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Bulgarian Development Bank’s on-lending programs evolve

Few people know that among the distinguishable functions of development banks is granting resources via other financial institutions. In addition to lending such resources might also be hybrid: in order to share the risk, or in the form of bank protection when granting the loans. Since its establishment 21 years ago Bulgarian Development Bank has created 15 programs for indirect financing via 20 commercial banks and 15 non-banking financial institutions in the country. Loans to the total amount of more than BGN 1,7 billion have been financed or guaranteed via them. The figure is impressive.
Banker Daily tells details on the topic

The Development Bank has implemented 15 programs for indirect financing via 20 commercial banks and 15 non-banking financial institutions in the country since its incorporation to date. Financing and guarantee agreements to the total value exceeding BGN 1,7 billion have been entered into via them. Nearly 10,000 Bulgarian small and medium-sized enterprises have been supported under the programs.

The Bulgarian Development Bank Act passed in 2008 gave the impetus to that activity of the state-owned bank. In that period of severe economic crisis the state made a targeted increase of the institution’s capital by BGN 500 million intended for indirect financing of SME.

”The need of such financing was palpable because the situation forced most commercial banks to limit the lending of credits or to grant loans at higher interest rate reflecting the higher risk they were taking under the conditions of an economic crisis,” Development Bank officials remind us.
Bulgarian Development Bank is the only bank in Bulgaria that provides indirect (on-lending) financing to other lending institutions. It is about providing financing facilities, most often target credit facilities for them by which the intermediary institutions can form portfolios of sub-transactions in favor of target groups of end borrowers. As a rule such financing is long-term one, at attractive prices and is intended to provide credits at pre-set, more favorable conditions, mostly to small and medium-sized enterprises.

To get a better impression it is important to specify that this type of financial institutions have two operating approaches. One is procyclic: as the market goes so too the Development Bank acts. The other approach is anticyclic: in the case of the second approach the bank strives to meet the needs of the market by filling in the “gaps” of shortages of financing or impeded access to financing without aiming to maximize its profits.
After the Act on its operations was passed Bulgarian Development Bank shows its intended purpose as well as the approach it has chosen.

”In 2008, the first two on-lending programs of Bulgarian Development Bank were created: for SME and for agricultural producers. Thus, the banks were provided with low-interest, long-term financing as the credit institutions were obliged either to grant loans to such enterprises within a certain period, or to recover the financing that has not been used as intended,” some long-serving employees of the state-owned bank say.
What the small and medium-sized business needed was precisely that type of fresh funds in order to “raise its head” and overcome the consequences of the 2008-2009 financial crisis at the time.

Subsequently, in 2011 (in cooperation with the German Development Bank), in 2012 and in 2014, Bulgarian Development Bank consistently created three more programs. The first two of them are again aimed at small and medium-sized business while the third one is a sector product intended for the agricultural producers.
”Most products are aimed at small and medium-sized enterprises in order to cover as many businesses as possible. About 90% of the enterprises in Bulgaria fall within that range,” Bulgarian Development Bank officials explained the strategy of the programs.

The state-owned bank officials add that the on-lending in its classical form was more actively sought by the banks until 2014-2015. Thereafter, their appetite for financial resource to borrow from the Development Bank decreased palpably, mostly because of the high liquidity on the market.

“Thus, we had to adapt to the changes. It is precisely at that time that we responded to that lack of interest in classic indirect financing by our first hybrid instrument: on-lending financing plus a guarantee commitment,” remind the bankers.
After that change the partnering banks again had to grant loans to SME, the difference being that now they had protection in the person of Bulgarian Development Bank, by sharing the risk of their losses.
The other direction the Development Bank had to adapt in was the type of financial intermediaries and indirectly financed the sub-transactions.

Since 2016 the Bank has started and established partnerships with financial intermediaries being non-banking financial institutions registered with the register of financial institutions kept by the Bulgarian National Bank under article 3а of Credit Institutions Act.
From purely credit transactions with SME end borrowers the bank transitioned also to finance lease sub-transactions as it subsequently upgraded its operations by providing an opportunity for indirect financing of operating lease financial institutions as well.

”We work mostly with well-established financial intermediaries. In our choice we are led by what volume of clients our partners can take, what their distribution network is and what their capacity and potential to generate benefits for SME is. We are also paying close attention to the quality of their portfolios,” explained the experts.

In its quest for new partners, new market niches and new opportunities for being the bank has also created a program aimed at mutual credit cooperatives registered with the Bulgarian National Bank. These organizations provide loans to their members who are private farmers. They make an introductory contribution to the capital and on the basis of such contribution they can obtain financing. There are statistics according to which the farmers in Europe are financed to a much greater extent via institutions operating on a credit cooperative basis. “Bulgarian Development Bank finds its role here because those credit cooperatives usually receive financing from abroad and not from Bulgaria. And when such financing is decreasing their capacity to develop their operations here is also reduced because as a rule the non-banking financial institutions, as ones carrying out operations competitive to the ones carried out by the commercial banks, obtain attractive financing from them more rarely,” Bulgarian Development Bank officials explain relying on the information provided by the credit cooperatives.

It is a statutory principle that the state-owned bank must act by the rule of market compatibility and for this reason such organizations are not its rivals.
“We do not measure our results with the commercial banks, we do not aim to maximize our profits, we do not set as our aim to attract clients at the expense of others. Being an instrument of the state we aim to enter where there is some non-optimal market situation characterized by shortage of lending resources or borrower-provided collateral, or by unsatisfied demand and impeded access to financing, respectively. In this case the non-banking financial institutions, including the credit cooperatives emerge as potential, natural partners, albeit on a much smaller scale, compared to the commercial banks and the products for SME offered by them on the market,” Bulgarian Development Bank officials share.

In most programs of Bulgarian Development Bank there is an important peculiarity: setting a maximum price when providing financing to end recipients. To put it otherwise, there is a maximum profit the banks and the non-banking financial institutions can make with respect to their clients. By taking resources from Bulgarian Development Bank they must bring their income and requirements for security interest into conformity with the restrictions under the relevant on-lending program. “Our philosophy is that in order that someone can benefit from such cheaper and long-term financial resources or credit protection they will have to transfer such benefit to the end recipients as well, i.e. the small and medium-sized enterprises. Not to keep the better condition with themselves but to transfer it to their clients,” Bulgarian Development Bank officials explain. It is important to clarify that the maximum permissible interest rates or percentage of annual costs of end recipients are among the main framework conditions set under the programs of the Development Bank.
Bulgarian small and medium-sized business can purchase at very attractive prices assets and equipment thanks to the Leasing Line on-lending program. It is aimed at all leasing companies registered with the register kept by the Bulgarian National Bank. In their turn, they must provide the resources to Bulgarian companies that want to purchase movable property for their small and medium-sized business. The start budget of the program is EUR 25,000 as BGN 42 million have been agreed upon with the intermediaries so far. The maximum amount of the credits for lease of machinery and equipment is up to EUR 500,000. The annual rate of interest or the price of the financing for end lessees, together with the management and application processing fees may not exceed 6.5 percent.

The OL/4/SME program for operating lease continues and extends the opportunities under the finance lease program. The idea is that it will facilitate the conditions for use of operating lease of machinery and equipment for small and medium-sized enterprises.

“Operating lease is making an increasingly serious entry as a service in Bulgaria and the Program found the precise time for its launch. Unfortunately, the outbreak of the Covid 19 epidemic subsequently changed the situation very much,” Bulgarian Development Bank officials explained. The start budget of the program is EUR 30 million as until now the bank has partnered with two financial intermediaries by entering into contracts for slightly more than EUR 6 million.

The other program of Bulgarian Development Bank the business can indirectly benefit from is “Cosme+”.
“Under this program Bulgarian Development Bank, with the support of the European Investment Fund, continues its tradition as in addition to on-lending financing, it takes on an even higher percentage of guarantee commitment in favor of its partners. To put it otherwise, Bulgarian Development Bank makes cheap and long-term resources available to the financial intermediaries by obliging them to again enter into long-term sub-transactions with SME with it under standard maximum rates of interest. On the other hand, Bulgarian Development Bank takes on a guarantee commitment to the financial intermediaries: in case that the loan under a sub-transaction is called due ahead of schedule Bulgarian Development Bank shall take on up to 60 % of the loss of the financial intermediary with respect to the small or medium-sized enterprise,” Bulgarian Development Bank officials explained.

The bankers also added that the program provides Bulgarian Development Bank’s partners with comfort by increasing their appetite for taking on risk and for financing, and stimulates them to be more open to the business.
In that program Bulgarian Development Bank has partners among both the banks and the non-banking financial institutions. So far, BGN 52 million have been agreed under it.

Bulgarian Development Bank takes into account the successful performance of the partnering commercial banks in the indirect financing of the small or medium-sized business by the "NAPRED" program. Its budget is BGN 150 million. The maximum amount of individual exposures to end recipients is BGN 3 million. BGN 140 million have been agreed upon with the partners under the program: Bulgarian American Credit Bank, Investbank, Post Bank and D Commerce Bank.
The Development Bank also works on the on-lending program for credit cooperatives of private farmers. The start budget of that program is BGN 15 million. The maximum amount of the credit for investment and working capital financing of the farmers being members of the credit cooperatives is BGN 50 thousand. The annual rate of interest may not exceed 8.5 percent. The total amount of the fees and commissions may not exceed 1% per annum.
The two most recent COVID programs of Bulgarian Development Bank are proof that its programs are transforming in relation to the market.

”Our two “COVID programs” we are implementing as mandated by the Government are aimed at natural persons and SME. Under them, what we offer is not lending resources but providing guarantees while meeting the needs of commercial banks,” Bulgarian Development Bank officials explain. Under them no financial resource is made available to the banks but only credit protection such as the portfolio guarantee.

Since Bulgarian Development Bank works on those programs by decision of the Government they are not typical market products but currently they are very topical and are the focus of increased interest..
The program aimed at the people who have suffered by the pandemic provides portfolio guarantees in favor of the commercial banks that grant interest-free credits to the amount of up to BGN 4,500. Under it Bulgarian Development Bank
provides guarantees for nearly BGN 170 million.

According to the most recent data, as at 14th September, the partnering commercial banks – Allianz Bank, DSK Bank, Investbank. International Asset Bank, UBB, Municipal Bank, First Investment Bank, Post Bank, Raiffeisenbank, D Commerce Bank, Central Cooperative Bank, and UniCredit Bulbank – have approved 17,907 requests for approximately BGN 75 million. More than 29,000 requests have been received for the first 5 months since the start of the program. More than 70 percent of them are from persons employed full-time and the remaining are from self-employed persons. 1,215 more requests are currently being processed. The average value of the approved loans is. BGN 4,225. The deadline for application is until the end of 2020.

The COVID- program aimed at the companies that have experienced difficulties in 2020 due to the pandemic stipulates guarantees for approx. BGN 650 million. The companies having made use of the measure so far operate in the sectors most affected by the pandemic, and namely: transport, tourism, hotel and restaurant keeping, wholesale trade.
The amount of the credits is up to BGN 300,000, as both new and existing exposures may be guaranteed. The loans enable a longer grace period of up to 3 years, and are granted at easier requirements for the borrower-provided collateral: not more than 20% of the amount of the financing sought.

The Development Bank officials said that they also launch a new program: “BROD” which is a continuation of the “Cosme+” program. Its resource is EUR 20 million but there is an option for increasing it.
“Currently, we are accepting offers. For now the partners with whom Bulgarian Development Bank has already been working with take an interest in it. We managed to establish good partnership relationships with them. We expect more non-banking financial institutions to join because they need long-term and low-interest financing they generally have greater difficulty obtaining from the commercial banks. We have found that niche and we are working in it which is typical for the mission of a bank,” Bulgarian Development Bank officials say.