Microloans for small and medium enterprises: challenges and opportunities

It is necessary to support microfinance organisations (MFOs) that offer loans to small and medium enterprises (SMEs), preserve their access to budgetary funding, make them attractive for investors, and ensure that they have an opportunity to employ different instruments of state support of SMEs. These are the suggestions that the Bank of Russia received as a result of a survey of microfinance organisations providing services to SMEs. The results of the analysis of the survey data were discussed during a meeting of the Expert Council for Microfinance and Credit Cooperation with the participation of SME Corporation and the Ministry of Economic Development of the Russian Federation.

For the regulator, expanding the segment that provides loans to SMEs is among the priorities of the microfinance market development. The overwhelming majority of such MFOs are non-commercial business support funds with regional or municipal participation in their capital. As of early 2018, 380 out of 2271 MFOs offered loans to SMEs. 226 of them participated in the survey (with the two thirds of respondents being enterprise support funds and the rest, commercial MFOs crediting SMEs).

According to the survey, in over 70% of cases, SMEs obtain microloans to finance their working capital, or to cover the so called cash gaps. The most popular types of collateral used by SMEs as security under microloans are vehicles (30-50% depending on the organisation type) and real estate (30-40%). Nearly 40% of loans provided by commercial MFOs are unsecured, while in non-commercial MFOs this figure is close to zero.

The survey also showed that over 85% of MFOs that applied for the participation in SME support programmes were approved; however, they pointed out that it took too long to review and execute the required documents. Among other problems, according to such MFOs, is a large amount of different reporting statements that are to be submitted to various public authorities besides the regulator. Enterprise supporting funds complained that not all regions were able to provide enough money to SMEs through MFOs and that there were no specialised programmes to support small municipal funds.

Funding can become a serious issue for enterprise supporting MFOs in case the government ceases to aid such institutions: the application of preferential rates allows offering small and medium enterprises loans at rates from 9.5% p.a. However, the overwhelming majority of microfinance organisations participating in SME support programmes (65-90% of respondents) intend to continue providing loans to small and medium enterprises even if the government programmes ensuring their access to cheap funding are terminated since they already have proven technologies and business models aimed at this market segment. Nearly 20% of respondents may consider turning to consumer and payday loans if the government programmes are ceased.

As of early 2018, loans to SMEs accounted for 21% of the aggregate MFO portfolio (?24 billion) with the average loan size of ?820 thousand in 2017.

Taking into account the significance of this segment, the Bank of Russia will continue to develop and implement measures and mechanisms aimed at encouraging the activity of enterprise supporting MFOs.