debts may be totally written down or converted into equity; a 60 percent or 75 percent majority of creditors (in value) is required to approve and extend the plan to dissenting or non-participating creditors (60 percent for stays up to 5 years and 75 percent for other operations); these majorities are increased up to 65 percent and 80 percent for secured creditors (just for the part of the credit covered by the guarantee).
  - Italy (2012) established an out-of-court procedure for SMEs where an independent expert appointed by the debtor may facilitate an agreement, but which binds only participating creditors.
  - Greece (2014) adopted an out-of-court framework for SMEs that enables reduction of debt according to economic indicators, a corresponding tax credit for creditors, and restructuring of public creditors’ claims according to installment schemes for public claims (with an extra 20 percent benefit); it entered into force in March 2015.
  - Ireland: lender-specific workout targets guided resolution of SME NPLs, with the two main SME lenders expected to have completed the workout plans of almost all SME loans by end-2014.
- Standardized regime with arbitration for SMEs (Iceland):
  - Targeted SMEs with less than ISK 1 billion of liabilities.
  - Aim: write down debt to the value of the SME (no equity value created).
  - Viability criterion: projected liquidation value less than going concern value.
  - For SMEs below a certain debt-to-equity ratio threshold, liabilities restructured based on capacity to pay.
  - For SMEs with a high debt-to-equity ratio, “deferred loans” used (reduced interest rates for three years).
  - Included an arbitration committee and government tax incentives; banks had monthly targets to successfully restructure SMEs.

### Banking supervision
- EU bank regulators conducted asset quality reviews, including the ECB comprehensive assessment, to harmonize and strengthen loss recognition and inform banks’ workouts.
- Supervisors strengthened supervision and instructed banks to enhance workout capabilities.
- Examples:
  - Ireland, Cyprus, and Greece introduced specialist functions and supervisory expertise and required banks to develop strategies and NPL resolution plans.
  - Ireland set debt resolution targets on a per-bank basis.
  - Central Bank of Cyprus (in 2013 for mortgages arrears only), Central Bank of Ireland (in 2012 for mortgages arrears only), and Bank of Greece (2014) adopted codes of conduct to standardize engagement between creditors and debtors for NPLs resolution.

### Institutional support
- Data:
  - The information gap on SMEs has narrowed but remains substantial.
  - Credit assessments from third-party providers exist; the ECB has started surveys on access to finance for SMEs (ECB 2014b).
- Tax changes:
  - Iceland (2010), Latvia (2010), and Portugal (2012) amended tax codes to remove disincentives for debt restructuring.
  - Italy (2013) relaxed limits on tax deductions for loan loss provisioning to encourage faster write-offs.
- Institutions and debt enforcement:
  - Portugal (2013) adopted a new legal regime for insolvency administrators and a new supervisory authority for insolvency administrators.
  - Ireland (2012) established the Insolvency Service of Ireland, which licenses and regulates personal insolvency administrators.
  - Portugal (2013) and Italy (2013) engaged in judicial reform to increase court performance management and specialization of the judiciary.
  - Latvia (2010), Portugal (2012), and Serbia (2014) strengthened debt enforcement frameworks.

### Government support for SMEs
- Government intervention has largely been legal reforms and other governmental support, including temporary moratoria on mortgage foreclosures and targeted schemes for households.
- Governments have not intervened directly into market-driven debt restructurings for SMEs.
- EU-level initiatives:
  - Distinct policy platform for SMEs under Enterprise and Industry Department; basis is the 2008 Small Business Act.
  - EU structural funds, the European Investment Bank, or the European Investment Fund provide financing (loans, guarantees, structured finance, trade financing) to the SME sector in certain EU crisis countries.
  - The Late Payments Directive aims at protecting SMEs by reducing vulnerability to insolvency triggered by liquidity constraints.
  - In April 2014, the European Commission issued a recommendation on a new approach to business failure and insolvency targeted at SMEs.
- National schemes:
  - SME credit guarantees: Austria, Belgium, France, Greece, Hungary, Italy, Luxembourg, Netherlands, Spain.
  - Financing funds for SMEs: Belgium, Germany, Greece, Ireland, Portugal.
  - Credit mediation services: Belgium, France.
  - Debt counseling services for micro and small SMEs: Italy.
  - Postponement of tax or social security payments for SMEs in financial difficulties: Belgium, Denmark, Greece, Italy.

### Early assessment and outcomes
- Insolvency law reforms and out-of-court mechanisms have increased successful rehabilitations in some countries.
  - Portugal: by end-August 2014, about 530 successful business restructurings (including SMEs) reported under new pre-insolvency and pre-pack process.
  - Iceland: 870 restructuring proposals recorded since May 2011 under SME standardized regime.
  - Portuguese formal regime: about 100 successful restructurings of SMEs as of end-June 2014.
  - Greek out-of-court mechanism entered into force in March 2015; too early to assess impact.
- Limitations and drawbacks:
  - SME-specific processes were sometimes abused and did not always help rehabilitate many SMEs.
  - Data on informal out-of-court mechanisms are difficult to collect.
  - Example: Only 13 percent of SMEs that presented concordato preventivo petitions between 2008 and 2011 were still operating after three years of presenting a plan; 53 percent were no longer operating (because they were in liquidation). Out of concordato in bianco petitions between 2012 and 2013, 36 percent ended in bankruptcy proceedings; in more than a third of cases the enterprises presented a plan.
- Overall assessment:
  - Pace of resolution remains slow.
  - Insolvency reforms have not fully addressed high cost and complexity of procedures, limiting use by small firms.
  - Large backlog of insolvency cases and limited court capacities create urgent need for efficient foreclosure and out-of-court restructuring.
  - Banks lack strong incentives to proactively resolve problem loans and assist distressed but viable SMEs.
  - Government support through loan guarantees and financing has helped stabilize weak SMEs but has not led to broader restructuring of the sector.
  - A stronger push across regulatory, supervisory, and judicial fronts, tailored to SMEs, is required.

### Lessons from international experiences
- Countries in past crises pursued varied approaches: insolvency reform, out-of-court mechanisms, and centralized “across-the-board” approaches for systemic cases.
- Insolvency reform experiences:
  - Countries with high NPLs first strengthened formal insolvency systems: Indonesia 1999, Thailand 1999, Turkey 2002, Japan 1999 and 2008, Korea 1998 and 2006.
  - Few countries adopted specialized in-court frameworks for SMEs.
  - Reform measures typically:
    - Allowed speedy liquidation of nonviable debtors or debtors that could not agree on a reorganization plan.
    - Enabled change in debtor’s management or control of shareholders.
    - Set up pre-pack procedures for quick court approval of debt restructuring plans negotiated between debtor and a majority of creditors.
  - Complementary reforms included specialized courts (Indonesia, Thailand), reform of insolvency administrators (Indonesia), and removal of tax and regulatory impediments (Indonesia, Thailand).

*Italic line: Chapter 11 in the United States. — Source: _sdn1504 - Chapter 11 in the United States.*

### 22.      Only a few countries introduced special in-court processes for SMEs. For instance, the

### Only a few countries introduced special in-court processes for SMEs

### Specialized in-court processes and experience
- Only a few countries introduced special in-court processes for SMEs.  
- Example: Japanese Civil Rehabilitation Act (1999) adopted a simplified and speedier debtor-in-possession restructuring process for SMEs; secured creditors, however, were not covered (IMF 2009a, Annex).  
- The rarity of separate SME insolvency systems may reflect the desire to preserve simplicity and efficiency of the insolvency process and avoid risks of delay from switching between multiple tracks.

### United States: simplified procedures within insolvency law
- The United States introduced SME-specific provisions in 2005 within Chapter 11 of the U.S. Bankruptcy Code, including standardized forms, simplified procedures, and no requirement of a creditor committee or trustee oversight.  
- Studies found SMEs’ use of Chapter 11 did not increase because of high cost, excessive influence of secured creditors, monitoring difficulties, and other procedural obstacles.18  
- An initiative to amend Chapter 12 (a simplified procedure for family farmers or fishermen) was launched but was not adopted (Small 2010).

Box 3 — Main features (exactly as presented)
- Chapter 11 for Small Business Debtors: eligibility defined as businesses engaged in non–real estate activity with total fixed debts of $2,490,925 or less. Features: simplified plan preparation and voting; plan filing period where only the debtor may file a plan is 180 days versus 120 days; reorganization plan must be filed within 300 days of commencing the case and confirmed within 45 days after filing; increased oversight by the U.S. Trustee; increased reporting requirements including most recent balance sheet, statements of operations, cash-flow statement, and federal income tax return to the petition; disincentive for quick infeasible plans via loss of automatic stay if another case is filed.
- Chapter 12 for Family Farmers and Fishermen: eligibility limits of $4,031,575 for family farmers and $1,868,200 for family fishermen; repayment plans to unsecured creditors over three to five years and to secured creditors over a longer time; standing trustee appointed in every case; strict deadlines—plan within 90 days and confirmation or rejection within 45 days; repayment flexibility preserving ownership if secured creditors are paid in full and unsecured creditors receive disposable income up to five years; more flexible procedures for administrative expenses and delinquent taxes.
- Chapter 13 for Smaller Sole Proprietors: available to individual debtors with unsecured debts of less than $383,175 and secured debts of less than $1,149,525 (as of 2014); similar procedure to Chapter 12 with notable exceptions on mortgage/security interest modification, five-year payment requirement for modified debts, and relaxed requirements for filing a plan.

### Out-of-court workouts: international experience and features
- International experience shows out-of-court schemes facilitate consensual corporate debt restructuring (including SMEs) that is more efficient and less costly (Altman 1984; Betker 1997; Gilson and others 1990; Franks and Sussman 2001).  
- Schemes vary from purely voluntary to enhanced/hybrid with formal government involvement (Garrido 2012). Examples: the London Approach; INSOL Principles for Multi-Creditor Workouts.  
- Common features of hybrid schemes used in crises:
  - Keeping restructuring voluntary, usually debtor-initiated.
  - Applying to debtors with more than one financial creditor.
  - Assigning a lead bank to coordinate financial creditors using binding/guiding principles or agreements promoted by bank supervisory bodies/bankers’ associations.
  - Providing regulatory/tax incentives.
  - Setting up a committee (government- or creditor-led) to monitor or facilitate deal making.
  - Relying on mediation/arbitration for dispute resolution.19
- Hybrid schemes generally involve less fiscal resources, protect debtors better without entirely shifting the burden to creditors, and deliver encouraging results, mostly for large corporates (Mako 2005).

### Crisis-related and SME-targeted out-of-court mechanisms
- Range: from providing fresh money to formal legal regimes.
  - Malaysia (1999): SMEs could seek bridge financing from the Loan Monitoring Unit of the central bank while undergoing restructuring.
  - Thailand (Bangkok Approach, 1999): simplified and time-bound process for SMEs under central bank direction.
  - Reserve Bank of India (1999): special framework for SMEs covering incorporated and unincorporated SMEs.
- Temporary out-of-court SME regimes with simplified processes and shorter timeframes included:
  - Government instructions to restructure SME debt (Japan 2009, Korea 1997, Turkey 2003).
  - Fresh money support by government or banks (Korea 1997; Japan 1997 and 2009; Turkey).
  - Incentives for banks to restructure SME debt (Japan 2009, Korea 1997).
  - Assistance through support centers to prepare restructuring plans (Japan 1997, Korea 1997, Thailand 1997).
- Approaches to who may request restructuring:
  - Japan and Turkey: only debtors could request restructuring.
  - Korea (2008): creditor-driven approach.
- Inter-creditor coordination emphasis varied; only Korea (2008) and Thailand emphasized “collective creditor action” via a committee and lead bank.

### Limitations and risks of specialized temporary frameworks
- Specialized temporary out-of-court frameworks for SMEs had limited success due to:
  - Financial-only restructuring with insufficient emphasis on business viability.
  - High level of SME state support inhibiting restructuring (Korea).
  - Regulatory incentives to banks viewed as damaging bank soundness (Japan).
  - Support to micro SMEs seen as indirect support to households and fraught with moral hazard (Turkey).

### Systemic approaches in severe crises
- Across-the-board approaches used in Chile (1982) and Mexico (1982) where large shares of debt were in foreign currency; government provided direct support using preferential exchange rates, covering foreign exchange, or postponing foreign exchange losses.
  - Fiscal costs: Chile 33 percent of GDP; Mexico 2 percent of GDP.
- Risks: do not distinguish between viable and nonviable enterprises, can prop up nonviable firms, undermine credit discipline, delay restructuring, and increase moral hazard.

### International lessons for SME problem loan resolution
- Primary focus: ensure resolution framework concentrates on viability of firms.
- For insolvency procedures: prioritize simpler, more cost-effective instruments tailored to SMEs rather than multiple insolvency tracks which may delay exits of nonviable firms and reduce recovery value.
- Out-of-court workouts: effective when supported by features such as a pre-pack, arbitration, a government agency, or majority voting processes; emphasize both operational and financial restructuring to exit promptly insolvent SMEs while assisting viable distressed firms.
- In systemic cases: across-the-board approaches may be expedient but risk propping up weak SMEs and worsening moral hazard.
- Greater benefits accrue when NPL resolution and debt restructuring are part of a comprehensive strategy beginning with a thorough diagnosis of SME sector weaknesses and obstacles to restructuring.
- Governments should strengthen insolvency and foreclosure systems targeted at SMEs and promote efficient out-of-court workouts to relieve courts; supervisors should ensure banks face proper incentives through strengthened capital and provisioning; governments should involve public creditors and remove tax and regulatory obstacles.

### Policy recommendations for Europe — common elements of a comprehensive strategy
- Tailor recommendations to country-specific circumstances: legal tradition, institutional capacity, fiscal space, restructuring experience, and sequencing to ensure success.
- Consider a “triage” approach in systemic cases to separate nonviable SMEs from viable but distressed SMEs for more standardized loan restructuring.
- Prioritize simpler and more flexible insolvency/foreclosure systems.

Key features of modern insolvency law to close the gap in Europe (see paragraph 11):
- (1) a rapid pre-pack in-court approval process,
- (2) permitting the restructuring of secured (and public) creditors in insolvency,
- (3) a temporary stay on all enforcement actions,
- (4) meaningful priority and protection for post-commencement financing to enable working capital financing.

Specific elements essential for SMEs:
- Liquidation and foreclosure:
  - For nonviable SMEs, an efficient liquidation and foreclosure process is essential to return assets to useful economic life quickly and minimize further losses to creditors.
  - Explore legal techniques enabling rapid enforcement/foreclosure out of court of collateral such as fiduciary arrangements (IMF 2014g).
- Simplified SME process for viable but distressed SMEs:
  - Trustee or administrator to closely supervise the process and keep courts informed (possibly supported/subsidized by a public fund).
  - Relatively short and strictly enforced deadlines.
  - Availability of debtor-in-possession processes.
  - Ability to combine personal and business bankruptcy processes.
  - More flexibility to repay administrative expenses (for instance, installment payments under a plan) (Collett and others 2014).
- Fresh start:
  - Afford a debt discharge or fresh start to honest entrepreneurs within a reasonable period of time (that is, three years) balancing debt discharge and debt recovery.
  - Note: about one-third of SMEs are “unincorporated SMEs” (sole proprietors 19 percent of all SMEs; partnerships 14 percent of all SMEs; EC 2010). For nonviable unincorporated SMEs with little prospect of recovery, liquidation with a fresh start may be preferable to rehabilitation.

*Source: TACKLING SMALL AND MEDIUM SIZED ENTERPRISE PROBLEM LOANS IN EUROPE (selected excerpts).*

### 34.      More harmonization on the EU level for insolvency system should be pursued. Different

### 34.      More harmonization on the EU level for insolvency system should be pursued.

### EU-level harmonization
- Different legal regimes in EU countries for insolvency and foreclosure weaken comparability across borders, increase costs, and inhibit cross-border assessment and debt resolution of distressed firms.
- Building on the EC recommendation, the EU could explore whether insolvency and even enforcement/foreclosure systems could be further harmonized in targeted areas across EU countries.
- Enhanced EU-wide coordination beyond the SME platform, specifically on SME debt restructuring, should be considered to enable an assessment across borders and to implement standardized and unified proposals.
- UNCITRAL’s work on specific recommendations for SME insolvency regimes should be pursued.
- Data collection of SME insolvency and foreclosure, such as recovery rates, number of cases, and lengths of proceedings, should be collected across EU countries on a unified basis to ensure appropriate monitoring and corrective actions.

### Priority and protection of provision of fresh money to distressed SMEs (Box 4)
- Post-commencement financing for working capital is essential to rehabilitate an insolvent business.
- International best practice recommends that post-commencement financing:
  - Be granted priority at least ahead of unsecured creditors.
  - If rehabilitation fails, such priority should carry over into a subsequent liquidation.
  - Can be secured by previously unencumbered assets; however, unless relevant secured creditors agree, post-commencement financing should normally not have priority over existing secured creditors.
  - Countries may consider a U.S. Bankruptcy Code–style “super-priority” for post-commencement financing, permitting court-granted priority over existing secured creditors subject to judicial control and safeguards (such as adequate protection for such secured creditors and the debtor’s inability to access post-commencement financing otherwise).
- Pre-insolvency fresh money financing should largely be protected against avoidance procedures provided it is furnished in good faith; the March 2014 EC Recommendation provides similarly for such protection.
- Government measures to enable or encourage pre-insolvency or post-commencement financing:
  - If banking regulatory frameworks prohibit banks from extending credit to an insolvent (or pre-insolvent) business or require (full) provisioning for such credit, such prohibition or requirement may need to be loosened subject to adequate safeguards.
  - If pre-insolvency or post-commencement fresh money financing vehicles do not exist in specific EU countries, consideration could be given to EU-wide operating funds (including with government facilitation) to enable sufficient economy of scale and spread of risk.

### More efficient out-of-court workouts
- For SMEs, (hybrid) out-of-court debt restructuring frameworks, with the assistance of a mediator or expert, should be promoted to enable consensual, efficient, and less costly restructurings.
- Out-of-court debt restructuring should occur against the backdrop of or in the shadow of an efficient and robust insolvency law.
- Out-of-court framework features to promote SME workouts:
  - Hybrid features: embed in-court features such as a stay or majority voting (see EC Recommendation); include arbitration or government support via an agency to facilitate creditor-debtor discussions.
  - Principles and templates: issue out-of-court restructuring guidelines in line with the INSOL principles; bankers’ associations or representative agencies should disseminate standard inter-creditor and restructuring agreements for banks and other creditors to use.
  - Mediators: government involvement through mediation or leadership of an agency (such as a central bank) could enhance effectiveness; consider government support or subsidization of mediation services as part of European SME schemes.

### More incentives for banks to restructure
- Banking supervisors taking a more active role can help tackle high NPLs while preserving financial stability.
- Following the ECB’s comprehensive assessment, supervisors should ensure banks are adequately capitalized and appropriately provisioned against problem loans.
- Regulators may need to force loss recognition (including write-offs for ”zombie” firms) and ensure provisioning approaches are consistently applied across banks, with attention to going-concern versus liquidation valuations and prudent assumptions.
- Regulatory forbearance should be avoided where possible.

- Banking regulators’ specific focuses for SMEs:
  - Collateral: ensure collateral values used for loan loss mitigation are current and reflect economic reality; consider developing fiduciary loan contracts to facilitate collateral enforcement where court involvement is high.
  - Provisioning rules: rules should be conservative enough to ensure sufficient reserves for restructuring or liquidation, but flexible enough to give banks space to maneuver on distressed loans.
  - Strengthen capacity: ensure banks have operational capacity and expertise to restructure loans in-house; where NPLs are systemically dangerous, require segregation of NPL management to a dedicated division, strong governance structures for NPL management, and detailed debt resolution strategies and action plans with operational targets; develop or outsource capacity where lacking.
  - Data reporting and disclosure: enhance standard reporting by introducing detailed NPL status and operational management reports and require banks to publish annexes with regular public financial statements; track debt recidivism more carefully.

### Supervisory follow-up and diagnostics
- Supervisors should follow up the European comprehensive assessment with a broader diagnostic of the NPL problem, particularly for SMEs.
- The combination of risk assessment, asset quality review, and capital stress test was applied to the 120 largest banks in the euro area and provided a first consistent view of euro area bank NPLs while ensuring adequate capitalization to absorb medium-term losses.
- This exercise needs to be complemented with:
  - A similar assessment of smaller banks within the euro area.
  - Macro-financial analysis to assess linkages between NPLs, asset price declines, credit growth, and economic performance.
  - Micro-level diagnosis of obstacles to debt resolution.

### Government support for SMEs
- Government efforts should involve public creditors and remove tax and regulatory obstacles to restructuring.
- Public creditors:
  - All creditors (including public creditors) should participate in debt restructuring on equitable terms, and insolvency laws should enable involvement (including being bound to a collective decision) of public creditors.
  - Consider issuing clear guidance specifying conditions under which public creditors may participate in debt restructuring; create a safe harbor for officials applying guidance in good faith to reduce or eliminate (super) priorities for tax and social security claims.
- Adequate incentives:
  - Address competition law/state aid, data protection laws, overly protective labor laws, and tax laws that may be perceived as obstacles to efficient workouts.
  - Ensure tax regimes do not penalize debt write-offs by making tax relief excessively difficult or imposing undue tax burdens on debtors; coordinate with the EC to ensure compliance with EU state aid rules where necessary.
- Financing:
  - Where fiscal space exists, explore temporary financing through a government fund; mechanisms could include government guarantee schemes, securitizations, and collaboration with development banks and agencies, consistent with EU state aid rules.
  - Administer such schemes cautiously to avoid propping up nonviable SMEs or increasing moral hazard.
  - Develop a market for SME debt securitization to help improve SME financing.
  - European institutions could explore European funding sources (European Investment Bank, European Investment Fund, structural funds) to assist SMEs with temporary liquidity shortages.
- Support:
  - Governments could establish centers providing legal and financial expertise, assistance, or debt counseling to micro and small SMEs (such as Japan).

### Systemic cases and a standardized approach to SME debt restructuring (Box 5)
- A government-led mechanism for viable SMEs that involves all creditors and employs standardized debt restructuring solutions could be explored in systemic crises.
- Features of a standardized approach:
  - Government-led: government takes charge, enables creditor coordination, and removes disincentives for debt resolution; solutions target debt overhang within a specified time frame.
  - Agency/committee: an effective standing agency/committee should lead while the process remains creditor-driven; led by the creditor with the largest exposure and including key creditors, representatives from key ministries, and the central bank or banking supervisor; empowered to engage independent financial and legal experts and develop templates, master standstill, and restructuring agreements.
  - Public creditors: government facilitates participation of public creditors (tax and social security) on equitable terms.
  - Moral hazard: scheme should be by application and creditor approved to minimize moral hazard.
  - Arbitration/mediation: provide for dispute resolution mechanisms such as arbitration or mediation, possibly within the agency/committee.
  - Feasibility/viability: support only viable SMEs; use simple indicators (for example, whether the SME’s going-concern value exceeds its liquidation value) to assess viability; automate and standardize support to micro and small SMEs identified as viable (for example, maturity extensions, principal reductions).
  - Stay/standstill: contractual standstills preferred and could use boilerplate contracts; court-imposed stay may be needed and could be established by simple notification rather than formal court approval to simplify processes.
  - Backstop: avoid majority voting by creditors without court involvement unless pre-agreed; provide a backstop with a pre-pack in-court approval process and cram-down to bind minority dissenting creditors.

### Conclusion
- Debt-distressed SMEs in Europe face challenges from large numbers, small size, and weak balance sheets that increase fixed costs and risks to banks of restructuring.
- Despite reforms, insolvency systems and out-of-court workout frameworks in Europe remain ill-suited to SMEs’ needs; difficulties in foreclosure have slowed loan resolution and contributed to NPL backlogs and corporate debt overhang.
- If unaddressed, SMEs’ high indebtedness and bad loans will remain a drag on recovery and financial stability.
- Resolving the SME loan problem requires a comprehensive strategy including:
  - Tighter regulation of banks’ NPL management.
  - Insolvency reforms to improve SME restructuring efficiency.
  - Greater emphasis on out-of-court workouts.
  - Supportive macro and financial policies.
- The strategy should provide a wide range of cost-effective and efficient tools and strengthen incentives for restructuring and resolution while guarding against moral hazard and ensuring exit of nonviable firms and support for viable but distressed SMEs.

*Source: _sdn1504 - 34.*

### 1.      This annex summarizes experiences with SME debt restructuring in crisis context in Indonesia,

### _sdn1504 - 1.      This annex summarizes experiences with SME debt restructuring in crisis context in Indonesia,

### Indonesia
- In 1998, the Indonesian authorities established a new governmental agency, the Jakarta Initiative TASK Force, which provided a one-stop forum to facilitate out-of-court workouts for corporates.
- The Jakarta Initiative TASK Force used simplified templates and also targeted SMEs, but few SME cases were resolved through the Jakarta Initiative TASK Force due to the government’s priority to resolving large corporates and the sheer number of distressed SMEs (IMF 2000a; IMF 2004).
- More than 100,000 SME NPLs were transferred to the Indonesian Bank Restructuring Agency, an asset management company.
- The Indonesian Bank Restructuring Agency adopted an across-the-board approach to SME debt restructuring:
  - SME loans were either targeted for resolution through cash settlement (with interest and principal discounts) or sold through an open tender auction to other financial restructuring agencies.

### Japan
- In 2000, the Civil Rehabilitation Act came into force; although not explicitly applicable to SMEs, it aims at providing simplified, expedited, and prepackaged procedures for distressed SMEs. Both debtors and creditors may initiate the procedure. The court needs to ascertain whether the debtor is experiencing actual or potential balance sheet insolvency. Any application proposing an infeasible plan or suggesting bad faith by the debtor needs to be rejected by the court (Anderson 2001).
- Key features of the Civil Rehabilitation Act include:
  1. no rights of secured creditors may be changed without their consent;
  2. rights of unsecured creditors may be impaired by a simple majority of creditors holding more than half the total amount of unsecured claims;
  3. there is no automatic stay, but temporary stays imposed by a court enable a time period to negotiate;
  4. consent of shareholders is not required to dispose of the business or reduce capital;
  5. post-petition financing has first priority in a class together with administrative expenses; and
  6. the debtor remains in possession during the restructuring, is subject to the duty to act honestly and fairly, and requires court permission to undertake certain actions (for example, liquidate assets, acquire new loans, settle or pursue lawsuits, and hand over collateral).
- The court confirms a plan unless it violates the law, is a product of fraud, has no possibility of success, or is against the general interests of the creditors (Pomerleano 2005; Bufford and Yanagida 2006; IMF 2009a).
- In 2000, the Japanese Ministry of Economy Trade and Industry established 47 support centers to facilitate consultations with SMEs and help formulate restructuring plans.
  - Over 17,000 SMEs used the support centers and more than 2,000 restructuring plans were formulated.
  - The Ministry also established 17 SME restructuring funds, which raised 51.5 billion yen, which were underutilized.
- In 2009, the Japanese government enacted the “Act Concerning Temporary Actions to Facilitate Financing of SMEs” (the “SME Act”) in response to the financial crisis; it was extended twice and expired in 2013 (IMF 2012b).
  - The SME Act formed part of a concerted effort to assist SMEs through various special support programs, including credit guarantees and public loans.
  - The SME Act obliged banks to use best efforts to amend the terms and conditions of distressed loans at the request of SMEs.
  - To incentivize banks to process applications, the supervisory guidelines for banks were relaxed, and restructured SME loans were no longer required to be treated as NPLs.

### Korea
- In 1999, Korea separated the distressed corporate sector into three segments: large, medium, and SME (IMF 2000b).
- For SMEs, the government instructed banks to evaluate financial soundness, identify workout targets, and set up individual workout departments in banks to review restructuring plans.
  - Banks evaluated the status of about 22,000 SMEs and classified 40 percent as viable.
  - Restructuring options included rolling over SME loans, providing grace periods for repayment, reducing interest rates, and, for larger and stronger banks, injecting liquidity by providing fresh money.
  - The government helped establish government-sponsored credit guarantee funds to provide loan guarantees to SMEs and set up Corporate Restructuring Funds to provide liquidity to SMEs through both debt and equity investment (IMF 2006; IMF 2010).
- The level of state support suggests SME over-indebtedness was delayed or inhibited rather than resolved:
  - State guarantees were available to SMEs with ties to larger corporates, concentrating bank lending around firms that could secure these guarantees and skewing incentives in favor of existing firms as guarantees were constantly rolled over, creating a barrier to entry.
  - For microenterprises, support to SMEs effectively meant support to the household sector (IMF 2010).
- In 2004, the government started a creditor-led restructuring program for SMEs under a revised Corporate Restructuring Promotion Act (“Corporate Act”):
  - The revised Corporate Act stipulates shorter deadlines, allows debtor in possession, and permits shareholders to repurchase converted equity.
  - About 7,300 SMEs underwent this program; half were restructured and one-quarter were liquidated.
  - Assessments by the Bank of Korea suggest banks’ implementation was too lenient and only moderately successful in resolving the debt overhang since in some instances nonviable SMEs also received debt restructurings (IMF 2010).

### Malaysia
- In 1999, Malaysia offered SMEs (with debts up to RM 50 million) bridge financing from the loan monitoring unit of the central bank while the SMEs pursued debt restructuring (Claessens 2005).

### Thailand
- In 1999, Thailand promoted several SME-targeted mechanisms:
  1. the Corporate Debt Restructuring Advisory Committee, formed within the Bank of Thailand, introduced a simplified version of its inter-creditor and debtor-creditor agreements for SMEs;
  2. the Bank of Thailand set monthly targets for financial institutions to resolve SMEs cases; and
  3. the Bank of Thailand led a consortium to purchase promissory notes issued by creditworthy SMEs at a discount. The facility was priced at below the average cost of funds to the banks in order to encourage its use (Claessens 2005; IMF 2000c).

### Turkey
- In 2006, Turkey established the “Anatolia Approach” targeted at SMEs.
- The “Law for the Restructuring of Debts Owed by Small and Medium Sized Enterprises to the Financial Sector” (the “SME Law”) aimed at rehabilitating 70,000 Turkish SMEs with debts in excess of YTL 1.7 billion, thus preserving jobs.
- Under the SME Law:
  - The Banking Regulation and Supervision Board developed the regulation concerning the general conditions for agreements.
  - Framework agreements prepared by the Turkish Bankers’ Association consistent with the regulation were approved by the Banking Regulation and Supervision Board for a two-year term and were signed by 21 commercial banks.
  - NPLs could be restructured in a variety of ways, including extending maturities, rolling over loans, providing fresh loans, decreasing principal/interest rate/default interest rate, and debt-to-equity swaps.
- Success was limited: by 2008, only 97 restructuring agreements had been signed, mainly because of limited interest and participation by the 21 commercial banks.

*International Monetary Fund.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1504.pdf_