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EHNHANCING FLOWS OF COMMERCIAL FINANCE TO SMEs IN RUSSIA

EHNHANCING FLOWS OF COMMERCIAL FINANCE TO SMEs IN RUSSIA. OBJECTIVE · Match solution to problem QUESTION · What is the problem? · What is the solution?. SME FINANCE PROBLEMS. Funds for start-ups Working capital/Export finance

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EHNHANCING FLOWS OF COMMERCIAL FINANCE TO SMEs IN RUSSIA

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  1. EHNHANCING FLOWS OF COMMERCIAL FINANCE TO SMEs IN RUSSIA

  2. OBJECTIVE • ·Match solution to problem • QUESTION • ·What is the problem? • ·What is the solution?

  3. SME FINANCE PROBLEMS • Funds for start-ups • Working capital/Export finance • Medium term loans so established SMEs can purchase new equipment • Insufficient collateral • Few SMEs have an established credit history

  4. BANK PROBLEMS • Regional Banks are small – can only make small loans, relative to the cost of new machinery ($250,000+) • Short term deposits (77% of deposits are one year or less) • Can make only short term loans, BUT • SMEs cannot finance equipment with short term loans

  5. BANK PROBLEMS (2) • Small number of banks eligible for IFC, EBRD, and IBRD credit lines • Banks that can borrow in the Euromarkets typically do not lend to SMEs • Start-ups do not have collateral or credit history • Uncollateralized loans face CBR restrictions • Banks are reluctant to lend to start-ups

  6. BANK PROBLEMS (3) • Inadequate credit assessment/admin. Skills • SME lending is not cost effective until a portfolio is established

  7. RESULT • Short term (one year or less) small loans • OK for working capital if you are an established SME • But Demand for working capital > Supply • No medium term equipment finance for established SMEs • No working capital or equipment finance for start-ups

  8. WHAT IS THE SOLUTION? • Increase the supply of longer term loanable funds? • Increase SME access to finance via guarantees? • Reduce the cost of loans via interest rate subsidies? GOR policy initiatives emphasize guarantees and subsidies; not supply of loanable funds

  9. Increase Supply:Line of Credit (From IFIs) • Provides longer term loanable funds • EBRD work with KMB and other banks: • flexible collateral requirements • does not require established credit history • excellent for start ups and small enterprises • mostly small, short term loans for working capital and small equipment; micro-credits • Less useful for equipment finance, but still possible

  10. Increase Supply: Line of Credit from IFIs(2) IBRD credit line – Enterprise Support Project (ESP) • Major source of large, medium term investment loans for established enterprises with collateral and credit history But: • ESP will close soon • Few qualified banks (for IFC and EBRD) • If line of credit with second tier banks, will GOR counter-guaranteeIBRD? • Will EBRD/IFC work with second tier banks?

  11. Increase Supply Line of Credit from IFIs (3) Limiting factor for credit lines is quality and size of local banks Solution: Improve the quality of larger regional banks?

  12. Increase Supply:Non-Bank Finance Investors establish non-bank financial intermediary (NBFI) with private equity NBFI borrows up to 2x private equity with guarantee of agency Uses pool of funds (equity plus debt) to finance SMEs Equity is at risk before guaranteed loans

  13. Increase Supply:Non-Bank Finance (2) Provides long term finance Creates de novo financial institutions dedicated to SME financing Prospects for corruption/chicanery? Who regulates? Cash flow matching issues

  14. Pooled and guaranteed Debentures guaranteed by Agency Public debt markets Private Equity SBIC Loans or Equity Small Businesses

  15. Increase Access:Loan Guarantee Program • A portion (50%) of eligible bank loan is guaranteed by a special agency (e.g., SBA) • Helps banks make larger loans relative to capital since guarantor bears some risk • Does not solve short term deposit/short term loan problem • Useful primarily for working capital loans and enterprises without sufficient collateral • Securitize and sell guaranteed portion?

  16. Increase Access:Loan Guarantee Program (2) Does not solve bank eligibility issue • instead of pro rata loss sharing, what if first loss is borne by bank and guarantor bears all losses above the agreed percentage? • Would this enable work with second tier banks? • Would banks/GOR-MOF be interested? • Need to find out

  17. Increase Access:Loan Portfolio Guarantee • Agency guarantees a portfolio of SME loans rather than individual loans • Risk sharing -- pro rata or first loss to bank? • First loss on portfolio is borne by originating bank, all losses above this amount would be borne by guarantor • Which is preferable for guarantee agency? • Will banks work with a first loss structure?

  18. Increase Access:Loan Portfolio Guarantee (2) • Encourages banks to make loans to SMEs • Protects guarantor against single borrower default; onus on commercial bank to make good loans • Need to agree bank selection criteria • Does not solve maturity issue

  19. Increase Access:Liquidity Facility Mechanism: (i) If loan is performing (to be defined) and (ii) If bank is solvent (to be defined) but faces a liquidity crisis (to be defined) THEN, liquidity facility will purchase loan from commercial bank at specified price

  20. Increase Access:Liquidity Facility (2) • Allows banks to make longer term loans without fear of maturity mismatch • Could be an excellent tool to facilitate investment loans for established, creditworthy SMEs with adequate collateral • Does not help start-ups obtain working capital or equipment finance • Does not solve bank eligibility and size problem

  21. Increase Access:Importer Guarantee Problem Russian enterprise wants to purchase imported equipment but cannot obtain long term loans from Russian banks Solution? Foreign export credit agency (ECA) will provide medium term finance at foreign commercial interest rates IF it can get a guarantee from an acceptable Russian commercial bank

  22. Increase Access:Importer Guarantee (2) Issues How to increase the number of acceptable banks? What banks in Russia can/will provide this guarantee? Will Russian banks take credit risk of local enterprises (from a credit perspective, issuing a guarantees is no different than making a loan)

  23. Increase Access:Importer Guarantee (3) Mechanism – an agency counter-guarantees the guarantee of an eligible Russian commercial bank • Counter-guarantee agency takes solvency risk of Russian bank, as with line of credit • Alternative: Agency issues guarantee to export credit agency and takes counter-guarantee from acceptable Russian commercial bank Solves maturity problem and provides low cost funds, but not bank eligibility and size problem or borrower collateral/creditworthiness problem

  24. Increase Access:Exporter Performance Guarantee Problem A Russian enterprise has a confirmed sales contract with an overseas buyer or a creditworthy Russian enterprise (backward linkages, procurement, etc.) Enterprise needs working capital (or capital goods) Solution Can use buyer’s payment promise to secure credit (from foreign or Russian bank), if seller can guarantee delivery of goods

  25. Increase Access:Exporter Performance Guarantee (2) Mechanism Agency issues guarantee vs. seller non-performance • Does not have to assess seller’s financial creditworthiness; only ability to produce Helps new or established SMEs with confirmed orders Provides low cost funds and bypasses weak local banks

  26. Cost of Funds:Interest Rate Subsidies Subsidy Mechanism • Reimburse borrower for a portion of interest paid to commercial lender • Low cost funds to participating banks – but this crowds out non-participant banks • Cap – Nizhny Novgorod forex scheme

  27. Cost of Funds:Interest Rate Subsidies (2) A solution in search of a problem • What problem does this solve? • Cost is not a problem • MFIs charge 4%/month • Borrowers pay • Very low default rate • Demand exceeds supply

  28. Cost of Funds:Interest Rate Subsidies (3) • Does not increase the supply of medium term loanable funds • Does not solve borrower creditworthiness/ collateral problem • Does not solve problem of small bank size • Does not increase access to finance -- will not induce bank lending to SMEs

  29. Cost of Funds:Interest Rate Subsidies (3)  Subsidizes borrowers who already have access to commercial loans A source of graft and corruption AN INEFFICIENT WASTE OF PUBLIC RESOURCES More productive to address SME finance and bank problems directly

  30. CAN GUARANTEES HELP? • Yes for working capital; but how to mitigate risks especially for start ups • Probably not for medium term investment loans • Problem is maturity • Without new mechanisms, guarantees cannot solve bank size and short term deposit/short term loan problem CONCLUSION • Need to define problem and solution with greater precision

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