very active in SME finance.
All these changes result in a higher sensitivity for risks and profits in the finance sector.
The changes in the finance sector affect the accessibility of SMEs to finance.
Higher risk awareness in the credit sector, a stronger focus on profitability and the ongoing restructuring in the finance sector change the framework for SME finance and influence the accessibility of SMEs to finance. The most important changes are:
? In order to make the higher risk awareness operational, the credit sector introduces new rating systems and instruments for credit scoring;
? Risk assessment of SMEs by banks will force the enterprises to present more and better quality information on their businesses;
? Banks will try to pass through their additional costs for implementing and running the new capital regulations (Basel II) to their business clients;
? due to the increase of competition on interest rates, the bank sector demands more and higher fees for its services (administration of accounts, payments systems, etc.), which are not only additional costs for SMEs but also limit their liquidity;
? Small enterprises will lose their personal relationship with decision-makers in local branches – the credit application process will become more formal and anonymous and will probably lose longer;
? the credit sector will lose more and more its “public function” to provide access to finance for a wide range of economic actors, which it has in a number of countries, in order to support and facilitate economic growth; the profitability of lending becomes the main focus of private credit institutions.
All of these developments will make access to finance for SMEs even more difficult and / or will increase the cost of external finance. Business start-ups and SMEs, which want to enter new markets, may especially suffer from shortages regarding finance. A European Code of Conduct between Banks and SMEs would have allowed at least more transparency in the relations between Banks and SMEs and UEAPME regrets that the bank sector was not able to agree on such a commitment.
Towards an encompassing policy approach to improve the access of Crafts, Trades and SMEs to finance
All analyses show that credits and loans will stay the main source of finance for
the SME sector in Europe. Access to finance was always a main concern for SMEs, but the recent developments in the finance sector worsen the situation even more. Shortage of finance is already a relevant factor, which hinders economic recovery in Europe. Many SMEs are not able to finance their needs for investment.
Therefore, UEAPME expects the new European Commission and the new European Parliament to strengthen their efforts to improve the framework conditions for SME finance. Europe’s Crafts, Trades and SMEs ask for an encompassing policy approach, which includes not only the conditions for SMEs’ access to lending, but will also strengthen their capacity for internal finance and their access to external risk capital.
From UEAPME’s point of view such an encompassing approach should be based on three guiding principles:
? Risk-sharing between private investors, financial institutes, SMEs and public sector;
? Increase of transparency of SMEs towards their external investors and lenders;
? improving the regulatory environment for SME finance.
Based on these principles and against the background of the changing environment for SME finance, UEAPME proposes policy measures in the following areas:
1. New Capital Requirement Directive: SME friendly implementation of Basel II
Due to intensive lobbying activities, UEAPME, together with other Business Associations in Europe, has achieved some improvements in favour of SMEs regarding the new Basel Agreement on regulatory capital (Basel II). The final agreement from the Basel Committee contains a much more realistic approach toward the real risk situation of SME lending for the finance market and will allow the necessary room for adaptations, which respect the different regional traditions and institutional structures.
However, the new regulatory system will influence the relations between Banks and SMEs and it will depend very much on the way it will be implemented into European law, whether Basel II becomes burdensome for SMEs and if it will reduce access to finance for them.
The new Capital Accord form the Basel Committee gives the financial market
authorities and herewith the European Institutions, a lot of flexibility. In about 70 areas they have room to adapt the Accord to their specific needs when implementing it into EU law. Some of them will have important effects on the costs and the accessibility of finance for SMEs.
UEAPME expects therefore from the new European Commission and the new European Parliament:
? The implementation of the new Capital Requirement Directive will be costly for the Finance Sector (up to 30 Billion Euro till 2006) and its clients will have to pay for it. Therefore, the implementation – especially for smaller banks, which are often very active in SME finance – has to be carried out with as little administrative burdensome as possible (reporting obligations, statistics, etc.).
? The European Regulators must recognize traditional instruments for collaterals (guarantees, etc.) as far as possible.
? The European Commission and later the Member States should take over the recommendations from the European Parliament with regard to granularity, access to retail portfolio, maturity, partial use, adaptation of thresholds, etc., which will ease the burden on SME finance.
2. SMEs need transparent rating procedures
Due to higher risk awareness of the finance sector and the needs of Basel II, many SMEs will be confronted for the first time with internal rating procedures or credit scoring systems by their banks. The bank will require more and better quality information from their clients and will assess them in a new way. Both up-coming developments are already causing increasing uncertainty amongst SMEs.
In order to reduce this uncertainty and to allow SMEs to understand the principles of the new risk assessment, UEAPME demands transparent rating procedures – rating procedures may not become a “Black Box” for SMEs:
? The bank should communicate the relevant criteria affecting the rating of SMEs.
? The bank should inform SMEs about its assessment in order to allow SMEs to improve.
The negotiations on a European Code of Conduct between Banks and SMEs , which would have included a self-commitment for transparent rating procedures by Banks, failed. Therefore, UEAPME expects from the new European Commission and
the new European Parliament support for:
? binding rules in the framework of the new Capital Adequacy Directive, which ensure the transparency of rating procedures and credit scoring systems for SMEs;
? Elaboration of national Codes of Conduct in order to improve the relations between Banks and SMEs and to support the adaptation of SMEs to the new financial environment.
3. SMEs need an extension of credit guarantee systems with a special focus on Micro-Lending
Business start-ups, the transfer of businesses and innovative fast growth SMEs also depended in the past very often on public support to get access to finance. Increasing risk awareness by banks and the stricter interpretation of State Aid Rules will further increase the need for public support.
Already now, there are credit guarantee schemes in many countries on the limit of their capacity and too many investment projects cannot be realized by SMEs.
Experiences show that Public money, spent for supporting credit guarantees systems, is a very efficient instrument and has a much higher multiplying effect than other instruments. One Euro form the European Investment Funds can stimulate 30 Euro investments in SMEs (for venture capital funds the relation is only 1:2).
Therefore, UEAPME expects the new European Commission and the new European Parliament to support:
? The extension of funds for national credit guarantees schemes in the framework of the new Multi-Annual Programmed for Enterprises;
? The development of new instruments for securitizations of SME portfolios; ? The recognition of existing and well functioning credit guarantees schemes as collateral;
? More flexibility within the European Instruments, because of national differences in the situation of SME finance;
? The development of credit guarantees schemes in the new Member States; ? The development of an SBIC-like scheme in the Member States to close the equity gap (0.2 – 2.5 Mio Euro, according to the expert meeting on PACE on April 27 in Luxemburg).
? the development of a financial support scheme to encourage the internalizations of SMEs (currently there is no scheme available at EU level: