Support for Small- and Medium-Sized Enterprises

Annual Report 2013
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# Support for Small- and Medium-Sized Enterprises

Vnesheconombank views developing SMEs as one of the crucial prerequisites for the economic development.

Undoubtedly, affordable debt financing for SMEs is a key to their rapid growth.

SME Financial Support Program (the Program) is designed to provide SMEs with access to inexpensive credit resources with a desired maturity. The Program is run by Vnesheconombank’s subsidiary OJSC Russian Bank for Small and Medium Enterprises Support (SME Bank).

A considerable emphasis is also placed on upgrading the available mechanisms and devising the new ones to support projects delivered by SMEs, in particular, using the funds raised from foreign and international financial institutions.

## SME Financial Support Program

In order to implement the Program, Vnesheconombank increased the SME Bank’s capital and provided the subsidiary with long-term credit resources.

Overall, Vnesheconombank channeled RUB 12.5 bn, of which RUB 0.542 bn – in 2013, to increase the subsidiary’s authorized capital.

As at 01.01.2014, the amount of long-term loans extended by Vnesheconombank to SME Bank totaled RUB 41.8 bn (as at 01.01.2013 – RUB 39.0 bn). The year under report witnessed a number of practical steps intended to put into practice the Memorandum of Understanding signed in November 2012 between the Permanent International Secretariat of the Council of the Baltic Sea States, German development bank KfW, and Vnesheconombank. Under the USD 110.0 mn loan facility opened by KfW, Vnesheconombank raised USD 87.0 mn worth of funds and extended same as a 5-year loan to SME bank. The funds are earmarked to finance innovative projects delivered by non-trading SMEs in the Northwestern Federal District as part of a pilot financial initiative for Russia’s Baltic Sea regions (St.-Petersburg, Leningrad Region, Kaliningrad Region), as well as Pskov and Novgorod Regions.

When carrying out the Program, the priority should be given to regions with a tough economic environment, and, in particular, to SME development in single-industry towns. The principal focus is on support for the non-trading sector, primarily, manufacturing companies, and SME innovative projects on modernization, energy efficiency and social infrastructure.

The Program covers all the key segments of the SME financing market, from large long-term loans to microfinance. Worth noting is that medium-sized (RUB 20 to 50 mn) and massive (over RUB 50 mn) loans predominate in the SME financing portfolio.

As at the end of 2013, support under the Program was provided to SMEs representing more than 80 constituent entities of the Russian Federation, in particular, to SMEs in 167 single industry towns.

## Program Performance in 2013

96.15
bn
RUB

worth of funds provided to SMEs as at 01.01.2014

The outstanding debt owned by SMEs to SME Bank’s partners7 in the Program increased in 2013 by 16.6% to reach RUB 96.0 bn as at the end of the reporting period (as at 01.01.2013 – RUB 82.3 bn).

The funds channeled by SME Bank to build the SME support infrastructure amounted to RUB 0.15 bn as at the end of the reporting period.

7 Partners of SME Bank are the recipients of its funds in compliance with the Program, i.e. regional banks engaging in local SME finance, and infrastructure companies (leasing and factoring companies, micro-financing institutions, regional funds and private equity funds).

72.25
%

Share of loans with maturity of over 3 years in total loans to SMEs is 72.25%

The year 2013 witnessed continued efforts to extend the maturities of loans to SMEs.

As at 01.01.2014, the share of loans maturing in more than 3 years in the total amount of SME indebtedness considerably exceeded the previous year figure (as at 01.01.2013 – 56.2%). Moreover, the share of loans with the maximum maturity of 1 year, dropped from 10.43% as at 01.01.2013 to 1.38% as at 01.01.2014.

Portfolio of loans extended to SMEs by partners: maturity structure, %

12.7
%

Average weighted interest rate for loans extended to SMEs by partner banks – 12.7%

In 2013, the interest rates for SMEs were kept at a level almost comparable to that of 2012 despite a slight upward trend in the respective lending market. The average weighted rate applicable to SME loans in compliance with the Program was, as at 01.01.2014, noticeably lower than that prevailing in the market (15-17% p.a.).

A significant event of the year 2013 was the adoption of the SME Bank’s Strategy for 2013 – 2015 that determined the priority segments in SME financing. In particular, the priority is given to innovative SMEs, non-trading SMEs beyond the innovative sector, and other non-trading SMEs. Furthermore, the Strategy defined strategic niches in relation to priority client segments. One of such niches is lending to innovative SMEs (those engaged in commercialization of scientific achievements, modernization of productive assets and practical implementation of power efficiency technologies) and long-term financing for non-trading non-innovative SMEs.

Along with SME Bank, development objectives are being accomplished by other subsidiaries of Vnesheconombank including Sviaz-Bank, GLOBEX Bank and VEB-Leasing.

As at 01.01.2014, the loans extended by Sviaz-Bank and GLOBEX Bank to SMEs totaled RUB 31.5 bn, the amount of lease contracts concluded by VEB-Leasing exceeded the same indicator of the early 2013 by 74.7% to make RUB 51.3 bn.

Portfolio of loans extended to SMEs by partners: strategic niche structure, %

## Guarantees as a mechanism to support medium enterprises

The year 2013 witnessed the launch of a guarantee mechanism to support medium enterprises. The mechanism is designed to enhance the capability of medium enterprises to raise finance from credit institutions to deliver investment projects.

This new form of support provides for SME Bank to issue guarantees under medium enterprises’ obligations to creditor banks in the amount of up to 50% of the loans obtained. The total guarantees by SME Bank were set at RUB 40.0 bn. SME Bank’s obligations under such bank guarantees are fully covered by Vnesheconombank’s bank guarantee, which, in its turn, is secured by the sovereign guarantee of the Russian Federation. Thus, the guarantee mechanism would allow medium-sized enterprises to raise no less than RUB 80.0 bn worth of credit resources.

The functions of the guarantee mechanism operator are delegated to SME Bank and provide for, among other things, selection of borrowers and their investment projects.

By year-end 2013, SME Bank issued some RUB 1.1 bn 9 worth of bank guarantees employing this guarantee mechanism. The loans granted to medium enterprises against such guarantees approximated to RUB 2.2 bn.

## International Entrepreneurship Support Fund

During the 2013 St.-Petersburg International Economic Forum, Vnesheconombank and European Investment Bank signed a loan agreement providing for USD 150.0 mn to be allocated to Vnesheconombank.

The funds will be used to finance the International Entrepreneurship Support Fund (the Fund) established by the decision of Vnesheconombank and KfW.

The Fund’s objective is to provide SMEs with affordable long-term resources extended by international financial institutions.

In November 2013, documents laying down the major principals of the Fund’s activities were presented to the Financial Sector Supervisory Commission, Luxembourg (CSSF) for preliminary approval.

## Cooperation with foreign financial institutions

For the Bank, promoting cooperation with international and foreign financial institutions is still another important business line aimed at both greater investments in SMEs engaged in innovations and export-oriented production, and experience exchange.

The practical result of such efforts was an agreement signed with EIB to grant the Russian party a EUR 200.00 mn targeted loan to promote SMEs.

Furthermore, Vnesheconombank signed a cooperation agreement on SME promotion with French development bank BPI-Groupe SA and a cooperation agreement with its subsidiary Bpifrance Financement SA to engage French companies in Skolkovo Innovation Centre projects.

The Agreement with Bpifrance Financement SA provides for a research into the Russian and French SMEs trade and economic cooperation potential. The research results would help assess the feasibility of establishing Russian-French funds in order to support Russian and French companies. The parties will also study opportunities for introducing in Russia the EuroQuity Platform designed to search for investors and partners in project delivery.

In compliance with the agreement signed with Vnesheconombank and Skolkovo Fund, Bpifrance Financement SA intends to give financial support to French SMEs wishing to invest in Russia. Moreover, the French business will be also given an insurance protection against possible economic risks in Russia to cover up to 50% of possible losses.

The year 2013 witnessed a seminar on experience exchange between specialists from Brazil development bank bnDES and Vnesheconombank, and a business visit of Vnesheconombank and SME Bank’s representatives to the Republic of South Africa to draw on the experience of SME support of the local financial institutions (DBSA, IDC, and Small Enterprise Development Agency).

Moreover, Vnesheconombank took part in the work of the International Association of Development Banks and Financial Institutions Montreal Group. Vnesheconombank contributed to an online storage of information on SME support to be created based on a common electronic platform (the Association’s website) enabling the participants to promptly exchange information on SME support.

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