A Lot of Money for Small Ones

Expert №33 (670)
August 31, 2009
Marina Talskaya

Vnesheconombank plans a fourfold increase in lending to small and medium-sized enterprises. About 60 banks are to participate in the program that provides for committing 40 billion rubles.

Mikhail Kopeikin
The photo is provided by VEB

The first stage of the new state program of supporting small and medium-sized enterprises (SMEs) ended in the second half of July. Vnesheconombank acts as the financial coordinator of the program. From June 19 to July 17, Vnesheconombank was engaged in receiving applications from banks seeking to participate in lending to small companies under this program. Vnesheconombank Deputy Chairman Mikhail Kopeikin is going to talk about a new mechanism for state support and its prospects.

New mechanism

- Mikhail Yuryevich, why did you have to launch a new program of providing support for lending to small and medium-sized enterprises? Did the old one prove to be bad?

- The old program which our subsidiary institution, the Russian Development Bank, has been implementing since 2004, was not a bad one at all. In my opinion, it yielded tangible results. We provided support for more than four thousand small enterprises in the total amount of 26 billion rubles. So, I think highly of this program’s implementation. And I also can tell you that this program is still being implemented now and about two thousand small enterprises are receiving and are going to receive support worth about 10 billion rubles. Formally, under the old program but based on the new requirements we are providing support for small and medium-sized enterprises of Kabardino-Balkaria, the Astrakhan region. In the most immediate future small enterprises of Adygeya, Karachaevo-Cherkessia, the Kaliningrad and Magadan regions will receive money. I’d like to stress that all these regions are deficit ones and they don’t have banks capable of meeting the new program’s requirements. That is why under the framework of the old program we are putting in place a transition period. It will be effective until 2011 as agreements with banks were concluded for a period of three years.

- Then why did you have to change the program? What’s the principal difference of the new program from the old one?

- One of the reasons is the increased state support for small and medium-sized enterprises. 30 billion rubles were earmarked to this end. If you add to this figure 10 billion rubles that VEB commits from its charter capital to the Russian Development Bank’s charter capital and 10 billion rubles from the old program, the amount of real support might be brought to 50 billion rubles.

In order to manage this substantial sum of money a principally new mechanism is expected to be used. The main idea behind it is that credits to small and medium-sized enterprises are to be refinanced on condition of transfer of claims under them. At first, the Russian Development Bank will refinance regional banks against factually extended credits. And then, having gathered a pool of credits under the program, the Russian Development Bank will apply to the Central Bank for refinancing. To this end, a principal agreement has been reached with the Central Bank. Thus, we’ll have a closed cycle of providing state support. How can we benefit from it? At least we’ll be able to double the amount of funds raised under the program of financing small and medium-sized enterprises. And by our estimate, we’ll be able to triple the amount of funds earmarked for supporting infrastructure of small and medium-sized enterprises. I’d like to remind you that out of 30 billion rubles 25 billion rubles would be used to support small and medium-sized enterprises through regional banks and five billion – for supporting infrastructure and here I mean leasing and factoring companies, microfinancing institutions.

- You are talking about doubling and tripling. So you mean refinancing to a full extent?

- In the case that a bank confirms that credits it will extend after refinancing will be used to support small and medium-sized enterprises they will be refinanced to a full extent by the Russian Development Bank. At the second stage of refinancing at the Central Bank there might be a discount I believe that it wouldn’t be large.

-What’s the expected effect of such multiplication of funds? Will this allow to meet demand for credit resources by most of small and medium-sized enterprises?

-This is hardly the case. But under the new program we’ll try to involve as many regions and small and medium-sized enterprises as possible. We have already established limits for constituent entities of the Russian Federation as well as regional quotas for partner banks. Actually, this would make it possible for a considerable member of banks to participate in supporting small and medium-sized enterprises. Quotas were set depending on the economic status of a region and the SME level of development in it. The maximum amount of quota is 800 million rubles, the minimum one is 100 million rubles. All regions with due regard to their capabilities should be given a chance to participate in this program. At the same time, we won’t be able to meet all requirements for credit resources. For example, a limit for Moscow is 800 million rubles and we received applications for financing in the amount of 3.5 billion rubles. The demand was more than four times the supply in Moscow, 1.5 times in Saint-Petersburg, three times in Tatarstan. By the way, there are also regions where even minimum limits were not in demand.

-What are these self-sufficient regions? Maybe it makes sense to hand over their limits to those who need them?

-We haven’t received applications from banks of eight regions whose total limit is 800 million rubles. They are the Altai Republic, Ingushetia, Kalmykia, Tyva, the Chechen Republic, the Yamalo-Nenets and Nenets Autonomous Areas. We together with the Ministry of the Economic Development are planning to work with these regions’ leaders and try to understand why they are not interested in the program. We’ll try to find out how many SMEs are there and if there are any partner banks there. Maybe, they don’t have regional banks that meet the program’s requirements. So, we are going to analyze the reasons for their reluctance to participate in the program. And then, if we fail to find appropriate options we’ll submit this issue for consideration by our Supervisory Board and might redistribute the funds.

Requirements for participants

-You’ve mentioned new requirements for partner banks. Can you specify them? How do they differ from the old ones? How many banks meet these requirements?

-We have received applications from 161 banks located in 75 regions. The total amount of applications was 43 billion rubles. We selected 60 banks from about 70 regions. In our opinion, we achieved a pretty good result for the first stage. Under the new program we decided to somewhat change the terms to favor banks. We decided to relax some of our requirements for them taking into account the complicated situation in the economy as a whole and in the banking system in particular. There are two principal relaxations. First, we relaxed requirements for the amount of a bank’s assets. Originally, it was 2 billion rubles, then we decided to allow banks to participate in the program if the amount of their risk-weighted assets was 1 billion 750 million rubles.

-The second important relaxation is related to bad loans percentage. The former requirement was eight percent with regard to credits extended to SMEs. The current requirement is 12 percent and it does not apply to credits extended to SMEs but to a loan portfolio as a whole. The reason for it was on the one hand that some banks do not set off SME debts in a separate line. On the other hand, the amount of total debts gives a clearer idea of a bank’s financial position. At the same time, we know that it’s not always correct to compare one bank with another. Some quite stable banks’ bad loans percentage with regard to SMEs can amount to 14 percent. But we decided to allow them to participate in the program. There are also some other relaxations of technical nature.

-By the Central Bank’s estimate, the general bad loans percentage in the banking system as a whole is 4.2 percent. When liberalizing your requirements for partner banks you assumed that the situation would worsen?

-I believe that banks servicing SMEs are more stable because their portfolio is diversified. The fact is that bad loans percentage in the banking system as a whole is on the rise and we believe that it is going to increase. In our opinion the said relaxation is not excessive and quite acceptable. It is designed to allow some banks to participate in the program. By the way, one of the program’s objectives is to feed the banking sector.

-Well, does the program after all give high priority to enterprises or banks?

-Of course to enterprises. I would like to stress another top priority: we are, above all, going to extend credits to companies operating in the real economy and here I mean transport, telecommunications, industrial and innovation sectors and etc. Under the previous program it was these sectors that accounted for 60 percent of support. Nevertheless, originally trade and service sector were in the lead. But we made consistent efforts to focus on lending to the real economy. While implementing the new program we are going to move in the same direction. We are going to formulate proposals for creating favorable conditions for financing the innovation sector.

A sign of comfortable lending is a simple procedure for obtaining funds. You have liberalized a number of key requirements for partner banks. And what about end borrowers? They say that bankers require credit applicants to present a business plan that can be compared with an application to the Nobel Committee in terms of size and requirements.

-I can’t tell you anything about the Nobel Committee but in fact borrowers are required to present a substantial package of documents. At a recent meeting of our Supervisory Board we made a decision to simplify the procedure for preparing and submitting documents to the Russian Development Bank by partner banks.

-Will this make things easier for end borrowers?

-Frankly speaking, I don’t think so. In any case in the near future. Regional banks are unlikely to make any serious changes in their products. But in the future we intend to recommend regional banks to minimize the list of required documents. Small enterprises where there are no full-fledged legal and economic subdivisions find it the hardest to prepare such business plans.

-Which proportion of SMEs would be refused credits because they fail to meet banks’ administrative requirements?

-I think more than a half.

-Perhaps, the most evident indicator of credit availability is a cost of borrowing. What cost of borrowing might we expect?

-Actually, it’s a key issue. We think that under the new program an interest rate for the end borrower would be 13.5 percent. For comparison, under the old program an average interest rate is 17.8 percent per annum.

I’d like to tell you how we get our new interest rate. We, that is, VEB receive 30 billion rubles on deposit at an interest rate of 8.5 percent. Then without setting any margin, we transfer these funds to the Russian Development Bank. We estimated the Russian Development Bank’s margin, its expense on monitoring the program, at two percent. Thus, we get a rate of 10.5 percent at which the Russian Development Bank would lend partner banks. And we recommend partner banks not to increase a margin by more than three percent. Ultimately, an interest rate for end borrowers might amount to 13.5 percent.

Furthermore, the new program provides for new mechanisms for making credits less expensive for borrowers. First, they will be able to have their interest rate subsidized – two thirds or even three thirds of it – through regional business support funds. Second, they can obtain guarantees in regional guarantee funds. 15 billion rubles were allocated to establish these funds. These institutions’ functions are being determined now and requirements for them are being formulated. As a result, I hope we’ll be able to reduce partner banks’ risks and make credit resources a lot less expensive for borrowers.

Control

-The new program hasn’t been launched to a full extent but we already know about some problems associated with it. They say that not all partner banks are happy about restrictions on the margin.

-The more so, I can say that a significant number of banks are very unhappy that their margin is limited. In this respect, our position is as follows: if they want to lend at higher rates of 20-25 percent, let them raise money on their own on the market. If they want to deal with state money, let them operate in accordance with the program. They can make money here too but within sound limits. I believe that we should impose restrictions on interest rates growth.

And we’ll exercise strict control over the implementation of our recommendations. And if we receive signals that an interest rate is too high this will influence the amount of funds to be extended to a bank in the future. Although we don’t rule out the possibility that banks can set commissions and increase interest for service.

-And if you find out that a bank ignored your recommendations, do you have an instrument for exerting pressure on the bank? Will you be able to force the bank to return the money it received?

-No, we won’t.

-So, one can gain at the program’s expense but only once.

-Yes, theoretically. But you should not forget about consequences. Those who wish to work in line with the program should act correctly.  By the way, we select reliable banks for participating in the program. So, “take and run” behavior is almost ruled out.

Efficiency

-The amount of state funds earmarked for the new program is significant but by your estimate it is not sufficient to meet the current demand for credit resources. Are you going to raise funds to finance SMEs from other sources?

-Business is business, funds are always in short supply. The size of the new program is substantial; the financing amount is to be increased from 10 to 40 billion rubles. Moreover, our subsidiary banks are also active in financing SMEs. For example, the National Trade Bank earmarked 9.5 billion rubles to this end, Svyaz-Bank – more than three billion, Globex-Bank – about 0.9 billion rubles. Thus, we get a sum of more than 100 billion rubles inclusive of funds from our subsidiary banks and cumulative effect of refinancing.

Moreover, we are making efforts to involve foreign partners in lending to SMEs. In particular, Vnesheconombank and the German Development Bank KfW signed an agreement worth 200 million euros. 14 Russian banks participate in the program and agreements were signed with half of them. We reached a preliminary agreement that the amount of this program might be increased to 400-500 million euros. The scheme is as follows: KfW is to extend foreign currency credits to Russian banks against Vnesheconombank’s guarantees. Unfortunately, we have to assume currency risks in this situation. But we believe it’s the right thing to do. As a result, money becomes rather expensive: about 10 percent per annum for a bank and 13 percent for the end borrower. But this product is in demand. If the economic situation in the country improves, we’ll be able to reduce the interest rate. We are planning to implement a similar program with the EBRD which is ready to open a credit line worth one billion euros on similar terms.

-So far, large-scale state lending remains to be the most important source of supporting SMEs within the framework of the new program. What criteria are you going to use to assess the efficiency of the program? For example, will the program’s implementation increase SME contribution to GDP substantially?

-We intend to assess the program’s efficiency on an annual basis. But it would be difficult to calculate the program’s efficiency numerically. By various estimates, the proportion of state support amounts from one to two percent of SME needs in financing. So, we can talk about the program’s efficiency only in terms of these parameters. The program would help to increase SME contribution to GDP but I don’t think that we’ll get a multiplier effect. In Russia, SME products account for 17-20 percent of GDP and in Western European countries they account for 60-75 percent. Factually, we are lagging three-four times behind.  So, I believe that this program would contribute to the development of our economy but I don’t think that this contribution would be very noticeable. If the first experience in implementing the program proves to be positive and I think this is bound to happen, we should expand the program further taking advantage of the so-called cumulative effect that would benefit both small and medium-sized enterprises and regional banks.