The modern conditions of small business credit market development

Date: 2015-10-07; view: 460.

Part 2 Small and medium sized enterprises and their relations with banks

For the first time special attention to lending to small and medium-sized businesses in Russia has been given by the European Bank of Reconstruction and Development (EBRD). In 1994 there was established support Fund to support small businesses. Thanks to the efforts of this bank lending to small businesses has become a palpable sense. Undoubtedly there are many benefits associated with lending to small and medium-sized enterprises. But EBRD doesn't directly give loans to enterprises. For this purpose there are banks –agents, which work with the European bank.

Before the crisis in 1998, the EBRD program was attended by 15 domestic banks. In general, they issued loans worth $ 350 million and 99.8% of these funds were returned by the enterprises[11].

In the current political and economic situation, some trends can be noted. Unfortunately they all mostly negative.

1. Reducing the solvency of SMEs. Over recent years, the owners of small and micro businesses were among the most active banks' customers. Especially for SMEs special products were created, especially technologies of mass credit ("credit factory") were developed. On the content the concept of in-line loans or "credit factory" is very close to scoring systems in retail lending. With the development of technology "credit factory" big banks were able to stabilize and quite successfully manage a higher level of arrears which are common for such products. However, the slowdown in economic growth, foreign policy instability and currency fluctuations caused a severe blow to the solvency of SMEs. And first to be overdue were unsecured loans. On the 01.07.2014 the level of arrears in the SME segment reached 7.6%, which is 0.5 percentage points more than 01.01.2014. In addition the share of non-performing loans to SMEs from the banks of the top 30 grew even more up to 10%, compared to 9% on 01.01.2014. To solve this problem, Sberbank of Russia has taken a number of measures. In particular, for the technology "Credit Factory" they revised requirements for the minimum term of operating on the market of the companies-borrowers. Under the "Credit Factory" they planned to introduce a number of initiatives related to the additional guarantee for loans that would preserve the high quality of the portfolio.[12]

2. Growth of arrears. Economic slowdown and deterioration in the financial condition of small and medium-sized enterprises have led to an acceleration of the growth of arrears in this segment. In response, banks have begun to set higher requirements for customers and reduce unsecured lending - one of the main drivers of market growth in the last 2 years. Additional pressure on the dynamics of lending had a decline in demand from SMEs due to the rising cost of credit. It was caused by increase of the key rate of the Bank of Russia and the deterioration of banks' access to Western capital markets.

3. Reduction of the total portfolio of loans to SMEs. Due to the data for the 1st half of 2012 the total portfolio of loans to SMEs increased by 10% and amounted to 4.3 trillion rubles[13], but in the first six months of 2014 portfolios of bank loans to SMEs grew by only 4% (8% in the same period of 2013) to 5.4 trillion rubles. If we compare the growth rate of SME portfolios in the 12 month period (01.07.2013-01.07.2014), it was 10%, versus 15% for the period 01.07.2012-01.07.2013.(Pic 3) This is due to the current political and economic situation in the world. As "Expert RA" predicted at the beginning of 2104, the growth rate of the portfolio of SMEs for the first time in the last three years were lower growth rates of big business. Restricting access to foreign capital markets forced the Russian big business mostly be funded within the country, which allowed to overtake the pace of lending to SMEs.

4. There has been a decline in the average life of the loan. Here we need to express reserves. This decrease was due to fears of a second wave of the crisis due to which there was a general simplification of loan products. Thus, the results of the 1st half of 2012, are such that 56% of loans were issued for terms up to 12 months, while the share of loans over 3 years is only 16%, which is provided by state-owned banks. Experts note that the loans were taken mainly on short-term needs, for example to cover cash gaps. There were virtually no requests aimed at business development.[14] In 2013 and 2014 the situation has not changed. Banks still prefer shorter loans of less than one year for small businesses.

5. The negative trend in 2013 and 2014 was the deterioration of the quality of the portfolios of large banks. Large banks more than other market participants reduced the amount of loans to SMEs. One of the reasons was the in-line lending (“credit factory”). By itself it carries greater risks due to the fact that an individual assessment of the borrower is not performed. According to experts from major banks, every 8th ruble portfolio is expired. However, small banks managed to maintain in 2013 the quality of assets like at the beginning of 2012 as they continued to use their own assessment models for SMEs. In small banks overdue loans in the portfolio are approximately 4%.[15]

6. One of the major trends in 2013 was lending to individuals as business owners. This type of loan is quite simple in design and does not require a large number of documents. The time spent to give such loan is significantly less than on a loan that is taken on the organization itself. In addition, most banks, lending to individuals as a business owner don't ask to confirm the use of funds, ie, the borrower does not need to verify the documents on which he spent a loan, while lending to the firm implies such confirmation .

Thus, we can conclude that the foreign policy instability, slow economic growth, exchange rate fluctuations and a number of other external and internal factors have led to a deterioration of the banking sector and the SME sector. The consequences of these factors were strict measures from banks regarding the interactions with small and medium-sized businesses.

Pic 3[16] Growth rate of SME loan portfolio decreased by 5 percentage points over a period 01.07.2013 – 01.07.2014

Pic 4[17] Share of top 30 banks by assets in loans to SME during the quarter