Crediting SME business in Russia

Brief

The fastest growing market: in 2007 the SME credit portfolio grew faster than corporate and retail crediting..

The corporate credit portfolio in 2007 went up by 49%, the individuals’ credit portfolio – by 57%, but bank credits то SME (our appraisal) increased by 62% and reached 54.1 bln dollars. Credits to small business (enterprises with revenues below 5 mln dollars a year) were almost doubled to reach 21 bln dollars.

Regional branches and interesting product offerings lead the SME credit market nowadays. The first extensive step of development has been completed – federal banks built up their regional branches and had to deal with systemic limitations, demanding further geographic extension. SME crediting among federal banks came to its geographic peak in 2006, when the top-ten increased their branches with SME services by 551. In 2007 another 252 branches were open, but altogether the deceleration of the branches growth was insignificant – new players were quick to catch up with the situation. The close proximity of SME credits turned out to be the new market paradigm.

On the other hand, new credit products of interest to small business gain a competitive edge. Parameters of crediting (demands to pledges, terms and schedule of payments), offered by banks, are not too attractive; credit transaction costs are quite high. New players in the segment may quickly turn into leaders, if there are innovative and attentive to clients’ needs.

The state active strategy may put 110 bln dollars at stake: by 2010 the SME credit portfolio may amount to 280 bln dollars, without the state involvement - only 168 bln dollars. The SME crediting banks currently face the problems typical for any crediting segment at the initial stage of development. Partially the problems would take care of themselves in the process of the market natural growth. On the other hand, the state active policy in the SME development may strongly impact the situation.

The state recent measures to encourage mortgage activities constitute a good example of a comprehensive strategy. SME development also requires concerted actions by banks, regulators and state administrations. Single efforts are not sufficient. The newly state-incorporated Vnesheconombank (Bank for development and foreign economic activity) is so far involved with large projects, although SME support is listed among its priorities.

The state active strategic stand would allow to lift the majority of current limitations, and the next three years may see the market speedy acceleration with the SME credit portfolio to be 280 bln dollars by 2010 (our appraisal). Without the state involvement the SME credit portfolio by 2010 would not exceed 168 bln dollars. The difference is dramatic.

Method of study

Our study is based on data obtained by Expert RA from banks, leasing and factoring companies, and supported by profound interviews with the most active participants of SME crediting market.

We need to explain criteria of putting enterprises into SME category. Today there are no formal criteria to clearly consider an enterprise as a subject of small entrepreneurship. The federal law “On development of small and medium entrepreneurship in the Russian Federation (valid since January 1, 2008) provides no clear classifying parameters either. According to the law, business with a number of employees below 100 is called “small” (micro-enterprises – below 15 persons), 100 to 250 persons - medium. Revenue indicators, determined by the RF government statistically, are to be introduced later.

Our study considers SME credits as those given by banks in the framework of specialized SME crediting programs. We understand that programs of different banks may be placed within one category, despite being targeted at enterprises of different sizes. Still, we find this approach the most proper to specify the market borders. Specialized programs imply specialized technologies, special approaches to risk assessment and business development – main parameters in determining problems and prospects of the market.

We asked banks to provide us with all indicators related to volumes of financing through specialized programs, or (no programs) to volumes of financing with annual revenues up to 5 mln dollars. We also asked (in case of a specialized program) to determine parameters of enterprises that might be credited in line with such a program. Averaged market conditions compared with current RF and EU legislations look as follows:

We distributed our questionnaire to 43 Russian banks:
Absolute-Bank, Akibank, Alta-Bank, Alfa-Bank, BALTINVESTBANK, Bank Saint-Petersburg, BTA-Kazan, Vozrozhdenie Bank, VTB 24, VSB, Zapsibcombank, KMB-Bank, KUB, LOKO-Bank, MDM-Bank, Metcombank, Nizhny Novgorod Bank, NOMOS-BANK, Probusinessbank, Regional Bank for Development, Rosbank, RBR, Rus-Bank, SB-Bank, Sberbank RF, SDM-Bank, Northern Treasury, SKB-Bank, SLAVINVESTBANK, SOIUZ, Stroikredit, Promsviazbank, Tatfondbank, TRUST, URALSIB, URSA Bank, Khlynov, Center-Invest, CHELINDBANK, EXPOBANK, Energobank, Uniastrum, UniCreditBank.

According to our assessment, studied banks gave about 50% of all credits to legal entities and about 70% of credits to SME.

The following speakers were profoundly interviewed:
Larissa Beliaeva, KMB-Bank deputy director on business, director of SME department

Liudmila Goncharova, Vozrozhdenie Bank board deputy chairman

Aleksander Kiselev, Alfa-Bank, deputy director on SME corporate clients, head of crediting department

Maksim Kondratenko, UniCreditBank, executive director of retail and private bank servicing department

Andrey Kuznetsov, MDM-Bank SME department

Mikhail Mamuta, Russian microfinance center, director

Oleg Rozhentsov, URALSIB executive director, head of product management department

Nadia Cherkassova, TRUST Bank SME executive director

We express our gratitude to all banks and speakers for their interest to our study.

SME bank crediting: crisis of growth

SME crediting dynamics

In 2007 total SME credits amounted to 80 bln dollars and increased by 28.07% comparing to 2006.

Diagram 1. SME crediting volume acceleration is still high

The SME credit portfolio demonstrates the fastest growth (diagram 1). The corporate credit portfolio in 2007 grew up by 49%, the individuals’ credit portfolio – by 57%, SME bank credits, by our assessment, went up by 62% and amounted to 54.1 bln dollars. Small business credits (with revenues below 5 mln dollars per year) were almost doubled and reached 21 bln dollars.

Despite being in the lead, the segment incremental growth might be even higher. The bank margin in the sector is still attractive for banks, and the “low base” effect is still in place. How come the market is still stalling?

On the one hand, the growth picture differs from one bank to another. Same as in other banking segments at the initial stage of development, the SME crediting is dominated by the RF Sberbank – the largest market player. By January 1, 2008 its credit portfolio amounted to 436 bln rubles, in 2007 its SME crediting exceeded 1022 bln rubles. The Sberbank share at the SME crediting market has been about 50% (our analysis), but it gradually goes down with new players entering the market.

Correspondingly, other banks cover the rest of the market 50%. They are the market main drivers with energetic build-up of the crediting volumes (table 1). Their credits in 2007 neared 1 trln rubles with incremental 41% comparing to 2006.

Table 1. Sberbank has accelerated below the market average, but is still an obvious leader

On the other hand, a segment-by-segment analysis shows: banks might be more active in accelerating SME crediting. The SME crediting market is still quite young – at such “age” retail and mortgage crediting markets were accelerating quite speedily. Worsened bank liquidity can not be taken as an explanation either – the annual results showed no decreasing trends in banking assets.

Our conclusion, based on our market and general Russian bank crediting analysis and on banks’ own opinions: the main reason for the sector poor growth is the state inactivity.

Competition

The SME largest creditors in 2008 are Sberbank, Vozrozhdenie, VTB 24, KMB-Bank and Akibank (table 2). Vozrozhdenie and Akibank specialize on shorter credits (to 12 months), and the rest have lower portfolio’s turnover. The SME credit accumulations (see table 1 in addendum) put in the lead Sberbank, VTB 24, Vozrozhdenie, KMB-Bank and URALSIB.

As was said, in 2007 the majority of banks grew faster than Sberbank. The top-ten list features highly accelerated VTB 24, LOKO-Bank and Akibank. The second dozen with impressive SME crediting development includes Absolute Bank, Rus-Bank and TRUST.

The top ten is quite consistent, although some changes are quite possible due to increased interest of banks towards small business crediting. The segment speedy growth provides for some skyrocketing.

Our expectations are statistic-supported: the “shock” top-ten banks slow down their growth as distinct from other banks (table 3). Leaders decelerate, and smaller banks speed up, which is natural for the gradual market development and increased interest of new players.

Table 3. “Shock group” decelerates, other banks speed up

Regional branches as leadership component

To credit large business you do not need extensive branches – you have to be in the center of the business financial flow. To develop retail crediting, on the opposite, you require broad branch coverage and proximity to your client. The SME crediting is similar to retail – you have to be “in the field”.

Table 4. The largest banks’ branches

The development geographic analysis makes it clear: leaders decelerate due to gradual exhaustion of the regional development potential. Data on the SME crediting outlets shows: the top-ten banks dramatically increased their SME crediting in 2006, when their branches were almost tripled (table 4).

Table 5. Credits per employee involved in SME crediting, thousand rubles per person/чел.

The period is noted by intense implementation of specialized SME crediting programs in the regions. When all the existing offices are covered, you need to open new ones to continue implementing the programs, which, obviously, is more time-consuming, than dealing with business-processes in existing regional branches.

Diagram 2. The SME crediting geographic distribution corresponds to geographic position of small enterprises themselves

Top-ten banks intensify their growth by giving larger credits per one employee, while the indicator remains stable in other banks (table 5).

The small business geography corresponds to geographic location of small enterprises themselves (diagram 2). Central federal district is the largest creditor (38%, Moscow about 15%), then Volga federal district (19%) and Siberia federal district (12%).

It is interesting to compare the credit geographic distribution in the two groups – the top-ten and other banks (see diagram 3). The top-ten SME creditors concentrate their business in Central federal district – almost 40% of all the credits (Moscow included). Second – Volga federal district (21%), followed by Siberia and South federal districts (11%).

Other banking operations in Central federal district are below 30%, Volga federal district - sufficient 24%.

A typical borrower: where is a financial vector directed?

Borrower’s profile

In June 2007 the former head of the Ministry for Economic Development German Gref at the Council on Competition and Entrepreneurship attached to the RF government made public the government priorities in the SME support till 2020. His presentation focused on the following goals:

• Reduce a number of trading SME down to 25% of the total SME amount.
• Increase service SME up to 30%.
• Increase science and IT SME by 5 times (from 2% in 2006 to 10% in 2020).
• Increase healthcare and social care SME by 5 раз (from 1% in 2006 to 5% in 2020).

To reach the goals you need a correspondent “tuning” of financial flows in support of SME by banks and other financial organizations.

Table 5. Pledges are far from diverse

So far a typical borrower of the SME special bank crediting may be described as a retail or wholesale trader, taking credits (3 to 10 mln rubles) to replenish one’s turnover funds for 12 months. As a rule such credits is fully pledged.

Diagram 3. Leaders are concentrated in Central federal district, while other banks focus on Volga federal district

Banks profit from obvious and well-secured borrowers. Therefore the majority of credits (about 50%) go to wholesale and retail trade. According to table 5, processing segments take about 19% and are followed by construction (9.33%). On the one hand, the above structure is well correlated with the SME industrial structure – trade area, according to official statistics, constitutes about 50%. On the other hand, the required advanced growth of servicing, innovative and healthcare enterprises demands relative financial priority for these areas.

A bank with focus on SME-crediting usually boasts a more industry-diversified portfolio. Experienced banks usually have more efficient risk-assessment systems and may deal with borrowers from different industries without being afraid of confronting high level of overdue payments.

The top-ten and other banks have sufficiently different industrial bias (diagram 4). The leaders are strong enough to analyze more business-complicated processing areas, while others prefer to deal with wholesale trade, where risk calculation is quite easy.

The top-ten banks energetically credit processing industries (21% of all credits) and wholesale trade (30%). Other banks have different interests: their portfolios are based on retail trade - 39%. Share of processing operations is small.

Parameters of products

Pledges and collaterals

Low pledge base is one of the obstacles to SME crediting. Pretty often banks refuse giving credits because a businessman is incapable of presenting a pledge in a bank-required form. Banks mostly give credits supported by full or partial pledge.

The most bank-acceptable pledges (table 6) are nonresidential property, goods in circulation, motor transport and special machinery, equipment, property of third parties and guarantee by business owners. Less popular is residential property, equipment being-purchased and real estate being-purchased (leasing companies may compete with banks in the area). The use of the last two pledge types seems to be most important for crediting, since they may simplify crediting of start-ups for banks.

Table 6. Trade enterprises still dominate among borrowers

Size of credits

The SME credit market clearly demonstrates differentiation of bank credit products by credit volumes. Banks restrict themselves by different credit volumes and create artificial market niches – the trend seems to be prevailing with time.

Three bank segments (without Sberbank) may be singled out by average credit volumes:

• Credits to 1 mln rubles – three big credit portfolio banks may be singled out – URALSIB, Ursa-Bank and KMB-Bank, and TRUST, speedily catching up with leaders.
• From 1 to 10 mln rubles – the most bank-saturated segment.
• From 10 to 30 mln rubles – Alfa-Bank and Regional Bank of Development gain momentum.

Vozrozhdenie tends to give bigger credits (80% of the credit portfolio consists of credits exceeding 30 mln rubles).

Table 7 shows sufficient diversity in volumes of credits. Vozrozhdenie experience, to our minds, is not typical (average credit is 70 mln rubles), therefore we dismiss it in specifying the average credit market figures – to avoid wrong appraisals.

The largest credit share – 28% – comes in the interval between 3 and 10 mln rubles. Next – credits from 1 to 3 mln rubles (19%), and, finally, from 10 to 30 mln rubles – 21% (diagram 5).

Credit time

The credit time gives a curious picture, too: the top-ten banks contain short-term credits prevailed (to 12 months), other banks actively operate in the credit segment from 1 to 3 years (diagram 6). Evidently, the leaders may find some necessary growth resources in the area, although giving longer credits would inevitably mean larger credit risks.

Diagram 4. Leading banks operate more with processing industries, while others prefer to deal with trade

Crediting goals and interest rates

The main part (54%) of the SME credits is used to replenish operative funds, which is fully in line with the trade-dominated SME crediting structure (diagram 7). Next group of popular credits is constituted by purchase and modernization of equipment (about 13%). Overdraft credits go next and amount to 11% of all the SME credits.

Credit rates depend on a number of factors, including crediting goals. It is hard to find some common trend here: according to banks, current SME competition is rather based on quality service, and not on interest rates.

Altogether SME credits cost 2-3% more than credits to large corporate clients. These distinctions may be explained by low inter-bank competition and relatively high operation costs of SME crediting.

SME take more credits to replenish their turnover means, and less – to purchase and modernize equipment (banks and leasing companies compete in the area). Costs of credits for SME should go down in the near future.

Ways to pay credits

Banks get more flexible in receiving payments. Over 90% of our respondents found it possible to give to borrowers an individual payment schedule. Still, mostly you have to pay on a monthly basis – to simplify credit portfolio management (this method helps to trace negative tendencies in the borrower’s financial state).

SME crediting: growth drivers

What hurdles normal SME operations: opinion of banks

We requested respondent banks to underline factors challenging normal SME crediting. The results were divided in two groups (top-ten and other banks) and presented two alternative views on the segment development – those of leaders and their followers.

The leading banks are first of all concerned about factors preventing them from energetic growth (table 8).

Insufficiency of branches was only the 6-th in the list. Banks do not consider branch development urgent. As a matter of fact, many banks have already built their basic infrastructure.

In the first lines of the hindrance list we find poor transparency of borrowers, absence of pledge security, inefficient legislation and state support programs.

Table 8. Pledge security is far from diverse

Other banks have similar opinion on the first two lines (table 9). Otherwise we see a notable difference – insufficient branches are placed the third.

Table 9. Small banks need branches

It is noteworthy that almost none of the respondents mentioned lack of financial resources, used by banks to develop the segment.

SME and other segments of bank crediting

Diagram 5. SME crediting mostly ranges between 3 and 10 mln rubles.

Integration of reasons for the problematic segment development, mentioned by responding banks, brings about the following: poor transparency of borrowers, absence or poor quality of pledge security, inefficient credit subsidies by state programs, lack of banking expertise in dealing with SME, poor knowledge of bank services by SME.

On the one hand, all the factors are typical for any crediting market at the initial stage of development. On the other hand, the factors may be easily mitigated to make the market grow faster and improve functioning of banks and SME. To resolve the problem let us thoroughly examine the reasons hurdling efficient SME crediting.

Poor transparency of borrowers

The poor SME transparency is double-edged for banks. On the one hand, poor transparency of borrowers brings about inadequate reporting (both book-keeping and administrative), unreflective of the enterprise real economic activity. One reason is poor quality of reporting (mentioned by many banks), another is a simplified taxation system providing for reduced reporting. To be competitive and technologically up-to-date, SME-dealing banks should understand the nature of SME business, make balance sheets and calculate financial flows on the basis of your client’s say-so.

On the other hand, poor transparency is also related to high share of “grey” SME business. As a result, it is very difficult for banks to assess SME crediting risks. Poor quality of risk assessment brings about uncertainty – hence higher credit interest rates. As a result, SME are less interested in financing by banks.

Absence or poor quality of pledge security

We have already referred to the SME low pledge base. At the same time, according to our assessment, over 75% of all special program credits are fully pledged by immovable property and equipment.

Diagram 6. Top-ten give credits up to 12 months, others – from 1 to 3 years

Banks will inevitably have to resolve the problem of insufficient pledges, since it seriously hinders increase of SME crediting. On the one hand, conservative pledge requirements “cut out” a wide range of bank clients, including start-ups, traditionally interested in credit financing. On the other hand, full pledge security is nothing more than an additional guarantee. Under any circumstances it takes a lot of time and effort for banks to obtain and sell pledged property – due to inefficient pledge legislation and poor experience in dealing with pledges.

State guarantees for crediting SME may be a good alternative to pledge security.

Inefficient credit subsidies by state programs

Poor bank subsidies may be looked upon in a broader sense – as inefficient state support of SME.

The state support problems have remained unchanged for a number of years. Still, not all banks are capable of subsidizing credit rates and getting guarantees through special state funds. The SME crediting programs made public by large state banks are quite vague. Interacting with state bodies on pledge security (in particular, immovable property pledge) is still problematic.

Diagram 7. Replenishment of turnover means is still widely demanded by the market

The SME state support is known to have two models – an American one (SME direct support and subsidies) and a German one (two-level system of re-financing).

The first model, if underdeveloped, is present in Russia both at federal and regional levels. But even lack of funds in federal and regional budgets is not the reason for disregarding SME – it is still possible to cut SME administrative costs and corruption pressure. “SUPPORT of Russia” analysis says: presently entrepreneurs spend about 9.6% of their monthly revenues on illegal payments to officials. The top priority task for authorities (local in the first place) is to cut the processes short.

Certain features of the two-level SME credit re-financing system are also present, but re-financing acceleration has been slower than expected. The state corporation Vnesheconombank (Bank for Development and Foreign Economic Activity), in line with Memorandum on Financial Policy, prioritizes its “participation in SME development projects by crediting credit organizations and legal entities, supportive of SME”.

The mechanism is still being built, and meanwhile Vnesheconombank is involved in other projects; if necessary, functions of re-financing organizations are performed by experienced leading banks, sometimes buying smaller banks’ portfolios instead of pure re-financing.

Lack of banking expertise in dealing with SME

Many banks have just started their SME crediting operations. Obviously, due to lack of experience and modern technologies, they exercise more conservative approach to risk assessment and use higher interest rates.

Scoring models for credits are not yet in use in the majority of banks. Credit decisions are usually taken by credit committees, which imply higher operative costs. This is another reason why credit rates are usually high, although level of overdue debts is pretty low at the segment (below 2% at the market in general).

Absence of service understanding by SME

Financial literacy keeps on growing with the banking sector. Still, many banks imply that they have to compete with SME stereotypes, not with each other.

Diagram 8. Banks are flexible towards their borrowers

According to “SUPPORT of Russia”, majority of entrepreneurs presently have sufficient finances to support their business at the current level, but lack funds for extension. Credits as sources of financing are not even considered – SME either do not require credits or find them too costly and inefficient.

Paradoxically enough, on the one hand business development needs money, on the other hand, taking credits is seen by SME as ambiguous alternative to independent business activities. Thus, banking credits are presently “unconsciously demanded”. When an entrepreneur after all decides to take credit, he has to deal with the above barriers, which turn into high rates, strong debt burden and time expenses to attract credit.

As was already mentioned, the above reasons are typical for many markets in the process of transformation. Strange as it may seem, Russia has already accumulated successful experience in the field. Actually, five years ago the above obstacles (poor transparency of borrowers, pledge problems, absence of state support, inexperienced banks and misunderstanding of service products by consumers) were characteristic for another segment – mortgage crediting.

At first glance, the examples stand far apart, but mortgage and SME crediting have a lot in common – complicity of the product for banks and consumers, long terms, need in pledges. The mortgage segment was also characterized for a long time by “unconscious demand”: citizens tried to improve their housing conditions but never considered mortgage as an option, since it looked expensive, complicated and too costly. Banks had risk-related premonitions, too (“grey” earning by borrowers, long terms).

Many programs were mitigated by strong state initiatives: the accessible housing market was made a national priority; comprehensive and systemic approach was embodied in the Accessible Housing national project. The project principle helped to consolidate efforts of different participants and channel them towards the same goal, thus making diverse measures more efficient. SME problems (and its crediting) may be resolved through such a balanced and realistic approach.

SME bank crediting forecast: the state makes its choice

In 2008 the government initiated discussions on SME problems. Special attention was paid to state guarantees and start-up crediting. Small business nowadays has no practical ways of attracting funds at the inception period; the problem may be resolved by building up the SME support infrastructure: guarantee and special funds.

Diagram 9.Growth of the SME credit portfolio may slow down or remain high

If the segment financing declarations are supported by deeds, SME bank crediting may show speedy development within next 3-5 years. There are three optional ways of the SME market development, directly dependent on the state involvement (diagram 9).

Pessimistic scenario: the state provides the SME segment with passive status quo support. The market development barriers would be lifted in the process of the market natural “ripening”. Banks would resolve pledge problems and gain required experience; competition would bring interest rates down; SME would no longer consider crediting as something financially exotic. According to the scenario, portfolios would decelerate their growth. SME accumulated credits would amount to 168 bln dollars by 2010 (forecast).

Diagram 10. Share of deals for a certain time period among total amount of deals, 2007, %

Realistic scenario: certain expansion of the state support, gradual development of subsidy mechanisms and credit re-financing, resolution of vital legislative problems (first of all, pledge legislation and SME corruption pressure). The segment growth deceleration is smooth, aggregated portfolio amounts to 205 bln dollars by 2010.

Optimistic scenario: the state efforts are systematic and effective. SME crediting is supported by active state policy. Aggregated portfolio growth may even accelerate; bank credit to SME may achieve 280 bln dollars by 2010. The state is to choose between these three options.

Leasing services to small business

Competition at the leasing market has been stronger. At the same time the competition nature may be totally different depending on the business size. Leasing companies fight for a large client with a good credit history and financial indicators. On the other hand, small and modestly financed medium-size companies demonstrate increased demand-supply ratio for leasing financing. Leasing for small business still remains one of the possible options to renew and expand its main funds.

In 2007 new business of leasing companies, dealing with SME (market volume), was assessed to near 8.5 bln dollars. The indicator went up by 90% comparing with the previous year. Out of 160 companies involved in 2007 market study, more than 120 worked with small business enterprises.

The market players themselves take note of increased leasing demand by SME. According to Alfia Garifullina, Leasing Company KamAZ general director, “the first half of 2007 showed growing interest of small business in leasing. Leasing companies do their best to attract the target audience – financial structures and business try to meet each other half-way. We are glad to inform our SME applicants that 95% of the segment applications get our financing”.

SME-leasing agreements constitute 43.5% of a total number of deals, but financially the SME-leasing share is twice as little – 23%. The market deals are mostly signed for 1-3 years (see diagram 10). Their share increased by 3% comparing to 2006 (diagram 10).

Deal terms have become lengthier: the market speedy acceleration make leasing companies and SME more willing to sign deals for longer periods. Time of deals also depends on SME-leased specific equipment. Mostly it is motor and cargo transport, storage facilities and lifting equipment, food industry machinery, trade and polygraph equipment, engineering and road-construction mechanisms.

Factoring services to small business

Factoring is usually demanded in the market segments with tense competition between sellers and provision of goods and services on delayed payment conditions. The instrument is aimed at financing turnover means – efficient suppliers make the instrument more popular. Besides, factoring provides for services to manage, insure and collect receivables. Many small companies without their own infrastructure and trade crediting skills in case of a payment delay may encounter significant cash breach and complicated debt collection.

Therefore factoring is more urgent for small non-monopolistic enterprises, ready to compete with rivals by giving their clients more flexible payment conditions, without increasing one’s risks or turnover deficit, which is important in times of insufficient liquidity among many companies.

Still, presently Russian Factors get the majority of their turnover from large companies: in 2007 large enterprises constituted 10% of the total number of served companies and transferred to Factors almost 50% of the 2007 financial claims. Comparing with 2006, share of big business clients in 2007 increased, both numerically and in turnover volumes. But soon the big business segment will be relatively saturated, and it would be the decision time for Factors – should they compete for premium clients or go smaller companies? In case of the latter price and service quality so far raise no competition, but you need stronger efforts to promote factoring as an unknown service to an average manager from a small Russian company.

Diagram 11.SME share in factoring deals (volume and number of clients) is so far stable

Factor turnover share of small enterprises has been consistently 14.4%, but a number of small-sized clients in 2007 went down to 43.2% (in 2006 – 52%). Thus, slow entrance of SME to the factoring market is compensated by speedy growth of factoring financing for such companies. Small business is quite perceptive to factoring.

Share of average-sized companies (number of clients) in 2007 increased and reached 46.7% (in 2006 – 41.4%), transferred debts of such clients to Factors amounted to 36.4% (in 2006 – 41.5%). Many clients considered in 2006 small, in 2007 moved to an average-size category according to new Factor criteria.

All companies with annual revenues between 150 mln and 1 bln rubles are included into a medium-size class; those at the low border show notably smaller turnover than average Factor clients in 2006 (diagram 11).

Present deals are mostly signed by Russian Factors on regress conditions: if a client’s debtor does not pay after payment delay period and Factor grace period is over, Factor may put forward a regress claim – a supplier of financing should be paid in accordance with the agreement. Regress deals are predominant, because such debts are mostly transferred to Factors by large clients; such clients have no reason to insure their debts, because their debtors are also big and reliable companies and they would definitely pay their debts, may be after a certain delay. Non-regress factoring may be very useful for small companies with smaller and less reliable debtors, which are hard to be assessed and controlled without proper experience and infrastructure.

That is why increased share of small and average-size clients in Factor deals’ turnover will change towards more comprehensive options. Factors have acquired new experience on a less risky segment of large clients and at present gradually move to coverage of their main target segment - SME.

Addendum

Table 1. Ranking of banks by small business credits
Table 2. Ranking of banks by development of branches
Table 3. Ranking of banks by credits given in Moscow
Table 4. Ranking of main banks by credits given in Central FD (Moscow excluded)
Table 5. Ranking of banks by credits given in Volga FD
Table 6. Ranking of banks by credits given in Siberia FD
Table 7. Ranking of banks by credits given in South FD
Table 8. Ranking of banks by credits given in St.-Petersburg
Table 9. Ranking of banks by credits given in South-West FD (St.-Petersburg excluded)
Table 10. Ranking of banks by credits given in Ural FD
Table 11. Ranking of banks by credits given in Far East FD

Review prepared by::
Irina Velieva,
head, rating of banks and leasing companies, department of ratings of financial institutions
velieva@raexpert.ru

Marina Chernysheva,
leading expert, department of ratings of financial institutions
marina@raexpert.ru

Anton Kartuesov,
expert, department of ratings of financial institutions
kartuesov@raexpert.ru

Roman Romanovsky,
expert, department of ratings of financial institutions
roman_r@raexpert.ru

Pavel Samiev,
director, department of ratings of financial institutions
psamiev@raexpert.ru