05.01.2022 Zhivko Todorov: “The BDB has an enormous potential to help entrepreneurs.”

An interview with the BDB’s CEO for the Monitor information agency and newspaper

“Mr. Todorov, how did the pandemic affect the BDB’s work?”

“The pandemic has made its mark on the entire global economy and this could not have missed the banking sector. Despite the crisis, the BDB managed to preserve its liquidity and remains one of the best-capitalized banks in the country with a capital adequacy ratio of 34.29% (compared to 22.36% for the banking system). The bank’s liquidity coverage is 635%, with a sector average of 283%, which is a testament of its solid foundation.

The generally high liquidity and capital adequacy of our banking system have helped people to remain calm and did not allow the crisis to engulf the financial sector. To compare to 2008, the banking system’s capital adequacy back then was a bit under 15%, while in recent years it has been over 22%. The total gross amount of approved loans and advance payments under the so-called banking moratorium as of 31 October is BGN 8.4 billion, out of which – BGN 6.6 billion to enterprises, and BGN 1.9 billion are for households. However, the moratorium period expires at the end of the year and in 2022 we can expect a rise of the level of bad loans, which is a reason for us to set aside substantial reserves. This is a global trend and a completely natural process through which each bank ensures its resilience. If you look at the numbers, the provisions of American banks have also grown substantially – they have increased by 137% just in the 2020s. The situation in Europe is similar: the total increase of potential losses has been 113%. I hope these negative forecasts will not come true, which depends entirely on the lending and interest policies in the following months. Institutions like the BDB will play a part with balancing functions – their role in a crisis period is to act in order to compensate for negative processes.

“How do you evaluate the bank’s measures to reduce the consequences of the crisis – were they effective, or not?”

“I joined the bank in the midst of a crisis of unseen scale. The BDB had to act quickly and begin negotiations with the commercial banks in order to develop the measures as soon as possible. Our teams worked literally day and night since the regulations in the banking sector are substantial and they cannot be ignored even during a crisis. We kept changing the COVID programs on the move in order to take into consideration the feedback we were receiving by banks and their clients. I think we did well within the scope of our mandate. The program for interest-free loans to people who were unable to work during the pandemic is over. Additional resources were allocated to that program due to the significant interest in it. We have granted interest-free loans to the amount of BGN 254.6 million to nearly 53 thousand natural persons.

The business assistance program is still ongoing, and we proposed that it is extended until mid-2022. This program follows the course of the pandemic and ensures continuous access to facilitated financing for companies that need it. We have utilized just one third of its resources until now, with 2,000 loans granted to companies at the total amount of BGN 324 million.

I would be delighted if we could soon resume talks about an effective recovery process, and the word “measures” is no longer part of our daily discussions.”

“Which economic sectors have the most active entrepreneurs who are looking for ways to fund new business ventures?”

“The most frequent loan applicants to the BDB are restaurant and hotel owners and people from other tourist sectors that were the most impacted by the pandemic. This is why we have prepared a new program custom-made for the needs of this sector. This, of course, does not mean a refusal and lower interest on our part to grant loans to companies from other economic sectors that have a business plan for their development. We have also prepared a special product for lending of rose processors who are also having pandemic-related issues. We are adapting to the specifics of their work, because the collaterals there are different.”

“Did the Bulgarian business sector learn for what they should be requesting money?”

“The Bulgarian business sector is mostly looking not for loans but for grant assistance. Especially now, during the pandemic. When they are in trouble, companies avoid taking more loans regardless of the long repayment periods.”

“Are entrepreneurs managing to provide grounds to support their loan requests?”

“The ones who have worked with a bank are managing. As far as entrepreneurs with less experience, we help them provide grounds for their ideas or to rework their business plan. This is the so-called advisory function of the development bank. The BDB, just like other banks, requests that the business is operational and has the requisite collaterals. No bank will be willing to lend money to a company that has no chance of survival.

“Is there a difference between the documents processing time for a loan to a micro-enterprise compared to a large company?”

“Micro-enterprises are easier because the amounts there are at the level of consumer loans – BGN 35-50 thousand. There is a difference, however – no business plan is required for a consumer loan, and it is required for a micro-enterprise because the bank needs to know how they are going to develop their business in the following years. There is no difference between small, medium, and large companies because the documents are the same.

“If the bank is only providing small loans, does it risk incurring losses?”

“If the bank is well-managed, it will not be incurring a loss, but there will be no considerable profit either. The BDB has to find the balance between following the state policy with state guarantees and operating as a commercial bank in some niche sectors.”

“Are you saying the BDB will need state financial support? This is where many people will be quick to say we do not need yet another unprofitable enterprise?”

“This is exactly the question: we need to develop a model which allows the bank to be profitable and self-sustaining in order to not be a fiscal burden, and also to help higher-risk businesses or sectors of strategic importance which the other banks are unwilling to fund. If we manage to find that balance, part of the equation will be solved.”

“Are you seeing ways to achieve this balance?”

“I think one of the potential solutions is diversification of the BDB’s revenue streams and using programs that will be profitable to the credit institution to counterbalance the effect of high-risk companies which we have to support in accordance with our mission and the law. The Polish development bank is a good example – it runs the funds of state companies at considerable profit. The bank uses the proceeds to finance programs and projects that involve more risk, thus guaranteeing its stability.

“What do you think about the chances of the economy to recover quickly from the pandemic stagnation and to achieve higher growth?”

“We had significant political instability in 2021 that was impeding investors. Right now it is more important than ever that Bulgaria has a stable government that can enact a coherent policy, allowing us to attract investments.”

“The economy is currently experiencing issues with the high prices of electricity and gas. Are there loan requests for renewable energy projects?”

“We have a product for solar power facilities. We are financing the purchasing of photovoiltaics by businesses and we have a lot of interest. Unfortunately, the approval process for projects like that is extremely long. There are too many bureaucratic hurdles. We are expecting a lot more loan requests for endeavors of this type in the second quarter of 2022 because by that time the entrepreneurs may have succeeded to receive the necessary permits.”

 “Are there loans granted to large companies that may prove to be risky and to cause losses for the bank?”

“There is no credit – large or small – that does not involve a risk for the bank (unless it is 100% secured with a cash deposit). The BDB’s risk profile is generally much higher than that of a regular private commercial bank since the loans we are granting to SMEs and to certain sectors are not of interest to commercial banks because the risk there is higher. All of our loans are currently being serviced in accordance with the signed contracts and repayment plans. The bank is always monitoring the clients, their operations and financial capability to service their loans. Next year, when the moratorium on loans expires, there may be loans where the bank will set aside additional provisions.”

“How many of these loans have been repaid early and are there loans where the bank has requested additional collateral or has terminated the contract and has requested repayment?”

“When the Statutes of the BDB were amended and the exposures were limited up to BGN 5 million, some of the larger corporate clients did early repayments of their loans on their own. With others, we negotiated a gradual exit from their exposures in order to not hinder their business operations. It is very important to point out that this did not happen due to pressures; it was because the BDB could no longer increase its exposures to these companies. We are facing the challenge to replace these early repayments with new, smaller loans which will compensate the revenue lost by the bank, but will also have higher risks. This will also mean more provisions.”

“Which of the European development banks is the best example in your opinion?”

“The status of a development bank depends a great deal on the national policy. More banks in Europe that are similar to ours are working with state guarantees of the grantede loans, but BDB does not have that – as is the case in other countries. It is modern nowadays to talk about various innovations, but it is difficult to secure a collateral for them. State guarantees are recommended for businesses like that.”

“You mentioned the BDB’s balancing function – how can we measure the effectiveness of the bank? We have the impression that there is no single vision of the way to a positive impact of the bank.”

“The bank in its present state was created in the period of the financial end economic crisis of 2008-2009, when there was a need to ensure liquidity for the system and for the real sector. This is when the BDB Act was adopted. Nowadays, banks have substantial resources and the BDB can be of more benefit to them as a risk sharing instrument than as a main source of financing. I would welcome a constructive debate about the kind of development bank that we want to have, because there are many examples around the world of successful credit institutions of that type. From the German KfW to the Polish BGK, the Croatian HBOR and dozens of others. Before that, however, we have to answer a few very concrete questions. Do we want the BDB to be profitable and self-sustaining, or not? Do we want the bank to compete with other banks or, on the contrary, only to try and support them? If we focus on filling the gaps in the banking market, what do we think about the BDB becoming a “first aid bank” that helps enteprises in trouble and returns them to the market after healing? You would have to agree that, especially in the COVID era, persons experiencing difficulties also need support – especially enterprises that are important to a given region and are supporting jobs there. If we take into consideration the lack of sufficient entrepreneurial drive in Bulgaria, how can we work together to change the startup environment by encouraging and stimulating it? We must first answer these questions, and then we can have a normal, level-headed discussion about potential good solutions for the BDB. We are currently preparing the review of the strategy that was adopted at the beginning of the year and are trying to cover various viewpoints that are in compliance with the BDB’s mandate, the Statutes, and the law.”

“BDB will be launching a new digital platform soon. What gave birth to the idea and which will be its main advantages?”

“BDB has a huge potential to help entrepeneurs, but this will hardly happen with just a nice building at a central boulevard. The business is not only in Sofia, and our mission is to provide easier access to financing. We also know from our own experience and from our partnering development banks that, especially during a crisis or in suboptimal market conditions, SMEs need not only access to financing, but also to a wider range of services and communication in support of their business processes. This was one of the first things I wanted to change when I started work here. I wanted to make the bank more accessible, open, and communicative. This is why I am particularly happy that we have already taken the first step. At the end of 2020, we adopted a resolution to develop a digital platform that will help small businesses, and we have already accomplished it. Within up to three months, our clients and others will be able to use the platform’s full functionality.”

“What will be businesses able to do with this platform?”

“The biggest advantage of the Business Booster platform (https:// businessbooster.bg) is the opportunity for faster contacts with companies in the entire country. We have developed a module there that aims to educate and encourage young entreprenerus to take a chance and start their own business. At the so-called business academy, we have created interesting manuals and video lessons, as well as useful documents for the registration and development of a business. The platform also has its own Business Plan Wizard that generates a very well-structured business plan that entrepeneurs can use to apply at various financial institutions, not just for us. By the end of January, our first clients – the micro-companies – will be able to apply for a loan entirely online, without visiting the bank’s office. Business Booster provides another advantage – companies can create for free their own online store through which they can start selling. The next year we will also launch our own mobile app. We intend for our platform to be regularly updated and upgraded to make sure there will be something new for each visit.”

BIOGRAPHY

Zhivko Todorov has a Master’s degree in Accounting and Control from the University of National and World Economy and an Executive MBA from Hult International Business School in London. His professional career started in 1997 at ING Bank – Sofia branch where he became a financial director and a member of the Governing Board for Bulgaria. In 2012-2014, he was the chief financial officer and member of the Governing Board of Alpha Bank – Bulgarian branch. From 2014 until March 2020, he was the chief financial officer and member of the governing board of First Investment Bank. Under his leadership, the bank developed and implemented an internal policy for transfer pricing of funds and a cost distribution model, as well as a profitability calculation model at the business line, products, and clients levels.