Lending to small and medium-sized enterprises (SMEs) across Latin America is a tale of feast and famine. For Peruvian banks, things could hardly be brighter: they are thriving on the back of strong economic growth, low rates and savvy government moves to foster the market. Colombian bank lending has been growing fast too. SMEs in Brazil, on the other hand, face an uphill battle. They are encumbered by the world’s highest real interest rates and low economic growth together with a deadening bureaucracy. Even so, lending is growing and new laws to simplify company registration should help.
“SMEs find themselves sandwiched between microfinance and big companies. They get neglected while the others get all the attention,” says Greta Bull, programme manager, access to finance, Latin America and Caribbean technical assistance facility at the International Finance Corporation (IFC). She is helping to set up a new IFC unit to help Latin American banks get to grips with the market. It aims to galvanise banks involved in lending in the micro and large company sectors to move into the middle ground and encourage those already there to expand portfolios. Using best practices from other regions, measures include strategic planning, encouraging banks to work closely with clients and benchmarking.
Brazil’s uphill battle
It is going to be a long haul to help out in Brazil. The benchmark interest rate is a hefty 13%. “Very few Brazilian SMEs can borrow at all,” says Fabio Lacerda Campos, manager, access and financial services at the São Paulo arm of Sebrae, a government agency to promote SMEs. According to a proprietary survey, in the past five years only 36% of companies in the state had taken out a loan. That compares with 57% that said they would do so if it were cheaper and easier. The survey also found that the lack of bank financing has led to supplier-customer loans flourishing. The market experienced 70% growth over the period while bank lending shrank by 8%.
Bankers insist that the situation is turning around. Antônio Sérgio de Carvalho Rocha, executive director for SMEs at state-owned Banco do Brasil, says the bank’s portfolio grew 21.5% in 2005-06 and predicts a further 22%-25% this year – although much of it is through federally supported programmes that provide subsidised rates. Last year’s law on SMEs will make a big difference, he adds. It facilitates registration for companies and should curb the bank practice of driving small company managers to take out a personal loan at 4.5%-8% a month by refusing corporate credit. “This is a real revolution for the Brazilian market and we will see de-bureaucratisation and cheapening of loans,” he predicts.
João Roberto Teixera, corporate executive vice-president at ABN AMRO in São Paulo, agrees that improvements are under way. “The SME market in Brazil was not covered by the large banks,” he admits. That has changed. ABN AMRO, for one, has been expanding by selling credit portfolios to investors to free up its balance sheet and lend more. Furthermore, the securitisation market using discounted receivables is growing fast, and costs for SMEs as assets get packaged together.
The IFC’s Ms Bull is sceptical that capital market-based solutions will be effective in kick-starting the market. “In our experience, if you can’t get banks to lend, trying to get fancy solutions is doomed,” she says. That means the real spurt in the Brazilian market will have to wait until rates hit the single-digit level, perhaps in 2009.
Peru’s boom
The market could hardly be more different across the Andes in Peru, which is enjoying a boom. Not only are rates low – the benchmark was just 4.5% in January – but also the economy is expanding fast, at 6.7% in 2005 and an estimated 7.7% in 2006. The pro-business government and favourable legislation are leading to a rapid expansion of credit. José Antonio Iturriaga, head of small businesses at Scotiabank Peru, is riding that wave.
He attributes some of the growth to benign government policies. Peru has a very transparent credit bureau, which allows open access to banks and companies to check the credit history of companies. Small companies are well aware that it will be extremely hard for them to borrow again in the event of bankruptcy. That has kept default rates at less than 2%, says Mr Iturriaga. Brazil, by contrast, has privacy laws that prevent banks from sharing such information, another disadvantage for the country.
A simmering economy and sensible regulation translates into booming business in Peru. Scotia grew its portfolio 40% in the SME sector last year to $200m and Mr Iturriaga expects it to grow by nearly that amount again this year. Not only that, but lending is no longer confined to Lima, the capital city, and that is critical in a country that suffers greatly from over-centralisation. “Last year, my four most productive relationship managers were outside Lima, in provincial cities like Chiclayo, Arequipa and Tacna,” says Mr Iturriaga.
That geographical spread is partly due to to the mining sector, where there has been phenomenal growth because of the commodity price boom, says Mr Iturriaga. Bank clients are service companies, providing food and transport, for example. But it does not stop there: textiles have been booming in recent years because of the Andean Trade Programme, which allows some duty-free imports to the US. Also agriculture, which had been stagnant, has picked up substantially and is performing well.
Companies are falling over themselves to borrow. “Smaller companies are growing so fast that rates are no longer the determining factor in which bank they choose. The first priorities are speed and access to credit,” says Mr Iturriaga. The market is attracting foreign giants, such as HSBC and Santander.
Rates, too, are competitive in the sector. The average is 16% a year, which compares with about 30%-35% in the microfinance sector and 12% for large companies. “The difficulty is judging the creditworthiness of the smaller companies,” says Mr Iturriaga. Rates vary a lot between SMEs. “You can bet that not all the sales will be represented on the balance sheet of the very small companies.” And that means personal contact with clients and even providing help in drawing up balance sheets is critical, he says.
Hindrance to Colombia
Colombia sits in the middle ground. Its benchmark rate is 7.75% and its gross domestic product grew by 5.1% in 2005 and an estimated 5.4% in 2006. Giant Bancolombia, which has 60% of the SME market, is witnessing rapid growth in its lending to SMEs, according to Carlos Esteban Montoya R, director of the personal and SME vice-presidency. Last year, lending grew by 70% to small companies and 36.7% to medium-sized companies, while the leasing portfolio was up 74%, he notes. That level of growth is expected to decrease from those exceptional levels this year but will continue to grow at a fast clip. Commerce and services are the drivers due to low entry barriers and capital requirements, says Mr Montoya.
Things might be better still except for the government, which plays a mixed role. It has established a national guarantee fund, which grew 35.42% and has been significant in helping growth in the area. At the same time, Mr Montoya complains that regulation, particularly a maximum interest rate fixed by law, cuts the bank’s freedom and ability to lend. Poor financial documentation and bureaucracy in the process of obtaining guarantees are further hindrances, he says.
