WRITTEN QUESTION E-2972/01

by Samuli Pohjamo (ELDR) to the Commission

(26 October 2001)

Subject: EU subsidies to banks in candidate countries to compensate for bad debts

Small businesses in the candidate countries have access to the SME Facility. The European Bank for Reconstruction and Development (EBRD) has selected the banks in the candidate countries which may support small and medium-sized enterprises under the SME Facility programme. The EBRD funds these banks to the tune of EUR 125 million.

If the support takes the form of lending at the normal price, which requires the normal guarantees, it will be of little use. It will not help the firms which need support. Firms which are able to obtain a loan from banks under normal conditions do not need support. It is important that SMEs in the candidate countries should be supported, but if normal conditions are applied the take-up of such loans will probably remain small.

To enable the support to be more effective, it should include interest subsidies and periods of grace (for normal loans), loans without the requirement for guarantees or for significant loan deposits, and loan guarantees to other financial institutions.

Is the EU prepared to subsidise the selected banks in the candidate countries in the event of bad debts, and if so, which banks belong to the system and on what conditions do the banks in the candidate countries grant loans to businesses?

Answer given by Mr Verheugen on behalf of the Commission

(21 December 2001)

The small and medium-sized enterprise (SME) finance facility programme was launched to provide a response to the difficulty SMEs in the candidate countries encounter in raising finance. Banks are often reluctant to lend to them for a number of reasons: the difficulty of assessing the risk, lack of available collateral, the fact that the costs of administering small loans are proportionally much higher than for larger loans, and because the banking sector in most candidate countries has suffered very substantial losses in the past, which has resulted in a more cautious approach to lending.

Under this scheme, the Commission provides support to local banks in the form of grants together with credit lines from International Financial Intermediaries (IFIs).

The primary objective of the SME finance facility is not to provide interest subsidies, which could distort the market, but to increase the supply of, and facilitate access to, credit for small companies by inducing financial intermediaries in the candidate countries to expand their financing operations for SMEs and maintain them over the long term. For this reason, the specific loans to SMEs are offered by the local banks at market conditions.

All local participating banks receive various incentives in order to develop successful, sustainable credit operations with SMEs clients. In particular, all local banks selected by the European Bank for Reconstruction and Development (EBRD) under the facility receive the incentive of technical assistance financed from PHARE resources to strengthen their administrative, credit and management capacities so that they can more effectively address the SME sector's needs.

As regards subsidising bad debts, one of the incentives the Commission's support may cover is a partial guarantee of up to 40 % of the loss incurred on the SME loan portfolio of the local banks participating in the facility. However, all the incentives that are funded are the result of individual negotiations between the IFIs who are partners in this programme and the local participating banks.

The objective of the incentives, including the partial guarantee, is to ensure that the necessary conditions for successfully developing business with SME clients are met. As a result, SMEs in the candidate countries will enjoy easier access to credit through undistorted, more competitive and efficient financing circuits.