04 May 2004 10:38
Russia`s small businesses could be big business for banks
RZB's entry into Russia's business banking market has highlighted the lack of interest in a sector which
makes up almost one-third of the country's economy. However, things may be about to change, as Gerard Lysaght
reports from the Russian Economic Forum in London.
Russian banks have good reason to be happy these days. The country's gross domestic product (GDP) rose by 8
percent in the first quarter of the year, consumer spending is booming, and the Russian government has implemented one
of the most business-friendly and liberal economic policies in Europe. However, Russia's small businesses have
never been top of their banks' agenda - but there are signs that this may be changing.
Up to now, the European Bank for Reconstruction and Development (EBRD) has been the leader in providing financing to
micro- and small businesses in Russia through its network of partner banks. Since it started lending to Russian small
businesses in 1994, the EBRD has made 182,000 loans of this kind, worth over US$1.5 billion.
This is a risky business, some might say. However, the EBRD disagrees. "Russian small businesses have an
exemplary repayment rate," said Mike Taylor, senior banker in the EBRD's Group for Small Business. The bank
reports that only 0.49 percent of its small business loans are non- performing and that the sector itself is very
stable. "Micro and small businesses are a very resilient sector. They survived the 1998 crash that flattened many
of the banks that lent to them." The EBRD's aim is to bring into the financial sector those enterprises
considered unbankable due to their lack of collateral or documentation. "The lack of credit skills in Russian banks
has forced them to rely on collateral or personal connections," Taylor said. "We've put western
consultants into banks to help develop their portfolio of micro loans." At this stage, around 1,200 credit officers
have been trained in the EBRD's Russian partner banks.
The EBRD lends between US$10 and US$10,000 to Russian micro businesses - US$20 was the smallest loan the bank ever
made to a micro-business and the average is US$8,500. It typically lends between US$10,000 and US$200,000 to small
businesses. Around 90 percent of the bank's loans go to companies employing up to ten people and, uniquely among
banks active in Russia, nine in ten of its loans are to companies based in regions outside Moscow.
The EBRD is concerned that Russian banks are paying only lip service to the needs of small businesses. "Efforts
need to be substantial rather than window dressing if the profitability of these small business financing programmes is
to continue. It requires a critical mass of lending not just in each bank, but in each branch," said Taylor.
Austria's Raiffeisen Zentralbank (RZB) is the first major bank to make a serious move on the under-served small
business market. The bank currently has eight branches in Moscow and one in St Petersburg. It plans to open branches in
a number of regional cities - Ekaterinburg, Samara and Nizhny Novgorod - during 2004.
The bank acknowledges that Russian entrepreneurship is flourishing and that this offers major opportunities for the
country's banks. "We are not interested in funding the oil sector anymore," said Michel Perhirin,
chairman of RZB's Russian subsidiary. "We feel that the SME [small and medium-sized enterprises] sector is the
next one to boom. In Russia, all of our corporate clients are large companies borrowing large amounts. There are nearly
1 million SMEs in Russia contributing 11 percent of GDP and 14 percent of the country's employment."
RZB's estimate of the number of small businesses is very conservative, given that Russian statistics do not count
sole traders as small businesses and the fact that the figures do not take Russia's grey economy into account. In
that case, RZB may be looking at a much larger market.
"The SME statistics are misleading," noted Michael Calvey, co-managing partner of Baring Vostok Capital
Partners. "SMEs in central Europe make up 50 percent of the economy, so there is a large grey area in Russia
that's not accounted for." Most estimates put the figure for Russia at approximately 30 percent, well below
western and central Europe, but much higher than official Russian statistics.
Calvey sees two major challenges facing the development of Russian small business: the country's omnipresent
bureaucracy and the way funds are disbursed by lenders. "Russia's government administration and bureaucracy is
the key issue for the development of SMEs. The cost of money has been decreasing. However, there are a lot of good
projects that don't get funded because the capital market doesn't channel funds properly to SMEs. It's a
problem of filtration. Things are improving because SMEs now have access to funding on 12- or 18-month terms, but at
very high cost." RZB plans to charge 12 percent interest on its loans to SMEs, due to the high cost of funds in
Russia. The bank has streamlined the loan application process to make it as straightforward and transparent as possible.
The one-page loan application form is posted on the bank's website. However, Perhirin noted that, of the
bank's 3,000 corporate clients, only 300 have got credit from the bank. "Most clients don't dare ask for
credit," he said, remarking that many Russian companies feel that they will not get loans from any bank, so it is
pointless in asking.
That said, Perhirin is keen to help budding entrepreneurs. "There are so many students coming out of university
now. It would be good if they could start a business. We have seen many clients - mainly IT companies - build a very
good business and become millionaires in two years. Russia is one of very few countries where that could happen.
I'm very optimistic." Other challenges Russia's banks face other challenges, too. The banking sector is
in dire need of reform. Indeed, Nikoil IBG Bank, a banking and insurance group with 600 points of sale, has called it
the country's Achilles heel. "There are 1,300 banks in Russia, but the funds they manage as a percentage of
GDP is small," noted Maarten Pronk, acting chairman of Nikoil IBG Bank. "If you have that many banks and each
of them has a president, directors and lots of cars, there's a lack of efficiency there." Apart from the
relatively small on-the-ground presence of RZB, Citigroup, ING and a limited number of other western banks, foreign
banks have been slow to move into Russia. Indeed, Boris Fyodorov, former Russian deputy prime minister and now honorary
chairman of United Financial Group, asked how China, with a different political system, could attract so much more
foreign direct investment than Russia, which has one of the most liberal economic policies in Europe.
Main obstacles facing Russian small businesses
Frequent checks and inspections
Licensing difficulties
Difficulties in raising finance
High taxation
Competition
Corruption
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