11 restructuring program, or to throw into liquidation those enterprises that cannot pay their debts. The situation is improving as more banks are privatized and governments introduce incentives for state banks to avoid lending to loss-making enterprises and to act more forcibly on enterprise restructuring.

There is a question of inconsistency between the commercial incentives for the banks and the role assigned by the government in restructuring. At one extreme, banks may want to liquidate more firms than governments are willing to allow. 17/ On the other hand, banks have reduced their credit exposure to the weakest firms and may no longer have incentives to undertake time-consuming and costly bankruptcy proceedings. The mandate to restructure enterprises has diverted banks from their major line of business, that is mobilizing and allocating short term credit. Introducing legislation that allows for universal banking is one thing; expecting the banks of CEEIFSU to actually manage the restructuring of many enterprises is another.18/

# Banks' Role in **Financing** Enterprise Resuturin

For the most part banks are not financing enterprise restructuring. On a voluntary basis they are providing short term commercial credits to profitable firms with adequate collateral. For banks this is and should be the major focus of their lending. Restructuring weak enterprises is a diversion. Most banks consider long-term loans to financing physical restructuring to be just too risky. Even profitable enterprises cannot get term credit. limiting the scope for expansion or rehabilitation of enterprises. There is a positive aspect to this conservative strategy. Bank lending may correctly reflect the best use of scarce resources. Given the general excess industrial capacity and the extreme shortage of resources in the transforming economies, financing working capital particularly for the new, private firms, probably has a higher expected return dtan most investment finance.

17/ In CEE many firms are being cut off from bank credit but bankruptcy has not been widely used yet. For example in Poland over 5000 firms had been declared uncreditworthy by 1993, but there had been relatively few bankruptcies or liquidations. Bankruptcies in Hungary are increasing, but these are usually initiated by the firm rather than the banks. In FSU the bankruptcy process has rarely been used. Russia had only eight bankruptcies in 1993. Moldova had none.

18/ In countries like Poland, where banks are growing increasingly independent of governmen **t** , hey have become quite aggressive in debt collection and enterprise liquidation, but their role in other aspects of enterprise restructuring remains limited. The survey of Polish enterprises by Pinto and van Wijnbergen (1994) led the authors to conclude that "banks played a powerful role in disciplining enterprises". It is importan **t** o note, however, that the banks started to use their power in executing financial discipline on enterprises only after their own governance changed as a consequence of banking reform at the end of 1991. In this reform the state banks were conunercialized (supervisory boards were established) and brought under control of Ministry of Finane. There were two important implications of these changes: (i) for the first time the banks were audited by international auditing firms and the problem of bad debts was disclosed, (ii) in October 1991 the Ministry of Finance forbade lending to the firms in trouble. The conclusion from this is that the adjustment of banks was forced by rigorous execution of administrative decision. (B. Pinto, S. van Wijnbergen, 'Ownership and Corporate Control in Poland: Why State Firms Defied the Odds." Mimeo. The World Bank, April 1994.)