“After conducting a wide-scale analysis together with the specialists of the Competition Council, we see that there is room for improving accessibility of financing for SMEs. We invite businesses, financial institutions, public authorities and all interested parties to participate in a public consultation on the proposed recommendations, which would facilitate SME financing,” said Jokūbas Markevičius, Director of the Financial Stability Department of the Bank of Lithuania.
“During the study, we also conducted a survey of SMEs that are potentially most affected by the decline in credit provision, which have been operating for no less than three years in the manufacturing, services, trade, construction and real estate or transport sectors. Our aim was to find out how enterprises are evaluating their financial situation as well as access to finance, financing conditions and other aspects. We have identified that most often applications for financing by these enterprises are rejected, since banks assess their financial situation as poor and they do not comply with collateral requirements. Failure to obtain funding is also related to the fact that enterprises do not maintain long-term business relations with financial institutions, do not take advantage of state aid measures and most often apply for financing only to one or two financial institutions. We hope that this analysis will attract attention of SMEs to the aspects limiting their possibilities to secure financing,” said Jurgita Brėskytė, Chief Adviser of the Competition Council.
According to the study, the portfolio of credit institution loans to enterprises, which was slowly growing until 2019, started to contract in that year, while after the start of the pandemic last year this trend intensified further. The SME loan portfolio contracted in 2019 despite the continuing economic growth, while the flow of new loans declined by 28 per cent, compared to the average of the previous three years. In the same period, the share of SME loan applications rejected by banks expanded as well, mainly among small enterprises. According to the survey of enterprises by the Bank of Lithuania, more than a half of applications of very small enterprises were rejected in the review period of 2018 to 2019. Bank lending conditions were tightened as well, whereas a decline in the flow of credit by several larger banks that offered lower interest rates resulted in enterprises having to resort more often to more expensive alternatives.
The joint study of the two institutions also revealed that the likelihood that very small enterprises will be granted credit is significantly smaller than in the case of small or medium-sized enterprises, even though their credit risk may be similar. With the tightening of lending conditions at banks, enterprises searched for and successfully found alternative funding sources. In 2019, their borrowing from credit unions increased by 40%, while borrowing from crowdfunding platforms went up by 92%, compared to the previous year. Enterprises also took advantage of the possibility to issue bonds, thus attracting 29% more funds using this instrument in the said period. They also borrowed more often from other non-financial enterprises.
According to the study, the main reasons behind the deterioration of SME financing possibilities were the following: 1) some banks evaluated real estate and construction as well as transport sectors more cautiously due to a perceived increase of risk in these sectors; 2) some banks showed lower risk appetite in general, i.e. they reduced financing of enterprises with lower credit ratings in all sectors; 3) several banks focused on the restructuring of their activities, increased interest rates and rapidly reduced the number of financed customers. This development was also determined by the actions of individual banks related to their reorganisation or withdrawal from the Lithuanian market. However, all these factors are considered to be short-term.
The study also revealed the following long-term challenges to SME financing: 1) enterprises often do not have eligible collateral for loans; 2) the information on alternative funding possibilities and state aid measures is insufficient, while enterprises apply for loans to one or two banks only; 3) borrowing opportunities are restricted by financial accounting deficiencies and insufficient financial reporting, as almost one-third of SMEs fail to submit mandatory annual financial reports or indicate having negative capital.
Taking into consideration the study results, the Bank of Lithuania and the Competition Council provided recommendations on the improvement of SME financing in several areas:
1. More targeted state aid and more efficient insolvency processes. It is proposed to review the granting of state guarantees together with financial institutions and focus state aid on sustainable smaller enterprises and enterprises of medium or higher risk that are unable to obtain financing at the market. It is also proposed to expand state aid instruments that do not require collateral from SMEs and to make financing cheaper for financial institutions, in order to reduce the final cost of financing. At the same time, it is recommended to consider the possibility for the state to act as an intermediary between an SME and a credit institution, when the loan application is rejected without a clear justification.
2. The reduction of administrative burden of SMEs and the increase of financial literacy of enterprises. These proposals are aimed at ensuring that documentation requirements do not become a hindrance to enterprises in obtaining financing. For example, it is proposed to avoid a repeated collection of information from enterprises, where that information is already available at state registers. It is also proposed to increase clarity of application forms for state aid and to apply a one-stop-shop principle in the administration of state aid. Financial literacy of SMEs could be increased by using information, consultation and training measures, for example, by organising seminars and involving financial institutions.
3. More information on alternative funding opportunities for enterprises. It is proposed to draw up and actively distribute the information to SMEs on the variety and the appropriate choice of financing sources. It is also proposed to seek agreement with market participants to ensure that an enterprise that did not receive funding is referred to other financial institutions.
4. Enhanced financial reporting of enterprises. It is proposed to create incentives for SMEs to submit financial reports to the Centre of Registers as well as consistently inform them about the importance of submitting financial reports and the potential consequences for failure to do that. It is also proposed to enhance the control of compliance with the regulation of enterprises with negative capital.
Comprehensive study data and recommendations are available in the published public consultation (available in Lithuanian). We invite SMEs, financial institutions, public authorities and all interested parties to submit their responses and proposals by 24 September. This autumn, the Bank of Lithuania and the Competition Council will assess the public consultation results and provide specific proposals on the improvement of SME financing.
