Conditions of WB SME Development Credit Are Unique

Mr. Edwards, what portion of the ASME facility has been transferred to the Central Bank and how much money will be utilized by the end of this year?

To date the Central Bank has received 25 million on its account, i.e., half of the facility, and this money is being used by 8 commercial banks which about have qualified for this facility. As of the end of October, of these proceeds AMD 2.6 billion was provided to small and medium businesses. We anticipate that by the end of 2009 lending will increase. It was planned to disburse $10 million for the first year and $20 million for the 2nd and 3rd years each. What distinguishes this facility is that banks provide lending to SME businesses in AMD (or USD if exporters) at a maturity of up to 5 years and its conditions are highly competitive and unique in the market.

According to some banks, the conditions of the WB facility are uncompetitive compared to other credit programs. Are you planning to revisit the terms and conditions of this facility? Don’t you think that it is being utilized at slow rates given its volumes?

In February, 2009 the credit proposal was presented to the WB Board of Directors, and at that time none of us knew what the situation would be like in the country. After the credit agreement was signed Armenia received a number of credits, and, in particular, arrangements were reached on extension of a sub-loan by Russia. Thus, the WB ASME facility became one of the several sources for mitigating the consequences of the global crisis. Since then we have revised several of the credit conditions, namely, reduced the credit interest rate, and allowed additional collateral and relaxed credit documentation requirements. This was done in order to facilitate the process of lending by banks. A considerable contraction took place in the Armenian economy during the crisis, and only in the third quarter some recovery was seen. During this period foreign remittances considerably dropped. In these circumstances we believe that the facility performance is good. This week we met with banks to make sure that they would continue their active involvement in the program.

To what extent was the interest rate reduced and when?

In February when the facility was approved, the interest rate on the Central Bank on-lending to banks was 8,5% and in early September it was reduced to 7%.

While the Central Bank re-financing interest rate is 7%, the commercial banks provide lending from these proceeds at 18%. Don’t you think that during the ongoing economic downturn this margin is rather high given that the Government provides financing to large enterprises at 10-11% interest rate?

The WB did not set limits on lending conditions by commercial banks, as we cannot distort the market. And that’s how we work with any country. Therefore, banks are free to define their own interest rates based on market circumstances and risk assessment. I would like to mention that the SME sector is becoming more and more competitive because the number of banks willing to provide lending to this sector grows. Therefore, interest rates have begun to fall.

First of all, interest rate reflects the cost of risk. Some banks provide lending without any security, for example, through credit cards. This kind of lending has a rather high interest rate because it also covers the existing high risks, while in general SME credits are backed by collateral and often real estate is used as a security. In this case the interest rates are lower. But interest rates are determined also by other factors. For example, in Armenia if a borrow is insolvent and unable to repay its debt, then litigation for collecting the debt lasts very long, and seizure of assets itself can take a year or even more. Unfortunately, it is another determinant factor for credit pricing.

You mentioned that more relaxed documentation requirements are set. Could you please give us some details on this? Can looser credit conditions be set in future?

We always try to offer lending conditions which would allow banks to use the source of financing. Similar SME programs are organized by the World Bank in many countries, and, of course, we look for ways for tailoring the financing to the circumstances of each specific country. We always consider changes which are aimed to facilitate the receipt of credit proceeds by commercial banks. For this reason, revisiting the conditions is a dynamic rather than static process. As to any further changes in the lending conditions in Armenia, if necessary these can be revised. At any rate, we aim to involve new participants in the program.

Can we assume that the list of the participating banks will change, including through involvement of credit institutions in the program? And, overall, what is your assessment of the involvement of commercial banks in the program?

We have raised the question of renewing the list of participants with the Central Bank. We expect that by the end of this year there will be a new roster. As to credit institutions, the CBA – which selects the participants of the program itself – has stated initially that it is desirable to have only commercial banks in the program. For credit institutions, so far as I know, the CBA has already asked some micro-financing companies to determine their level of interest in the program.

Earlier the Minister of Finance Tigran Davtyan made a statement that the Government of Armenia is discussing with the IMF and the World Bank issue of restructuring the existing and expected credits in order to relax the lending conditions. Do you think that restructuring is possible?

We do not distinguish between countries based on credit risks, i.e., all countries receive WB credits at the same interest rates. In reality, the WB credits are inexpensive and for many countries they represent the most favorable source of financing.

Artur Yernjakyan, Lilit Aslanyan.