29.12.2021 BDB prepares new strategy for sustainable development and green investments

Small and medium-sized enterprises to drive sustainable recovery

There is hardly a more recurrent refrain in the public policy conversation than that of supporting SMEs as the backbone of the economy. The results of a BDB study have confirmed this fact. SMEs have the potential to be the locomotive of growth for the Bulgarian economy and have the resources to achieve sustainable development. SMEs represent 99.8% of all enterprises in Bulgaria, create 65% of the added value in the economy and 75% of the jobs in the country. However, they have the lowest average productivity in the EU.

The BDB study shows that their problems have been exacerbated by the pandemic, but beyond its effects, difficulties remain, such as:

- High energy consumption: 3.5 times more energy inputs per unit of GDP than the EU average.

- Lack of management capacity, human and financial resources – at a disadvantage compared to large corporate clients.

- Need for not only ordinary financing but also business training, brokerage, advice and guidance on business management.

- Insufficient investment in corporate innovation, modernization and international collaborative chains.

The study shows that the requirement for multiple documents complicates the application process and presents an additional obstacle to the development of small and medium-sized businesses.  The needs require more flexible lending conditions and the use of guarantee and facilitation instruments to remove the most common obstacles to seeking bank finance: insufficient collateral, the lack of a solvent co-obligor for new businesses, and the lack of own money in investment. This is particularly important given that three out of five companies (58.6%) are securing the necessary funding through bank loans for business expansion and planned revenue growth.

A survey among Bulgarian companies that use banking products from BDB on the effects of these products on their business shows:

1) An increase in the number of employees in the company; 2) an increase in annual turnover; 3) energy efficiency and 4) cleaner production.  When considering their additional effects, the largest increase is expected in the companies’ annual turnover, with an estimate close to the maximum.

Very important for the Bank's new strategy is the response of companies on how much financing they need. Over half (53.9%) of those who will seek external funding in the next 6 months will apply for amounts up to BGN 350 thousand. The second largest group in terms of relative share are those who will seek funds from BGN 350 thousand to BGN 1 million, with a relative share of 27.7%. Only 3.8% of the companies need financing above BGN 5 million, as this type of loans is needed by the companies to the greatest extent when expanding exports.

The Green Transition

The second part of the survey focuses on the so-called green transition and how familiar managers are with new regulations and changes for businesses.  Managers' responses show that only a fifth (19.7%) of them are familiar with the new regulations, and half (45.1%) say they are only partly familiar. Awareness of the companies in different areas of the economy is almost the same, but the survey clearly shows the need for an explanation and information campaign about the conditions and parameters of the Green Transition.

This is a particularly important issue because investments in green and sustainable projects will follow new rules and logic. Along with the financial parameters of the business, banks will assess the environmental and social aspects as well as the path to reach climate neutrality (zero carbon emissions). The new framework for assessing business models and investment projects will be a challenge and a new regulatory burden for small and medium-sized enterprises. European legislators plan to alleviate this regulatory "green" burden by applying rules proportionate to the size and complexity of the business. Banks, which in turn must provide the necessary resources for the transition, will also have to explain the new rules for obtaining its financing.

This is also evident in the BDB survey. Nearly three-quarters (71.3%) of executives believe that banks need to provide information about the new green standards to each of their customers. When asked how the Bulgarian Development Bank could be useful for their transition to a green economy, representatives of 7 out of 10 companies (69.8%) mentioned targeted green loans, 50% thought the BDB could be useful through information and advice, and 24.2% of managers mentioned guarantee products.  The survey can be viewed in the attached file.

Based on the survey, BDB is already planning its strategic objectives, new financial programs and instruments for the 2022-2023 period. In response to business needs, the Bank has already launched several loan products to assist companies. The first group of loans targets companies that find it difficult to obtain financing due to lack of collateral – Business : Creative : StartUP.  And the second facility responds to companies' growing concern about the cost of electricity and increased demand for power. Through it, companies can obtain financing to build photovoltaic plants for their own use or for sale.

The new SME lending model, linked to recovery from the pandemic and support for green investments, will be implemented through risk sharing with international financial institutions and the state, regular analysis of lending barriers and unresolved market bottlenecks, and new, more lenient and flexible financing and product terms.

  • Sofia Kasidova, Iliana Andronova, "Strategic Analysis and Development of BDB"
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