29th Jan 2023

Billions in EU cash intended for small businesses being hoarded by banks instead

  • 'Many intermediaries appear to be making very few allocations to SMEs' (Photo: snorski)

Billions in EU cash intended as loans for small businesses in eastern Europe who have been bludgeoned by the economic crisis have instead been hoarded by intermediary banks.

In 2008, evidence began to mount of how small and medium-sized businesses were being cut off from access to loans as a result of the credit crunch.

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In response, European finance ministers unveiled a stimulus package that involved rapid deployment of €15 billion in loans via the European Investment Bank expressly intended for these businesses.

However, the process involved the EIB first providing loans to third-party intermediary institutions - for the most part commercial banks - who were then supposed lend on the funds along with their own contribution to small businesses.

According to a new report from Bankwatch, a Prague-based transparency campaign group, these banks have instead held on to the loans, boosting their own liquidity, but not passing them on to their intended recipients.

"Many intermediaries appear to be making very few allocations to SMEs despite the fact that they have often received the entire global loan amount and have had, in some instances, over two years to find SME beneficiaries," the report authors state.

Examining the lending process in four eastern EU member states - the Czech Republic, Hungary, Poland and Slovakia - from 2008 to June 2010, the report found that just 0.001 percent of all small and medium-sized businesses in the region had received any loan allocations.

Of the extra €15 billion set aside for small businesses, only 74 percent has so far been disbursed by the EIB to intermediary banks.

Of this, in what the authors call a "best-case scenario", just 69 percent has been passed on to such businesses. Moreover, those that did receive funding tended toward the larger end of the small-to-medium-sized spectrum.

In Hungary and Poland, the number of these types of loans - EIB cash passed on to intermediary banks - actually declined in 2008 and 2009.

Bankwatch says that the result may be due to the intermediary banks tightening their credit conditions. Small businesses in the region have continued to report great difficulty in accessing EIB loans as a result of stiff lending conditions imposed by the banks.

The banks themselves have found it difficult to raise cash cheaply, and so the EIB funding "provided a boost to the intermediary banks which took advantage of it."

"For these banks, it appears to have been easier and cheaper to hang on to the funding for as long as possible," the group suggests.

"In essence, the package that was designed to stimulate the SME sector of the economy appears to have provided greater stimulation to the intermediary banks who were the initial recipients of the funding.

While focussing on the east, the report authors say that there is evidence that a similar bottleneck is occurring in western Europe as well.

In Ireland, they say, very little assistance from the EIB has trickled down to local firms.

Ian Talbot, chief executive of Chambers Ireland, said in 2009: "We don't know the number of loans given under the EIB funding, but we haven't got a sense that a lot is flooding out the door".

The new report, published on Wednesday, backs up a similar finding earlier this year by the European Bank for Reconstruction and Development in an investigation into its own practices in SME lending.

In an evaluation of the EBRD's crisis response, the authors note that its own lines of credit to local banks was not producing the desired effect of passing lending on to small businesses.

"For the EBRD to simply extend lines of credit to financial intermediaries for SME financing may not induce sufficient bank lending," the report said. "Banks need to be both able and willing to lend, and they proved unwilling to lend to SMEs due to the higher perceived risk."

The EBRD report found that credit lines were not made available during the months of the most severe liquidity squeeze, with little disbursement of funds during the first nine months of the crisis.

The report also found that many borrowers complained that the the pricing of the loans was prohibitively expensive.

In a damning self-assessment, the report concluded: "Banks had slowed down lending, especially to SMEs. Therefore, the EBRD SME credit lines did not prevent the credit crunch, particularly for small businesses."


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