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Improvement of legal regulation of bank lending as a factor contributing to the development of small and medium-sized...
Section 14. Science of law
Ruchkina Gulnara Flyurovna, Financial University, Dean of Law Faculty, Doctor of Science, Professor
E-mail: gumer@bk.ru
Melnichuk Marina Vladimirovna, Head of Chair of Foreign Languages-3, Doctor of Science, Professor E-mail: mvmelnichuk@gmail.com
Improvement of legal regulation of bank lending as a factor contributing to the development of small and medium-sized businesses in Russia
Abstract: The paper analyzes the need and possibility of obtaining bank loans by small and medium-sized businesses. Requirements of a credit institution to be met in order to obtain a loan are defined. The necessity to improve the legal regulation of the bank lending to promote development of small and medium-sized businesses is justified.
Keywords: small and medium enterprises, credit resources, collateral, credit institution, government support, finance lease.
The economic prosperity and social well-being of a country largely depends on the degree of small business development and medium business sustainability.
In countries with successful economies the above sector accounts for the major share of all tax payments and a considerable portion of the gross domestic product — up to 50-70 %. The situation in Russia is different: more than half of the gross domestic product is created by large industrial holdings while small and medium enterprises are facing serious difficulties in running their businesses. The situation is not likely to be altered by the fact that the share of small enterprises in the Russian GDP for the last five years has grown more than twofold. According to the Russian Federation Ministry for Economic Development, the contribution of small and medium-sized businesses to the country’s GNP as of 2012 totaled 19.2 % (the benchmark designated by the Russian Federation Government for Russia is 40-50 %), while as far back as in 2011 this figure in the USA and Germany was at the level of 50-52 %, with 55-62 % in France and 52-55 % in Japan [1].
In this situation the credit market with a real opportunity for a company to obtain much-needed credit resources is an important factor of support and development of small and medium-sized businesses (the loan portfolio for small and medium-sized businesses in Russia amounts to RUR 4.2 trillion). To make credit resources available to enterprises means not only to support the existing small and medium-seized business sector and bring it out of the shadows but also to promote emergence of new business entities (Sberbank with its 26.5 % of total loans granted in 2012 is the biggest player
on the small business credit market. VTB and Promsvyazbank complete the top three).
Undoubtedly, the financial crisis has made the situation in this segment still worse. The primary effort (RUR1.0 trillion) was directed by the government to support large business entities. In the meantime, the sphere of lending to small and medium businesses was shrinking. Many banks in that period cut down on programs of lending to small and medium businesses because of high operating costs (exceptions were about twenty largest banks, such as Sberbank, VTB 24, URALSIB, Alfa-Bank, KMB Bank, Bank ofMoscow, Rosbank, NOMOS-Bank, PSB and other banks). Until now the limited supply of loans for small enterprises and the lack of a competitive market of lending services have been the causes of high interest rates. Interest rates in that period stopped at the level of 23-24 % in rubles. Six-month loans — 23 %, 6 months to a year — 23.3 %; more than a year -23.8 % per annum. To reduce interest rates, there are various ways to control the costly part of the loan, including the selection of the best form of credit for a business and the use of government financial support programs. As for a franchising program, the bank selects a franchisor company, performs its audit, arranges for cooperation and makes an offer to the enterprise. The latter can suggest a company of its own choice as the franchisor in which case the bank takes time to audit the company and make an agreement.
At present, there are over 4 million small enterprises and private entrepreneurs in Russia. And 70 % of small businesses are engaged in the provision of services (primarily in commercial activities). In the current year, the number of individual
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entrepreneurs has decreased by approximately 300,000. On the one hand, in the past year there was considerable tax loosening such as increased access to a simplified taxation system, significant modification of the patent system, introduction of the voluntary procedure of using the unified tax on imputed income (UTII). On the other hand, the consolidated social tax reform of 2009 resulted in a situation when small businesses began to pay more from the payroll fund. If in 2010 almost all taxpayers using the simplified taxation system paid 14 %, then in 2011 the payments rose to 26 % and only for those engaged in socially important industries for which in 2012-1013 the rate was reduced to 20 %. All other small businesses pay the general 30 % rate. The majority of contributions have a fixed value irrespective of either the size of an enterprise or its production efficiency.
In this regard, the growing need of small and mediumsized businesses in borrowings is quite logical (according to expert estimations, the amounts of lending to small and medium-sized businesses can reach those in developed countries not earlier than in 15 years). The borrowed funds are used by enterprises for various purposes such as working capital replenishment, procurement of shop, production or office equipment, repair of sales and production areas, acquisition of transportation vehicles and real estate, capital and/or ordinary repairs, acquisition of licensed software, etc.
At the same time the level of lending to small and medium-sized businesses is insufficient, which is caused by the following factors: lack of reliable borrowers; high operating costs; non-coverage of loans; non-conformity to requirements; non-transparency of business; limited scope of activities carried out by small and medium-sized businesses, which complicates their assessment; lack of incentives to encourage adequate reflection of financial results in reporting documentation and hence submitting non-transparent and unreliable reports; low quality of business plans for receiving loans; inadequacy of small business profitability to loan interest rates, which is aggravated by bank commissions, etc.
As a rule, entrepreneurs apply for loans at the beginning of their activities, without clear understanding of growth prospects and would-be incomes; nor do they have sufficient legal and economic knowledge to design an acceptable financial project of their development or a possibility to provide appropriate financial documents required by a credit institution. Meanwhile, business plans are given close scrutiny: subject to analysis are not only the financial calculations but also the market research carried out by a potential borrower. An incorrectly written business plan complicates the expert examination and can be a motive for the loan application rejection. To support entrepreneurs, credit organizations are offering ready-made model business plans. In cooperation with social organizations business models are created suitable for implementation according to an available business plan.
The low transparency of small and medium-sized businesses, poor organization of the accounting policy, inadequate qualification of employees, use of illegal (“gray") schemes lead
to the lack of reliable information about an entrepreneur’s activity, which is a reason for loan rejection.
It is quite clear that entities enjoying financial stability and a firm position in the market of goods, works and services have better opportunities for being provided with financial resources through lending. For credit institutions, an ideal borrower is an entity with revenues of RUR 60 to 200 million, the loan amount of RUR 6 to 9 million, a 6-12 month loan term, doing business for 2 years and collateral on the whole loan amount. However the social function of a credit institution is, in fact, lending to small and medium-sized businesses to support them in launching their activities. The primary objective in this case is the development of small and medium-sized businesses in the country. Moreover, a small entrepreneur may in the future become a solid corporate customer capable of consuming a wider scope of financial products, including those of the investment nature.
Meanwhile, the maj ority ofbanks would not consider the above-mentioned entity as a prospective borrower. Standard requirements of a credit institution are successful business activities for at least 6-12 months, satisfactory financial performance, the transparent history of the capital origin, absence of claims from creditors and tax authorities as well as a positive credit history.
Credit institutions carry out comprehensive measures aimed at increasing returns, on the one hand, and reducing credit exposure, on the other hand (credit policy). The credit risk assessment means evaluation of the borrower’s status in terms of its ability to settle obligations, feasibility of granting a loan and the borrower’s ability to repay the principal debt along with interest payment in time. It should be added that the financial result of a credit institution is affected by loan loss provisions. The requirement for loan loss provision allowances is stipulated by the Russian Central Bank [2], motivated by bank credit risks and depends on the financial status and stability of the borrower.
Granting a loan is preceded by a considerable amount of preparatory work in order to obtain the maximum information on a potential client/borrower [3]. If the potential borrower is an individual entrepreneur the credit institution analyzes the client’s solvency using combined methods of assessing a physical person and a business entity (for instance, taken into account are personal expenditures as well as directs costs of running a business). Lending to small and mediumsized entities is not profitable because of small loan amounts. At small loan amounts with market-competitive interest rates, the profitability is reduced to a minimum. At the same time, no matter how small a loan may be, it needs labor efforts of bank employees for servicing the loan application, assessment and monitoring of the collateral and servicing the loan itself.
The priority in granting a loan depends on the type of business activity. Credited with great caution are the construction industry, brokerage business, transportation of goods, manufacturing and sales of premium-class products. More often loans are granted to business entities engaged in
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Improvement of legal regulation of bank lending as a factor contributing to the development of small and medium-sized...
trade (retail and small-scale wholesale shops, small-scale wholesale networks), in services (real estate leasing, public catering, sports and recreation and medical services, car repair service), in production (small enterprises in the food and chemical industries, modular productions (bakeries, sausage shops, packing lines)).
The possibility of obtaining a loan is also dependent on a freely available collateral. The optimum collateral for a credit institution can be real estate, motor transport and equipment. Along with that, any asset that meets the requirements of free turnover, liquidity or having the price exceeding the obligation amount may serve as collateral (at present, it is the collateral department of a credit institution that evaluates the collateral for small and medium-sized businesses).
Assets accepted by banks as collateral, according to “Regulation on the Procedure for Making Loan Loss and Similar Debt Provisions by Credit Institutions" (approved by the Central Bank of Russia, March 26, 2004, No. 254-P) [4], also include listed securities The most popular among them are government securities that can ensure the loan amount of 95 % of their value. The so-called “blue chips” also possess high liquidity. Assets provided as collateral may include precious metals in bullions (gold, silver, platinum and palladium). The use of precious metals as collateral should be compliant with the Procedure for Operations with Mineral Raw Materials Containing Precious Metals Prior to Refining approved by RF Government Resolution dd. December 01, 1998, No.1419 15. According to paragraph 8 of the Procedure, mineral raw materials, not encumbered, can be used as collateral. Essential collateral terms stipulated by the parties in concluding a loan agreement are defined in Art.47 of the RF Law of May, 29, 1992, No.2872-1 “On Collateral” [5]. In the court practice the essential terms are interpreted somewhat differently: according to the conclusion made in Regulation of the Federal Antimonopoly Service of the East-Siberian District of 30 October, 2002, No. A74-2353/02-K1-F02-3217/02-S2 (“Consultant Plus” Legal Reference Service), the essential terms include the subject of collateral, its assessment, nature, amount and term of execution of collateral-covered obligation as well as indication of its location (the same position is reflected in other court decisions. See, e. g.: Resolution of the Federal Anti-Monopoly Service of the Volga District dd. 11 May, 2000, No. A06-1429-6/99//Consultant Plus Information System). The mortgage holder is interested in the safety of a mortgaged asset; therefore, the creditor has the right to exercise control over its storage. It should be noted that the legal limitation for application and enforcement of collateral reduces the loan obligation coverage.
It is still possible to obtain a loan without collateral. The loan repayment is guaranteed by a warranty statement issued by the general director of an enterprise or the proprietor. However, small loan amounts, higher interest rates and short lending terms do not solve the problems of financial support of small and medium-sized businesses.
The effective cooperation of financial institutions and businesses appears to be possible only with active government intervention. Federal, regional (interregional), sectoral (intersectoral) and municipal programs of small business development and support are the principal tools of the government policy in this sphere. The complexity of the organizational structure of the government support of small and medium-sized businesses makes this policy inefficient and limits the range of entities to be supported.
In 2006 the Moscow Government established the Small Business Credit Assistance Fund. Similar funds were created under the support of the Russian Government in 79 subjects of the Russian Federation with a total capital worth RUR 36.4 billion (surety organizations in the Russian Federation issued more than 32 thousand warranties totaling RUR 87.5 billion. The attracted finance volume amounted to more than RUR 185.1 billion). The Fund’s warranty is granted to entrepreneurs included in the Moscow Register of Small and Medium-Sized Businesses engaged in business for at least six months and current on taxes and duties payable to budgets of all levels of the budget system. The Fund includes 45 banks.
Vnesheconombank (The Bank for Development and Foreign Economic Affairs) is the main paying bank in the government support of small and medium-sized businesses. However, the Federal Law of May 17, 2007, No. 82-FZ “On the Bank for Development” [6] in paragraph 15 of Part 3, Art. 3 does not clearly define Vnesheconombank’s activities. The bank participates in the financial support of small and medium-sized businesses through financing of credit organizations and legal entities that provide support to small and medium enterprises. Moreover, in doing so, Vnesheconombank must meet the requirements of the Memorandum on Financial Policies of State Corporation “The Bank for Development and Foreign Economic Affairs (Vnesheconombank)” [7], in which except the definition of the loan term (over 2 years) and amount — no more than RUR 150 million — no specific mandatory instructions are made. Furthermore, Vnesheconombank cannot act independently in performing the function imposed on it. The Decision of the Vnesheconombank Supervisory Council as of February 5, 2009, has defined the procedure for the financial support of small and medium-sized businesses by Vnesheconombank according to which the support is provided by an 100 % affiliated credit organization — “The Russian Bank for Development” public joint-stock company (further “The Russian Bank for Development”).
The small and medium-sized business support primarily concerns enterprises engaged in the innovation and hightech businesses. Banks that provide loans to small business entities in regions are refinanced by Vnesheconombank in compliance with a standard procedure developed by the latter. Vnesheconombank’s program also provides financing for a non-banking small business support infrastructure including loan cooperatives and microfinancing
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organizations, leasing and factoring companies that work with small businesses.
The need to change approaches to crediting small and medium-sized businesses is obvious. Regions are to play an important part in this process. The modern credit market must satisfy the demands of small and medium-sized businesses in borrowed funds in the full scope.
The development of the small business lending institution is a fairly complex process, the success of which depends on consistent implementation of effective multi-aspect and multi-directional measures. Measures aimed at development of lending to small and medium-sized businesses include but are not limited to improvement of the system for evaluating the solvency of small and medium business entities; development of new lending programs; interest rate reduction; improvement of lending terms, particularly introduction of standardized procedures allowing lending operation cost saving and reduction of the application consideration time; loan risk reduction by using various loan warranty and loan collateral schemes; encouraging large business enterprises to act as warrantors for small and medium-sized businesses; streamlining regulatory requirements of the Bank of Russia (thereby making it possible to reduce loan interest rates); expansion of subsidizing
the loan interest rate; measures directed toward increasing the transparency of small and medium-sized business activities; development of the support infrastructure; educational, particularly, legal work in the small and medium business environment; establishing regional and municipal small and medium business support funds rendering, among other things, assistance in collection of documentation for obtaining a loan; development of alternative sources of financial support.
Microfinancing [8] is a financial tool capable of making up for the current slowdown in the lending to small and medium-sized business entities. The development of microfinance organizations is targeted at making financial resources available to small and medium-sized businesses.
In our opinion, it is necessary to develop and adopt new financial and legal instruments to facilitate cooperation of Russian banks with small and medium-sized businesses in the field of providing the needed financial support, the more so that the majority of banks have already designed work packages intended for servicing the above-mentioned businesses.
It is important to develop and introduce new effective loan guarantee programs defining distribution of loan risks between the private capital and the state.
Furthermore, the early Federal Law “On State Support of the Small Business in the Russian Federation (repealed) [9] stipulated concessional lending facilities (according to Art. 11 of the Federal Law of 14.06.1995, No.88-FZ “On State Support of the Small Business in the Russian Federation”, loans to small businesses were granted on concessional lending terms while the corresponding difference was indemnified to credit institutions at the expense of small business support funds. Moreover, credit institutions themselves were granted certain benefits under this regulation), whereas the current Federal Law “On Development of Small and Medium-Sized Businesses in the Russian Federation” [10] does not stipulate such facilities, which adversely affects the development of the small and medium entrepreneurship despite the fact that paragraph 2 ofArt. 15 of the Law refers credit assistance funds to the infrastructure of small and medium-sized business support.
Therefore, the right of the above businesses to lending concessions rather than a possibility of concessional lending to them should be formalized in legislation. Special funds should indemnify the respective difference to credit institutions based on a loan agreement rather than at their own option. At present there is a two-sided need (both on the part of businesses and credit institutions) in the legal recognition of the respective concession.
One of the effective solutions to the lending problem might be active use in the financial market of the financial leasing concept. To obtain a financial lease for acquisition of fixed assets for small and medium-sized businesses is easier and cheaper than obtaining a bank loan, the more so that such transactions are supported by government subsidies extended to cover the advance payment [11].
Credit organizations as per paragraph 2 Art. 5 of the Federal Law “On Banks and Banking Activity” may engage in leasing activities independently using their own funds, which makes it possible to increase their income and reduce costs of the lessee.
Given that credit institutions are originally adapted to the leasing activity, the Federal Law “On the Financial Rent (Leasing)” [12] should reflect this fact. This will constitute the basis for boosting the activity ofcredit organizations in that direction.
References:
1. Экономический форум. Приложение. - № 103 (5134). - 2013.
2. Положение ЦБ РФ № 254-П//Вестник Банка России. - 2004. - № 28.
3. Федеральный закон от 30 декабря 2004. № 218-ФЗ «О кредитных историях»//СЗ РФ. - 2005 - № 1 (часть 1). - Ст. 44.
4. Вестник банка России. - 2004. - № 28.
5. Ведомости СНД и ВС РФ. - 1992. - № 23. - Ст. 1239.
6. СЗ РФ. - 2007. - № 22. - Ст. 2562.
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8. Федеральный закон от 2 июля 2010 года № 151-ФЗ «О микрофинансовой деятельности и микрофинансовых орга-низациях»//СЗ РФ. - 2010. - № 27. - Ст. 3435.
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9. Федеральный закон от 14.06.1995 № 88-ФЗ «О государственной поддержке малого предпринимательства в Российской Федерации» (утратил силу)//Собрание законодательства РФ. - 1995. - № 25. - Ст. 2343.
10. Федеральный закон от 24.07.2007 № 209-ФЗ «О развитии малого и среднего предпринимательства в Российской Федерации»//СЗ РФ. - 2007. - № 31. - Ст. 4006.
11. Приказ Минпромторга РФ от 15.02.2010 № 123 «Об утверждении Ведомственной целевой программы «Развитие малого и среднего предпринимательства в отраслях промышленности и торговле»//Информационная программа КонсультантПлюс.
12. Федеральный закон от 29.10.1998 № 164-ФЗ «О финансовой аренде (лизинге)»//СЗ РФ. - 1998. - № 44. - Ст. 5394.
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