Interview : Conditions Of WB SME Development Credit Are Unique

Artur Yernjakyan, Lilit Aslanyan

2009-12-11 23:25:00

At the end of last year the Government of Armenia requested for
new credit proceeds from the World Bank. Subsequently, under its
assistance strategy, the WB decided to provide a credit of up to $545
million to Armenia during 2009-2012. From this credit $50 million is
intended for implementation of the program for financing small and
medium businesses in Armenia – whose development is identified by the
Armenian authorities as a priority during the ongoing crisis. The
ASME facility agreement was signed in February 2009 between the
Central Bank of Armenia and the International Bank for Reconstruction
and Development (IBRD) which is part of the World Bank Group. Under
the CBA guidance the proceeds have been disbursed through 8 Armenian
commercial banks since July this year. However, implementation of the
program is less favorable compared to other sources of financing. In
his interview to Arminfo, Michael Edwards, the World Bank Principal
Financial Advisor of the Private and Financial Sector Department,
has commented on these and other issues on the ASME facility.

Mr. Edwards, what portion of the ASME facility has been transferred
to the Central Bank and how much money will be utilized by the end
of this year?

To date the Central Bank has received 25 million on its account, i.e.,
half of the facility, and this money is being used by 8 commercial
banks which about have qualified for this facility. As of the end of
October, of these proceeds AMD 2.6 billion was provided to small and
medium businesses. We anticipate that by the end of 2009 lending will
increase. It was planned to disburse $10 million for the first year
and $20 million for the 2nd and 3rd years each. What distinguishes
this facility is that banks provide lending to SME businesses in AMD
(or USD if exporters) at a maturity of up to 5 years and its conditions
are highly competitive and unique in the market.

According to some banks, the conditions of the WB facility are
uncompetitive compared to other credit programs. Are you planning to
revisit the terms and conditions of this facility? Don’t you think
that it is being utilized at slow rates given its volumes?

In February, 2009 the credit proposal was presented to the WB Board
of Directors, and at that time none of us knew what the situation
would be like in the country. After the credit agreement was signed
Armenia received a number of credits, and, in particular, arrangements
were reached on extension of a sub-loan by Russia. Thus, the WB
ASME facility became one of the several sources for mitigating the
consequences of the global crisis. Since then we have revised several
of the credit conditions, namely, reduced the credit interest rate,
and allowed additional collateral and relaxed credit documentation
requirements. This was done in order to facilitate the process
of lending by banks. A considerable contraction took place in the
Armenian economy during the crisis, and only in the third quarter
some recovery was seen. During this period foreign remittances
considerably dropped. In these circumstances we believe that the
facility performance is good. This week we met with banks to make
sure that they would continue their active involvement in the program.

To what extent was the interest rate reduced and when?

In February when the facility was approved, the interest rate on the
Central Bank on-lending to banks was 8,5% and in early September it
was reduced to 7%.

While the Central Bank re-financing interest rate is 7%, the commercial
banks provide lending from these proceeds at 18%. Don’t you think that
during the ongoing economic downturn this margin is rather high given
that the Government provides financing to large enterprises at 10-11%
interest rate?

The WB did not set limits on lending conditions by commercial banks,
as we cannot distort the market. And that’s how we work with any
country. Therefore, banks are free to define their own interest rates
based on market circumstances and risk assessment. I would like to
mention that the SME sector is becoming more and more competitive
because the number of banks willing to provide lending to this sector
grows. Therefore, interest rates have begun to fall.

First of all, interest rate reflects the cost of risk. Some
banks provide lending without any security, for example, through
credit cards. This kind of lending has a rather high interest rate
because it also covers the existing high risks, while in general SME
credits are backed by collateral and often real estate is used as
a security. In this case the interest rates are lower. But interest
rates are determined also by other factors. For example, in Armenia
if a borrow is insolvent and unable to repay its debt, then litigation
for collecting the debt lasts very long, and seizure of assets itself
can take a year or even more. Unfortunately, it is another determinant
factor for credit pricing.

You mentioned that more relaxed documentation requirements are set.

Could you please give us some details on this? Can looser credit
conditions be set in future?

We always try to offer lending conditions which would allow banks to
use the source of financing. Similar SME programs are organized by
the World Bank in many countries, and, of course, we look for ways for
tailoring the financing to the circumstances of each specific country.

We always consider changes which are aimed to facilitate the receipt
of credit proceeds by commercial banks. For this reason, revisiting
the conditions is a dynamic rather than static process. As to any
further changes in the lending conditions in Armenia, if necessary
these can be revised. At any rate, we aim to involve new participants
in the program.

Can we assume that the list of the participating banks will change,
including through involvement of credit institutions in the program?

And, overall, what is your assessment of the involvement of commercial
banks in the program?

We have raised the question of renewing the list of participants with
the Central Bank. We expect that by the end of this year there will
be a new roster. As to credit institutions, the CBA – which selects
the participants of the program itself – has stated initially that
it is desirable to have only commercial banks in the program. For
credit institutions, so far as I know, the CBA has already asked
some micro-financing companies to determine their level of interest
in the program.

Earlier the Minister of Finance Tigran Davtyan made a statement that
the Government of Armenia is discussing with the IMF and the World
Bank issue of restructuring the existing and expected credits in
order to relax the lending conditions. Do you think that restructuring
is possible?

We do not distinguish between countries based on credit risks, i.e.,
all countries receive WB credits at the same interest rates. In
reality, the WB credits are inexpensive and for many countries they
represent the most favorable source of financing.

Thank you for the interview.