Summary of the Chief Economists July Roundtable

Should Development Banks have greater influence in lending during a down cycle in an economy?

The Montreal Group’s Chief Economists met again on July 13th to exchange on two questions. i) Should Development Banks have greater influence in lending during a down cycle in an economy? If yes, what strategic initiatives can be deployed? and ii) What techniques (other than products) can wholesale Development Finance Institutions deploy to influence pricing of SME loans?

  • (JAPAN) Hikaru Fukanuma, JFC: as part of government policy, JFC offers certain loans, dependent on political consensus, because cost of increases related to risk is covered by government funding. As a safety net, JFC offers insurance on guarantees for SME loans by local Credit Guarantee Corporations, which does not cover the loan’s interest but contributes to activation of SME finance. In addition, in the last 30-40 years, agencies of JFC offered substitution loans, schemes where they share the risk with JFC.
  • (BRAZIL) Fabio Giambiagi, BNDES: Government under ex-President Lula da Silva used to promote greater state in the economy during downturns. With President Bolsonaro, under a liberal orientation, the reaction has been more limited: an increase of only 15% of loans was displayed during the pandemic, compared to the increase of more than 100% in 2008. This administration prefers the use of guarantees as tools to help SMEs. Development banks have a countercyclical impact but are highly dependent on the political will.
  • (MEXICO) Armando Gamboa, NAFIN: Companies preferred using their credit lines at the beginning of the pandemic to stock liquidity. Between May 2020-2021, commercial credit fell by 7% due to high uncertainty from companies, that decided not to acquire more debt. Mexico needs to adapt the matrix of guarantees to increase their scope. The Corporate bond issue guarantee program facilitates the access of medium sized companies to the bond market. Since investors tend to consider corporate bonds as riskier, guarantees represent a real advantage to access liquidity for Mexican SMEs. 
  • (CANADA) Pierre Cléroux, BDC:  There is an important shortage of labor caused by an aging population, and government programs allowing people to stay home instead of going back to work. During the recent down cycle, commercial banks increased lending mostly to bigger firms. Smaller business had more trouble securing liquidity. It is on this segment in which BDC is intervening the most. Demand for loans is way lower than last year due to deleveraging efforts.
  • (FRANCE) Sabrina El-Kasmi, Bpifrance: Consumption indicators are pretty good even though recent announcements could slow down the recovery. Businesses have strong cash reserves showing public support (state-guaranteed loans) efficiently absorbed the shock and provided access to short-term credit. Regardless of the economic cycle, development banks have a countercyclical role, and can address projects that would not be handled by private banks. Public funds are less risk-averse thanks to guarantee programs, that have a large impact on investment and employment.
  • (NIGERIA) Joseph Nnanna, DBN: the Development Bank of Nigeria is in a difficult position as the Central bank is directly managing the recovery. Thus, they keep searching for new ways to push out funds, including the creation of new products with risk sharing agreements, to incentivize partnering commercial banks to increase SME lending. However, disbursements are expected to soon plateau and then decrease.

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