08/31/2020 6:35 AM

Public Financial Support: Why Such Low SME Uptake?

Recent statistics published by the Bank of Lithuania have shown that the amount of finance provided by banks to non-financial companies has continued to decline rapidly. As a response to this reduction in credit, the Lithuanian government has introduced various measures to help companies manage their cash flow during the COVID-19 pandemic.

However, many companies operating in Lithuania have decided not to take advantage of this government financial assistance. But what are the reasons behind such a trend?

The Funding Provided By Credit Institutions To SMEs Continues To Decline

According to the Bank of Lithuania’s data, the value of non-financial corporations in H1 2020 was 8.8% less than a year ago. The last time such a decrease was witnessed was at the beginning of 2011. The flow of new loans also experienced a steep decline, falling even faster. The volume of new loans granted over the past twelve months has fallen more than a third.

These trends are particularly noticeable in the SME sector. For example, during the COVID-19 pandemic, the flow of large new loans (those greater than 100,000 EUR) remained almost unchanged, while the amount of smaller loans fell by almost a quarter. However, considering the fact that smaller businesses constitute a greater risk for lenders, perhaps these developments are less than surprising.

Variety of Types of Financial Assistance Offered by the State

State-owned Invega offers three types of support measures to SMEs, some of which are implemented directly and others through financial intermediaries. Types of assistance accessible by SMEs through Invega include loans, compensation and guarantees.

Of the money allocated, approximately EUR 253 million will be distributed through loans; EUR 157 million through compensation, while EUR 461 will be made available for guarantees.

When viewed initially, such measures appear effective as they largely offset the decline in corporate lending from MFIs. For example, from March to June 2019, new loans from MFIs amounted to approximately 796 million EUR, while figures for the same period in 2020 came to just under 796 million EUR. However, taking Invega’s financial assistance measures into consideration (256 million EUR granted in the form of loans and compensation and 80 million through guarantees), the flow almost levels off.

The use of aid measures by SMEs is not high enough

Taking the size of the financial support budget into account, the uptake appears to be rather sluggish. According to Invega, there is only one financial aid program where all allocated funds have been used. In fact, to date only 39% of funding has been used.

Other support measures were discontinued due to the small number of applications. For example, the ASAP Loan Program was recently discontinued, even though its budget had not been fully utilized. Again, Invega stated that one of the main reasons for this was the significant decrease in the number of applications it received.

The lower uptake of support funds is influenced by the banks' lending policy and strict conditions for the provision of support

Therefore, one has to ask the obvious question – why are more companies not making use of the supports the state is offering?

First, banks recently signed a moratorium agreeing to defer loan repayments for up to six months for entities experiencing financial difficulties. The uptake was very high, as many businesses rushed to take advantage of the offer. According to data from the Bank of Lithuania, the value of corporate loans renegotiated increased significantly from 100 million EUR per month in February 2020 to 340 million EUR per month by July 2020.

Another reason for the low uptake in government financial support is the extremely strict and inflexible conditions companies have to meet to receive support. For example, support is not available for all business activities. In addition, strict requirements, including onerous financial reporting, are imposed on companies following receipt of government aid. On top of all this, a number of companies have complained that support is provided too slowly, while the process has proven for many to be overly bureaucratic.

There are a number of ways to encourage the use of public financial support

It’s obvious that the situation could be changed by relaxing the terms and conditions imposed on applicant companies and improving the process itself. Increased cooperation between public authorities and credit institutions (including alternative financiers) would contribute significantly to achieving these goals.

Indications so far show that such cooperation has proven to be quite successful, with financial intermediaries successfully distributing support funds. However, the number of intermediaries assisting could still be significantly higher. Moreover, automation would considerably accelerate the process and reduce the frustration experienced by applicants. This is all entirely possible, but only through close and active cooperation of both the state and private enterprise.