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Interview : Conditions Of WB SME Development Credit Are Unique

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  • Interview : Conditions Of WB SME Development Credit Are Unique

    INTERVIEW : CONDITIONS OF WB SME DEVELOPMENT CREDIT ARE UNIQUE
    Artur Yernjakyan, Lilit Aslanyan

    ArmInfo
    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.
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