Credit costs high for small firms despite rate cuts

Marcin Zarźbski saw the almost continuous interest rate cuts that started last year as a golden opportunity to get a favorable bank loan to finance the expansion of his computer business. But despite applying for credit at six different banks, he had to put his plans on hold when all the prospective lenders set their loan terms and conditions at prohibitive levels. "I cannot afford opening another shop based only on my own assets," said Zarźbski, who has owned a computer store in a prime Warsaw location for four years. "The banks do not want to (issue) credit to such an uncertain venture unless they boost their profit margins." Other owners of small- and medium-sized enterprises (SME) who have sought loans to expand their operations have also been turned away by banks or given what they believe to be unreasonable loan conditions, despite lower interest rates. The National Bank of Poland's (NBP) Monetary Policy Council (RPP) lowered the base interest rate - which helps determine loan market rates - six times in 2001. This year, it has dropped the key rate four times from 11.5% at the beginning of January. The RPP left the current base interest rate unchanged at 8.5% during its meeting last week, citing initial signs that Poland's dismal economy may be recovering.

Fear of bad loans But even if interest rates undergo further cuts this year, SME owner sare unlikely to receive favorable credit conditions, experts said, because of banks' continued fears about bad loans. "The average bad debt ratio in banks (now) amounts to as much as 17-18%, whereas two to three years ago it was at a safe 13% level," said Krzysztof Rykowski, the spokesman of the Warsaw-based Bank for Social-Economic Initiatives (BISE). "There is no significant drop in the recent number of granted credits - only more companies are not able to pay them back. This leads to an increase of the cost of credits, no matter what the interest rates are." Others agreed that high risk levels have deterred banks from giving SMEs more generous borrowing offers. "Interest rate cuts have an impact (on the conditions for credit agreements), but there are also bad debts that increase costs for the banks," said Michał Olszewski, an SME expert at the Polish Confederation of Private Employers (PKPP). Granting credits to small businesses is the most costly financial activity for banks, he added. The complex evaluations of credit-worthiness and repayment abilities to which banks subject loan applicants has meant that fewer SMEs can meet requirements based on their financial records. As a result, banks disqualify many small business owners with limited capital for down payments. "The methods of verifying the credit capabilities of SMEs have been improved, and as a result, the whole procedure is more complicated," said Mateusz Szczurek, a senior economist at ING Bank.

Kołodko in action SMEs are a vital part of Poland's economy, accounting for two-thirds of the of total employment and about half its gross domestic product (GDP), the total value of country's goods and services. The government has acknowledged the difficulties that small business owners face in trying to obtain financing. The new finance minister, Grzegorz Kołodko, is now implementing a recently released economic policy draft, which includes more government-backed loan guarantees for all companies, both privately owned and state owned. At a press conference last week, he stressed that Poland needed to revitalize small companies to embark on a path of fast economic growth. Yet, some economists say that the government guarantees may turn out to be an expensive solution. On average, the government already repays about 30% of all state-backed loan guarantees for companies that fail, Szczurek said. He added that increased spending on guaranteed credits would be a serious burden for the already battered Polish budget and suggested that the only solution to the problem would be for banks to maintain a credit-worthiness database of customers. Szczurek added, however, that it was improbable that such a solution would be implemented since it would "certainly be associated with the totalitarian methods of the past."