12.10.2023 Iliya Karanikolov, Chairman of the Management Board and Executive Director of the Bulgarian Development Bank: The European Commission trusted the BDB
The Bulgarian Development Bank has the richest experience in the country in the management of financial instruments.
By the end of 2023 or the beginning of 2024, the new portfolio of financing for small and medium-sized companies will practically replace the old portfolio of the bank, predicts Iliya Karanikolov, Chairman of the Management Board and Executive Director of the Bulgarian Development Bank.
Will the work of the Bulgarian Development Bank change and in what direction, Mr. Karanikolov, according to the new 2024-2026 strategy that you are currently discussing?
At the moment, the bank's team is preparing a SWOT analysis of the strengths and weaknesses of the current strategy - the tools we have implemented and the effect achieved by them, and only then will the development of the new strategy in cooperation with the business begin. So that we can implement in it only the best that small and medium-sized businesses need.
We are also preparing an analysis of the market itself because economic cycles imply different demand in different periods. The current period is characterized by high liquidity and low interest rates, with active competition between banks, so BDB had focused primarily on direct financing and guarantees to cover risk during the COVID pandemic. Considering the rising interest rates since the middle of last year, we believe that there is an opportunity to offer other instruments, mainly in the scope of indirect financing or through commercial banks, such as risk sharing or direct financing of commercial banks to support small and medium enterprises (SMEs) under preferential interest conditions. The goal of BDB is to find market niches with growth potential, where there is demand from market participants but limited supply. I am convinced that BDB, as part of the European family of national development banks, needs to strengthen its role.
Is this the main difference - if the previous one focused on guarantees, in the new one you see a greater opportunity to support small businesses by means of financial instruments through commercial banks?
It is quite normal that economic cycles require different support for businesses. In 2010-2012, for example, the bank provided instruments with a lower cost of the resource, and in combination with the resource of commercial partner banks customers actually received financing at preferential interest rates compared to market ones. When a crisis hit the market, there was a need to cover the banks' risk and support came in the form of the European initiative "JEREMIE". At the moment, conditions are changing again - the market is characterized by high liquidity but loans are starting to become slightly more expensive, and growth may reach 1 percentage point really soon. And the market itself is becoming more and more sensitive to the cost of loans. Then the role and tools of the development bank will change and the only thing that remains is the goal - to achieve financing under preferential conditions for small and medium-sized businesses.
What are the biggest difficulties that small companies face in financing their activities?
In the last two years, we have been doing regular research together with the National Statistical Institute. The data are categorical - 57% of companies state difficulties in finding financing due to insufficient collateral. Adding the 10% that have difficulty securing a co-debtor, in reality around 70% of companies have difficulty with collateral. The next problem is the lack of sufficient self-participation. Enterprises from the processing industry have the most serious difficulties - a quarter of the surveyed companies stated that they were experiencing difficulties. In general, the smaller the company, the greater the difficulties and the correspondingly limited access to financing. Micro- and small enterprises with a turnover of up to BGN 1 million experience the greatest difficulties - this is about 60% of them. In the case of medium-sized enterprises with turnovers over BGN 20 million, the percentage falls to 7-8. It is no coincidence that all the programmes that are made by BDB are focused on micro-, small and medium-sized businesses.
But until recently, the focus was on special customers with large loans...
Certainly the bank has performed reproachable actions in the past, but at the moment, with the programmes and tools we have developed and are running, we are replacing the old portfolio that we found with a new one formed only by SMEs. My prediction is that the trend will be reversed by the end of the year, maybe early next year at the latest, and the new SME funding portfolio will effectively largely replace the portfolio that you are referring to.
Does this replacement have anything to do with the bank's financial results for the last year, the reversal from loss to profit?
In fact, the financial results in 2020 and 2021 are the result of provisions and impairments made in connection with the BDB portfolio formed under the COVID recovery programmes, as well as for part of the credit portfolio, and the assessment is rather conservative.
At the moment, the bank is fully financed by its lending activities. For the first six months of 2023, we have a 394% increase in the portfolio of newly granted loans compared to the same period last year.
We do our best to provide a resource through programmes that are in demand by businesses.
For the first half of 2023, we have generated about BGN 30 million in profit.
You are shifting the weight of the bank's portfolio to SMEs, but what happens to the large bad loans that have generated a lot of noise?
We are experiencing some difficulties related to poor governance in the past, but I think we are overcoming it. The bank's team is doing very well with the restructuring of a large part of these loans. We have made and are making a lot of efforts, and the most important thing is that we do not lose principal, we do not lose interest, i.e. the bank will get back all the loans that it has granted.
How did the limit of BGN 5 million per single loan granted affect the work of BDB? Are there exceptions to it, is this limit an obstacle to the bank's work, and do you plan to change it?
A limit of BGN 5 million cannot help but hinder the business of a bank. At this point, the limit seems reasonable. The average amount of direct loans granted is well below this threshold. I am confident that the period of large loans is definitely behind us. With a very clear mandate from the government - on a specific occasion or support programme, a reasonable amount of restriction will obviously be considered, if at all necessary, in accordance with the tasks set before the bank to solve. There are currently some concerns about the long-term sustainability of the bank's business model. But we are trying to implement our business support plans within the current framework, which is difficult but not impossible. In reality, many new deals are being looked at now, which puts the teams and the bank to the test and focuses on the internal transformation and efficiency of the processes.
It has often been asked, does the existence of a state-owned bank make sense - what is your answer?
In recent years, development banks have been established in Romania and Greece. In reality, all EU member states now have their own development banks. These countries have long appreciated that it is a tool for advancing state policy - an elegant way of multiplying the effect of policies. Because every lev that we give as guarantees or financial instruments is multiplied by the attraction of private resources. If we provide one lev and it results in 9 or 10 levs of financing for SMEs, then this is a 10-fold increase, and these levels are achieved by our guarantee instruments.
The Bulgarian Development Bank has the richest experience in the country in the management of financial instruments. This is the place from which commercial banks look for support for their portfolios, this is also where they come when there is a need to obtain co-financing on a loan. The development bank is the institution that can ideally translate and multiply the effect of the state's economic policies.
If there is any drawback, it is rooted in the fact that BDB is a commercial bank with the regulatory restrictions on commercial banks - sector restrictions, limits, and at the same time our main goal is to support the public policies of the state.
You also have experience in the private banking sector - how are the challenges different in a state-owned bank like BDB?
Commercial banks think primarily in terms of profitability. I clearly remember my first meeting with development banks at the Thessaloniki Economic Forum in 2011, how very out of date we were, coming from a commercial bank, to talk about profit, return on capital and assets, and all such ratios that commercial banks are proud of. A development bank means thinking about market niches with prospects for development but demonstrating the weaknesses of the market supply. Once upon a time, when I started this adventure in 2011, commercial banks only granted loans to companies with 3 completed financial years. With the support of BDB and the Fund of Funds, it is no longer an accident to look for just one completed financial year. In fact, this is the meaning of public support - to enter certain undervalued segments of the economy at the relevant time. When BDB launched its first guarantee scheme for financing aquaculture projects, there were only 200 loans granted in the entire banking system at that time. Now, and years later, things are radically different.
On the other hand, there is the challenge of working with partner banks to support the business. So BDB needs to be well aware of the market, trends and demand within a medium-term period of about 2 to 3 years when preparing its products if it is to be adequate and provide the support that SMEs are also looking for.
Speaking of policy translation - BDB has recently been accredited by the European Commission; what exactly does this mean for the business?
BDB is the only institution in Bulgaria that successfully passed an extremely difficult approval procedure and received accreditation as an InvestEU Implementing Partner. The European Commission trusted us and we can now implement projects on its behalf. The Bulgarian state also trusted us - EUR 125 million from the budget of the operational programmes will be implemented under InvestEU through BDB's financial instruments. By adding a guarantee in the amount of EUR 40 million from the European Commission, which we won ourselves through a tender procedure, by the end of the year we will launch a procedure for guarantees for about BGN 3.2 billion.
I want to point out that our instruments have the highest leverage in Europe - we will achieve an almost 10-fold increase in our funds under management, which will reach the business, compared to the standard 2 to 4-fold increase. I think that this is the example that will be the focus of the European Commission in the coming years. Furthermore, we recently signed a contract with the European Investment Fund under the InvestEU programme and we are already lending under various projects related to innovation, digitalization, green transformation, social activities - with relaxed conditions, such as a reduced requirement for collateral or co-indebtedness, etc. There is also a price reduction, in some cases as much as 6% over our risk-based pricing.
What criteria did the bank have to meet in order to receive this accreditation from Brussels?
It took the bank about 2 years. To meet the requirements, we redesigned a significant part of the internal control environment related to risk management, portfolio control, spending of funds, procedures for selecting partner banks, publicity and prevention against money laundering and much more. In reality, our entire internal control environment has been subject to review and confirmation by auditors appointed by the Commission. It was difficult, but we are satisfied and I think that at the moment both the Commission itself and some of the commercial banks are enthusiastic about what we have been able to achieve within these two years.
How is the financing under BDB's Accelerated EU Funding Absorption Facility going?
This is one of the most successful programmes that the bank has created. It has an indicative budget of BGN 60 million, and for the first two months alone, almost half of the funds have already been allocated.
The programme is in demand because we offer one significant advantage - we provide up to 100% financing with no additional collateral other than the EU funding contract that our customer has won and, accordingly, the grant that they will receive when they implement it.
We try to consider applicants within a week to ten days. With the entry of the bank's new Management Board, we found an approval process lasting a few months; our team's goal is to make this happen within a week.
And what is the interest in the green energy programme?
BDB has financed projects with a total capacity of 18 megawatts located throughout the country. We cannot compete with commercial banks in terms of the cost of loans, but we offered less self-participation and less collateral without underestimating the risk. We currently do not have a single loan that our assisted customers are experiencing difficulty with. Green transformation projects are the main focus for both InvestEU and the European Investment Bank, from which we received BGN 350 million. BDB's commitment is to direct a minimum of 20% of this resource to green projects, and with the help of EIB we are introducing internal rules and procedures for evaluating these projects. Our desire is to be truly recognized as a bank focused on the Green Transition with a focus on transformation. We will try to raise the awareness of our customers in this direction, because here we are talking about solutions related to reducing the energy intensity of production, extending the life of existing products, recycling materials - everything that is related to environmental protection and reducing our footprint on it.
Have you taken stock of the bank's COVID programmes where you have quite a loss provision?
Under the COVID programmes, the bank granted more than BGN 880 million in loans, of which almost 60,000 loans were for individuals in the amount of BGN 254 million, and for companies they were just under 2,900 in the total amount of BGN 630 million. At the moment, about a third of these funds have been repaid. Below 10% are the loans overdue by more than 90 days, and I would like to note that this is still not a loss. Of course, compared to 4% arrears in the portfolios of commercial banks, the situation is obviously a little more complicated, but we must not forget the time when these loans were granted. For the people to whom they were provided, the most important thing is that help came on time. My experience shows that if you delay in making decisions, you may end up with no one to help. So I think that the 10 percent distressed loans at the moment are perfectly acceptable to the bank. The possible risk of the borrowers becoming insolvent was already taken into account by the decision of the Council of Ministers, when the bank's additional capital injection was granted. I think the programme is doing great and I believe that the people who were helped are responsible enough to respond appropriately to the state's support and to repay the funds provided to them so that they can flow back into supporting the Bulgarian economy.
You have worked for the state for most of your career. Was it by coincidence or a matter of choice?
Maybe it was a coincidence at first. I have had the honour of participating in the preparation of Bulgaria for the management of structural funds after our accession to the EU in 2007. I started as a financial controller and part of the team that implemented the first grant scheme that Bulgaria implemented under a memorandum in 1999. After that, it was natural to move to commercial banks as well, after they focused on business support in the implementation of grant projects. After all, my graduation thesis was related to risk management. Then, with my appointment at BDB, my expertise in general synergy of the functioning of a bank and public administration was somehow supplemented. With the then team, we made the first guarantee schemes - in agriculture, in the field of aquaculture; we structured various national programmes, including the first energy efficiency schemes.
I actively participated in the construction and the first steps of the Fund of Funds. And then, in connection with BDB's preparations for InvestEU, I rejoined the bank with a focus on accreditation and structuring of financial instruments.
But you have also worked in the private sector.
My first contact with the market at all was in the trade in fast-moving goods. I have also been a consultant in large projects in the field of transport. But the state gave me a way of thinking. The way of working with regulations, laws and by-laws. In private business, the focus is on money, how it is made, profit, profitability, etc. Whereas that punctuality, the accuracy - the article, item and paragraph to lean on - to collect the information and analyze it is something that only the state can give you. And I am extremely grateful to it for giving me this opportunity.
Apart from being efficient and that you like short deadlines, what else can be said about your personal management style? How do you choose your team?
I like to open new horizons and give "wings" to my team to achieve the results that I am looking for. And they are not small at all. In fact, I always seem to set big goals for myself and strive to achieve them, capturing the attention of the people I work with.
There are two main things that I value for the people in my team - trust and a responsible attitude towards duties. The option where someone else thinks and you execute is not what I am looking for. There must be responsible people in the team that I can have confidence in. People with drive with whom I can discuss, debate, argue a lot - I never enter a conversation with a predetermined opinion and want to come out with it. I.e. I don't convince my colleagues but I expect that together we will find the best solution, looking at it from different aspects. What I appreciate is that people don't think in boxes but give the options of how something can be done, not how it can't be done. If you have a justification, if you have arguments, there are no problems for them to be heard and for the best solution to be found. I have many similar examples in my practice. In this type of institution, the framework is conditional and I try to give this confidence to my team as well. I want BDB to achieve its goals effectively.
ILIA KARANIKOLOV IS CHAIRMAN OF THE MANAGEMENT BOARD AND EXECUTIVE DIRECTOR OF BDB
Iliya Karanikolov has over 20 years of experience in banking and finance and substantial knowledge of BDB from his position as a member of the Management Board and Executive Director during the period 2011-2013. From 2007 to 2011, he was part of the Eurobank Bulgaria (Postbank) team. His professional career includes working at the Ministry of Economy and Energy and the Ministry of Labour and Social Policy. He has comprehensive expertise in public administration, European integration, EU strategies and programmes. He has lectured on topics such as cost-benefit analysis of large infrastructural, municipal and private projects, control of structural funds, financial instruments, etc.
From 2016 to 2017, he was part of the Fund of Funds’ Management, where he held the position of Deputy Chairman of the Management Board and Executive Director, and in 2021 he was Chairman of the Supervisory Board of the Fund. He has been BDB’s Head of Financial Instruments since 2019.
Mr. Karanikolov holds an MBA from the University of National and World Economy in Sofia and has specializations in Artificial Intelligence (University of Helsinki), Management of Financial Instruments (London), Credit Risk (Prague), Management of Structural Funds (Brussels, Maastricht, Dublin) and many others.