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Russia Impact Brief


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Russia Impact Brief

  2. 2. On the Cover: The city of Rostov-on-Don BACKGROUND EVALUATION OBJECTIVES In 2003, small and medium enterprises (SMEs) in USAID’s Office of Development Credit (EGAT/DC), Russia accounted for 94 percent of the total number which administers the DCA guarantees, of businesses in the country. However, despite their commissioned an evaluation of the Center-Invest numbers, SMEs produced only 13 percent of GDP in guarantee in 2009. This evaluation assesses the 2004 and commercial performance of the guarantee relative to its objectives ABOUT DCA credit available to help as defined in the Action Package developed by USAIDs Development Credit Authority (DCA) was created in 1999 to mobilize SMEs grow met only one USAID/Russia, i.e., increasing access to credit for local private capital through the percent of demand. High SMEs in Rostov, Krasnodar, and Volgograd. The establishment of real risk sharing transaction costs, evaluation assesses the outputs, outcomes, and relationships with private financial perceived riskiness of impacts of the guarantee. institutions in USAID countries. The tool commercial lending to is available to all USAID overseas The evaluation covers Center-Invest’s lending missions and can be used as a vehicle SMEs, lack of sound risk behavior and potential demonstration effects in the for providing much needed credit to an assessment methodology, array of enterprises and underserved banking sector. It does not examine EGAT/DC’s or and unfavorable sectors. The evaluation in Russia is part USAID/Russia’s administration of the guarantee, nor regulations governing of a set of evaluations that EGAT/DC is does it examine the guarantee’s contribution to undertaking in different countries, to test collateral possession in USAID/Russia’s strategic objectives. a series of developmental hypotheses case of default related to the DCA guarantees. discouraged banks from EVALUATION METHODOLOGY lending to SMEs. SMEs This evaluation used a mixed methods approach, that wanted to borrow did not have sufficient including statistical analysis of loan data, key informant collateral to meet bank requirements and faced and group interviews, and document review. It began burdensome interest rates. with a review of background documents on Center- Invest and its DCA guarantee, and continued in Russia USAID responded to the lack of SME finance in 2004 from June 15-26 with semi-structured interviews with by providing a $6 million, 5-year loan portfolio Center-Invest staff and clients, the USAID Mission, guarantee (LPG) to a regional Southern Federal and other financial sector experts. The lead evaluator District (SFD) bank, Bank Center-Invest. USAID had used comparative analysis, statistical analysis, and discovered that Center-Invest was planning to expand content pattern analysis to draw findings from the its SME lending to other oblasts in the SFD and collected data, from which she drew conclusions. agreed to support the bank with an LPG under the Agency’s Development Credit Authority (DCA). The Data limitations included: (1) unavailability of and non- program proposed to cover 50 percent of Center- response from several Center-Invest staff members; Invest’s principal losses on a portfolio of loans made (2) lack of data on Center-Invest’s non-guaranteed to SMEs through its new branches in Krasnodar and lending; and (3) no interviews with recipients of Volgograd, with the objective of providing credit to guaranteed loans. However, the evaluator does not SMEs who would not otherwise have access to formal believe these limitations significantly impact the financial markets. evaluation conclusions. CENTER-INVEST DCA LOAN GUARANTEE Ceiling Number of Median Average Loan Starting Ending Aggregate Utilization Amount Loans (as of Loan Size Tenor Year Year Amount ($) Rate ($) 6/2009) ($) (months) 2004 2009 6 million 137 4,570,886 76.18 % 17,809 9
  3. 3. KEY FINDINGS AND CONCLUSIONS Krasnodar and Volgograd does not receive muchOUTPUTS government support, the environment is lessConclusions The DCA guarantee purpose—to expand conducive for SME lending.lending to Krasnodar and Volgograd—fit perfectly • Center-Invest principals said the bank used itswithin Center-Invest’s business strategy. However, due standard processes to assess the creditworthinessto its risk aversion and the challenging SME of SMEs and to calculate the collateral requirementenvironments in Krasnodar and Volgograd, the bank for each loan. In cases in which otherwise soliddecided it was not ready to lend to these markets right businesses could not meet the collateralaway and therefore used most of the guarantee funds to requirement, Center-Invest made loans under theloan to collateral-poor SMEs in the Rostov region. DCA guarantee. • Center-Invest’s average collateral requirement isCenter-Invest’s lending portfolio has performed well 150 percent of the value of the loan. The averagesince the DCA guarantee began. The guarantee’s collateral percentage among DCA guaranteed loansinfluence on Center-Invest’s portfolio characteristics was 111 percent.was minimal, simply because the guaranteed loans • The value of Center-Invest’s SME portfoliorepresented a small proportion of the Bank’s SME increased from RUR 3,206 million in 2003 to RURportfolio and the bank made no procedural changes to 10,045 million in 2008, a 213 percent growth.accommodate the guarantee. • Together, the total value of the DCA guaranteedFindings in support of these conclusions include: loans represented one percent of Center-Invest’s • The Purpose of the signed Guarantee Agreement SME portfolio value as of January 1, 2009. between USAID and Center-Invest was “To strengthen the Guaranteed Party’s ability to OUTCOMES expand its SME loan portfolio through its newly Conclusions The DCA guarantee has contributed to opened branches in two Russian regions: increased credit access for Center-Invest’s borrowers Krasnodar and Volgograd….” This purpose is and may have influenced the bank to participate in other consistent with Center-Invest’s objective for the guarantee funds. The full impact of the guarantee on guarantee: developing relationships with clients in Center-Invest’s non-guaranteed lending business is Krasnodar and Volgograd, which was also part of larger than the one percent it directly contributed to Center-Invest’s 2003-2008 business plan. the bank’s growth, but we do not have sufficient data to • Center-Invest provided eight of its 137 DCA make a reasonably accurate estimate. guaranteed loans to businesses in the Krasnodar Findings to support these conclusions include: region and five in Volgograd. • Center-Invest’s Head of SME Lending explained • Center-Invest’s Head of the SME Lending that clients who received DCA guaranteed loans Department explained that the bank had not would not likely have become clients without the scrutinized the markets in Krasnodar and guarantee, because they could not meet the Volgograd prior to receiving the DCA guarantee collateral requirements. The bank retained all but and was hesitant to risk lending to unknown three or four of these clients. markets. By the time Center-Invest felt more • The bank intends to participate in an upcoming comfortable lending in Krasnodar and Volgograd, it tender from the Rostov regional government for a had already come to within 76 percent of the guarantee fund that backs loans to SMEs short of maximum portfolio amount allowed under the collateral. The bank also signed an agreement with guarantee. the Regional Guarantee Fund of Volgograd for • Representatives of Center-Invest and the European guaranteeing loans to SMEs lacking collateral. Bank for Reconstruction and Development (EBRD) • Center-Invest expanded its credit product in Rostov said that since the SME sector in offerings for SMEs between 2003 and 2009 from
  4. 4. fewer than six identifiable loan products to 13. CENTER-INVEST BANK SME LOAN PORTFOLIO The Head of SME Lending at Center-Invest said 20,000 SME Portfolio value (million that the DCA guarantee inspired the bank to 18,000 extend its credit product line. 16,000 14,000 • Center-Invest is now the largest provider of SME 12,000 RUR) loans in the Rostov region in terms of volume, 10,000 overtaking the previously dominant, state-owned 8,000 6,000 Sberbank. 4,000 • Since clients who received a guaranteed loan 2,000 received additional loans from the bank, the 0 multiplier effect pushes the guarantee’s direct 2001 2002 2003 2004 2005 2006 2007 2008 one percent contribution to the bank’s loan portfolio higher, but there is insufficient data to estimate the multiplier value. • Reasons given for Center-Invest’s success in the Rostov region SME market include: effective public which attracted banks to lend to them. relations, ties with the local administration and • SMEs said that it is still very difficult to obtain finance in international partners, and an unwavering focus on the Rostov and collateral requirements can be as high as needs of regional SMEs, along with strong community 400 percent. The EBRD said that banks still see ties. crediting SMEs as risky and therefore do not offerIMPACTS terms that are favorable to SMEs, or treat SMEs asConclusions Other banks have increased lending to SMEs corporate clients, with documentation, accounting, andsince 2004, especially in the SFD, because of a combination collateral requirements that are too high for SMEs toof favorable economic and infrastructure conditions that attain.fueled SME development, government programs encouraging • Since its founding, Center-Invest has supported SMEslending to SMEs, and experience with SMEs as profitable through a variety of charitable and financial projects.customers. However, SMEs’ access to credit has not Center-Invest has been providing free legal advice tosignificantly improved. Center-Invest seems to be unique in clients via a hotline since 2006. With funding from theits concerted efforts to make financing accessible to small IFC, the bank introduced an energy efficiency programbusinesses in the SFD, and it has significantly improved the in 2005, which finances projects that reduce companies’environment for SME lending. operating costs and promote a greener economy.Findings to support these conclusions include: • In 2006, the bank hosted its second international • All interviewees, including Center-Invest clients, agreed conference, “Russian and German Day for SME that banks have increased lending to SMEs in Russia in financing,” in which it connected its SME customers general and in Rostov specifically since 2003 because: with entrepreneurs and financiers in Germany. The (1) banks expected SME lending to grow; (2) SME loans bank recently hosted a workshop to instruct SMEs on provide good yields; (3) the Russian economy was how to obtain government contracts, to which it growing rapidly; (4) there was unmet demand for SME invited both SME clients and government officials. credit; (5) banks found that SMEs were reliable borrowers; (6) the regional Rostov administration This publication was produced for review by the United States Agency for supported SMEs through subsidies; and (7) the International Development. It was prepared by SEGURA/IP3 Partners LLC under SEGIR Global Business, Trade and Investment II – IQC Indefinite Quantity Contract, favorable economy in Rostov attracted more SMEs, Number EEM-I-00-07-00001-00 Task Order # 04, Development Credit Authority Evaluation. CONTACT INFORMATION U.S. Agency for International Development Office of Development Credit 1300 Pennsylvania Avenue, NW Washington, D.C. 20523 Keyword: DCA