Vnesheconombank Deputy Chairman Mikhail Kopeikin’s Interview to TV Channel Russia-24
HOST: Why are small and medium-sized enterprises so poorly developed in Russia, why do banks extend credits to businessmen at such high interest rates, how is the state going to support businessmen – this what Vnesheconombank Deputy Chairman Mikhail Kopeikin told my colleague Irina Matjushenko about in his interview.
Reported by Irina Matjushenko
CORR: At present, the share of small and medium-sized enterprises (SMEs) in the Russian economy is evidently insufficient. For example, in European countries 60 and even 80 percent of budget revenues might be generated by small and medium-sized enterprises. Tell us why small and medium-sized enterprises are so poorly developed in our country?
Mikhail KOPEIKIN, Vnesheconombank Deputy Chairman: The main reason is that our small business is only 22 years old. I’d like to remind you that in 1988 a law on cooperatives was passed, which made it possible for cooperative movement and then small and medium-sized enterprises to develop. Over these 22 years the number of small and medium-sized enterprises as well as individual enterprises amounted to more than 5 million 600 thousand. Thus, their total number increased by more than 40 times. As far as this period is concerned, it’s a pretty good dynamics.
CORR: Vnesheconombank commits money to support small and medium-sized enterprises including monetary funds from the National Wealth Fund. Will you tell us how much money will be provided to small and medium-sized enterprises in 2010?
Mikhail KOPEIKIN: I’d like to start with the year 2009 because in terms of supporting small and medium-sized enterprises it was a critical year and the state committed a significant amount of funds to finance programs of supporting small and medium-sized enterprises. In particular, Vnesheconombank received 30 billion rubles from the National Wealth Fund, and moreover, Vnesheconombank contributed another 10 billion rubles to the Russian Development Bank’s charter capital. 30 billion rubles were also provided to the Russian Development Bank to implement the program of supporting small and medium-sized enterprises. So, 40 billion rubles were committed for supporting small and medium-sized enterprises.
CORR: And if we mean 2010?
Mikhail KOPEIKIN: We plan that only under the program of providing the state’s support for SMEs 55 billion rubles will be committed by the end of 2010. The total amount of funds to be provided to SMEs is scheduled to reach 100 billion rubles by the end of 2010.
CORR: You’ve said 100 billion rubles. Is this a large or a small sum of money on the national scale?
Mikhail KOPEIKIN: Compared with the year before last, or two, three years ago this is a huge sum of money, many times more than in the past. But if we mean support for SMEs in general this is a small sum. By various estimates, it’s about 2-3% of the amount of funds used to finance SMEs. In my opinion, a development institution’s goal is not to take the whole market or a significant part of it but, for example, to encourage those sectors of SMEs, which are not attractive for commercial banks and where risks are high. So, one of the most important lines of activity now is to provide support for SMEs operating in the innovative and high-technology sector.
CORR: Which companies are supposed to receive the said money in the final analysis? You’ve mentioned innovation business. And if we talk in general terms, which SMEs can receive the money in the first place? Are they trade or construction companies?
Mikhail KOPEIKIN: As far as SMEs are concerned, most of the funds are intended for wholesale and retail trade. Over the recent years about 40-42 percent of total credit resources have been committed for this sector. And I’d like to stress that 3.5 million people work in it. The manufacturing sector accounts for about 10 percent of funds. Two million people work in this sector. This is a structure that has remained unchanged for several years and banks lend to it.
CORR: At what interest rate are credits extended to businessmen?
Mikhail KOPEIKIN: I can say that two years ago an interest rate for the end borrower was about 19 percent, last year it was 17 percent and this year the interest rate ranges from 13 to 15 percent for a number of regions but not for individual borrowers and, of course, we are quite aware that SMEs, which start new businesses or implement projects related to innovations, high technologies or to monitoring these projects, run the highest risks. For this reason, we commit a part of funds to finance this sort of projects. We have already prepared several banking products. One of them is called “Innovation and Modernization”. To my mind, it is a very attractive banking product. The product provides for extending credits at an interest rate of 10 percent per annum. I’d like to draw your attention to the fact that there is a high demand for this product because credits are extended for a period of up to 5 years. This is a pretty long period of time, which creates favorable conditions for SMEs to develop successfully in the innovation sector.
CORR: 15 percent - this is a very high interest rate, isn’t it?
Mikhail KOPEIKIN: I think that a rate of 15 percent is pretty high. But I can say that a lot depends not only on Vnesheconombank but also on a specific region, borrower and many other conditions. As far as we are concerned, we firstly recommend the Russian Development Bank to set a minimum margin that is largely linked to monitoring a credit product. On the other hand, we limit regional banks’ margin to about 3-4 percent when we provide credit resources to them to support SMEs financially.
CORR: Business community has its own view on lending. For example, such organizations as Delovaya Rossia or OPORA ROSSII have repeatedly said that commercial banks are reluctant to lend to SMEs and even if they do, they extend credits to SMEs at extortionate interest rates and maybe it makes sense not to commit huge sums of money to fund SMEs but create a mild tax climate by way of reducing tax rates for businessmen?
Mikhail KOPEIKIN: To a large extent, a lot depends on the borrower’s financial standing. You’ve just mentioned the point of view of Delovaya Rossia and OPORA because they promote interests of SMEs. And I can express banks’ viewpoint. Banks would like very much to extend credits to a great number of borrowers on very favorable terms. But they believe that there are no good borrowers. And in many cases it’s not a matter of a bank that sets a margin of 25-30 percent it’s first of all a matter of the borrower’s quality. If it’s not clear if the borrower will return the money or not it will be refused a loan. But if there is a chance that the borrower will fail to repay a credit, a credit might be extended to it at a high interest rate.
CORR: This means that banks believe that risks are very high and credits might not be repaid?
Mikhail KOPEIKIN: Yes, risks are rather high especially in a period of crisis. Moreover, things associated with modernization and for the most part with innovations carry high risks. As I’ve already said, credits are extended for a period of up to 5 years and it’s not always clear what is going to happen to a certain project in 3-4 years and whether products to be manufactured by an innovation company will be in demand in the long run.
CORR: When do you think we’ll have interest rates on credits of 3-4 percent like, for example, in Europe? And what conditions should we create to this end?
Mikhail KOPEIKIN: In my opinion, we’ll be able to extend credits to SMEs at European interest rates when we have the same conditions like in Europe.
CORR: Mikhail Yurjevich, thank you very much for your interview.
Mikhail KOPEIKIN: Thank you.
Financing for Innovations and Modernization
Magazine DF, July 7 (44),
Objectives set in the programs of support for Vnesheconombank’s innovative projects go in line with the priorities of the government policy
Attention to the activities of Vnesheconombank in investment and innovation policy is well-timed not only because the bank has top rating positions on the market. Today, Vnesheconombank is one of the national development institutions, having received an official acknowledgement a few years ago when pursuant to the Federal Law «On the Bank for Development» it was granted a special status and became the State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’. Programs of support for small and medium-sized enterprises (SMEs) have been carried out for several years through the involvement of the Russian Development Bank (RDB), a subsidiary of Vnesheconombank. Recently, the Bank’s new programs of support for innovative projects have come to light. In addition, the announcement has been made about a new innovation and high-tech department that will operate within Vnesheconombank. The DF editors asked Mikhail Kopeikin, the Management Board Member and Vnesheconombank’s Deputy Chairman, to make a comment on the Bank’s innovation policies.
- Due to its program aimed at supporting small and medium-sized enterprises, Vnesheconombank has actually confirmed its status as a bank for development. VEB is viewed now not only as an institution involved in large-scale investment projects, interstate economic agreements but also as a crisis-management instrument for supporting the domestic economy as a whole including small and medium-sized enterprises. Are you ready to sum up the results of the activity in supporting SMEs for 2009 and specify plans for 2010? What’s the amount of financing already made and scheduled to be made? How many SMEs have received financing through Vnesheconombank’s schemes in cooperation with its subsidiary banks and regional partners?
-We were most active in our traditional work on supporting SMEs through the Russian Development Banks’ partner banks. For a period of one year 91 banks joined our program and as a result agreements were concluded for a total amount of 25.3 billion rubles. Up until now, SMEs have obtained 3 278 credits through banks.
The Russian Development Bank’s new line of activity aimed at supporting SMEs through infrastructure organizations yielded good results: 66 infrastructure organizations have become our partners and the value of agreements made is 8.7 billion rubles. Due to our active joint efforts infrastructure organizations entered into 1 390 agreements with SMEs.
Taking into account the objectives of promoting the development of the innovation sector set by the Russian Government, the Program of providing financial support for SMEs is scheduled to be increased to 100 billion rubles and instruments for providing financial support are also scheduled to be upgraded to transfer the Russian economy to the innovation and modernization path of development.
-As it became known, in its new strategy for 2010-2014 Vnesheconombank is to fundamentally change its attitude to modernization and innovation-oriented projects. Special emphasis is to be placed not only on projects linked to modernization of production facilities and import substitution but also on those, which are directly related to innovations. Do you also mean SMEs operating in the innovation sector? How is VEB going to draw up schemes of financing the said projects – would you like to use the existing channels by working with your subsidiary banks and regional partner-banks or would you like to devise a new scheme?
-This year Vnesheconombank’s subsidiary bank – the Russian Development Bank launched a Program “Financing for Innovations and Modernization”. Under this program, financing will be provided for both innovation projects (projects related to commercialization of SMEs’ own developments) and modernization projects (those providing for upgrading and renewing machinery, equipment and technological processes).
The Program is to be implemented by way of a two-tier scheme – through a network of the Russian Development Bank’s partner-banks. The information about the Program was communicated to all 97 partner-banks. At the moment, we are examining partner-banks’ proposals for implementing concrete projects.
As of today, we have received replies from 40% of banks and only 46% of banks that replied said that they were considering appropriate projects or that they were ready to submit them in the near future. Most of the projects submitted (all in all we received 71 project applications) are modernization projects, for which partner-banks would like to receive preferential terms of refinancing. Only 8 projects were innovation-oriented ones, that is, in line with the selection criteria. This fact reveals a serious problem Russian commercial banks are faced with: so far, they don’t have sufficient customer and credit technologies to finance innovation projects.
-What are the main objectives of the Program “Financing for Innovations and Modernization”? What terms of financing innovation projects do you mean?
-The Program “Financing for Innovations and Modernization” focuses on supporting small and medium-sized enterprises whose activities are in sync with top-priority development lines of science, technologies and machinery or top-priority lines of economic modernization.
In order to avoid financing perpetuum mobiles and various idealistic schemes we should select projects, which are at least moving from a startup stage to an expansion and growth stage. A criterion for innovation here is taken to be the availability of applicable patents, test data proving economic feasibility, ecological properties, energy efficiency and safety of technologies and products.
A two-tier financing scheme provides for funds to be made available to SMEs through partner-banks, which receive financial resources from the Russian Development Bank at an interest rate which is equivalent to ѕ of the Russian Central Bank’s refinancing rate (now it’s a bit less than 6% per annum) for a period of up to seven years. And pilot innovation projects could even be financed at an interest rate, which is equivalent to Ѕ of a refinancing rate.
Financial ratios of a project are as follows: the Russian Development Bank fully refinances a partner-bank’s credit to an SME provided that co-financing of the project through using the SME’s own funds should be no less than 15% thus being a guarantee that the borrower is serious in its intentions.
And in this situation, the Russian Development Bank works for the future: Russian banks, which are accustomed to taking real estate as security will gradually get used to working with more complex security for loans, for example, such as intellectual property.
Bank lending is of great importance for SMEs because it enables them to market their products faster, and given a significantly reduced new products development cycle in the world, it might prove to be critically important not only for identifying priorities but also for ensuring an enterprise’s survival.
-Another initiative by the Russian Development Bank is to set up a Fund of Direct Investments, which would enable the Bank to be directly involved in SMEs’ projects in the innovation sector thus minimizing risks and making these projects more attractive for investors. What resources are you going to raise for this Fund and how do you plan to operate this Fund?
-The Russian Development Bank’s strategy provided for establishing the said Fund of Direct Investments in order to provide non-credit support for innovation SMEs. This Fund’s competitive edge is in its close contacts with the Russian Development Bank’s partner banks in search for and monitoring investment projects. The Fund will be responsible for making long-term investments in innovation and modernization projects for a period of 5-7 years and as part of its current business among other things it will be also responsible for forming tier 2 capital. Under the existing terms, a partner-bank is to provide debt financing to the Fund’s customer throughout a period of investments (until the Fund exits from the capital of an innovation SME) in the amount of up to 60%of a project’s value. Financial ratios of a project also include the Fund’s investments in the amount of up to 25% of a project’s value. The amount of funds to be invested by a project’s initiator should be no less than 15%. The Russian Development Bank may consider participating in the capital and at the same time providing a partner-bank with financial resources to extend a long-term credit to an innovation SME.
The Fund’s size is scheduled to amount to 600 million rubles including 260 million to be invested by the Russian Development Bank. Organizational arrangements are to be completed and the Fund is to be launched till the end of 2010.
-What innovation fields does the Russian Development Bank regard as the most important ones? What requirements for projects does the Bank make when applying a credit financing scheme and upon financing through the Fund of Direct Investments?
-At the current stage of the Program’s implementation we are not planning to impose any strict sectoral restrictions. The main criterion for classifying a project as innovative is, as I’ve said before, the fact that an enterprise has applicable patents on the basis of which a batch production is planned to be launched. As far as modernization projects are concerned, top priority is to be given to projects designed to bring technological processes and equipment in line with the world’s standards and quality indexes for example ISO and GMP (Good Manufacturing Practice) standards.
Lending is designed to finance the set-up of batch production, purchase of new equipment, technologies as well as certification of products to bring them in line with the said standards.
A preferable stage of a project’s implementation is its transfer from a startup stage to an expansion and growth stage. An average amount of financing a project is 70-100 million rubles, given that the project’s initiator should invest no less than 15% of the project’s total value using its own funds.
As of today, the Russian Development Bank got down to implementing the first pilot projects of a number of mid-sized regional banks’ innovation and modernization customers in Voronezh, Chuvashia, Yakutia, Togliatti, Bashkortostan and Tatarstan. At present three first projects have approved for financing and another 16 projects are under consideration.
-What interest rate can we expect for final borrowers?
-We expect an interest rate for final borrowers to be no higher than 10% per annum in rubles. But to achieve this goal we have to resolve an issue of funding transactions within the Program. The Program “Financing for Innovations and Modernization” creates favorable conditions for improving quality of labor and productivity in the real SME sector. Thus, SMEs start to compete against foreign producers – importers. In order to encourage projects the Russian Development Bank should provide credit resources at minimum interest rates because innovation projects are very sensitive to the cost of funding.
-It’s also known that in its activity to support the innovation sector Vnesheconombank cooperates with other development institutions both financial and industrial ones. They include Rosnano, the Russian Venture Company, the Fund to Support Small Enterprises in the Scientific and Technological Sphere, the Federal Agency for the Youth Affairs, the Moscow Interbank Currency Exchange and OPORA Rossii – they are all in one form or the other involved in supporting small and medium-sized enterprises in the innovation sector. What is the agreement they signed aimed at? What objectives are they supposed to achieve at their working group’s meetings, the first of which was held this May?
-The agreement signed aims to set up an organizational mechanism that would make it possible to promptly exchange information on the projects being implemented and chose a support instrument for each project that is best suited for a given stage of an innovation company’s development.
This sort of cooperation is underway now – many parties to the agreement cooperate with each other on a bilateral basis. The agreement would enable us to systematize this work, establish optimal procedures for cooperation and develop unified approaches to selecting, examining and structuring innovation projects.
The working group was formed from representatives of the parties to the agreement to promptly coordinate the parties’ efforts. The working group’s first meeting discussed issues of ensuring a prompt exchange of information between the organizations, which are parties to the agreement. The meeting’s participants reached an understanding on making a list of pilot projects that would be supported financially as part of implementing the agreement.
We plan to hold the working group’s meetings on a monthly basis. We are going to discuss issues of “transferring” specific projects from one development institution to the other, given the available support instruments, and we are also going to discuss issues of joint participation in implementing projects.