U.S. Department of the Treasury

(Archived Content)

HP-452

I'm also directing Secretary Rice and Secretary Paulson to develop a new initiative that will help U.S. and local banks improve their ability to extend good loans to small businesses [in Latin America].  It's in our interest that businesses flourish in our own neighborhood. Flourishing business will provide jobs for people at home.
–President Bush, March 5, 2007
http://www.whitehouse.gov/news/releases/2007/03/20070305-6.html

A thriving small business community can reduce poverty and inequality, as well as create jobs. When individuals turn their ideas into productive businesses, they make a transition from workers to owners. Ownership helps create sustainable and stable economies with broader opportunities for all citizens. Economic and social mobility have always been at the core of the U.S. system. We want to help Latin American countries create the same mobility for their citizens.
–Treasury Secretary Henry M. Paulson. Jr., June 12, 2007

Secretary Paulson announced today a three-part plan to provide the ways and means to encourage market-based bank lending to small businesses. The first two elements will provide support to banks willing to commit to specific and ambitious targets for small business lending.  The third will address the regulatory environment.

First, introduce new lending models that fit the unique characteristics of smaller firms.One key barrier to credit is that banks lack information about, and experience with, smaller companies. Banks are often more comfortable lending to larger companies that have collateral, formal financial statements and documentation. Small companies may not yet have these resources. Banks need the tools necessary to assess the value and risk of these smaller companies. We will promote the spread of new lending models that fit the unique characteristics of smaller companies. We will help banks build capacity to quickly and accurately assess the credit quality of small companies. 

Subject to approval from its donor committee, the Inter-American Development Bank's Multilateral Investment Fund (MIF) will engage with selected interested and eligible banks to provide tailored technical assistance to work with banks to expand small business lending.

• MIF would provide financing to support consulting services related to credit officer training, material development, software and computer equipment, credit scoring systems, and other relevant assistance required to implement a successful small business lending program and minimize per-loan costs. 
• MIF is proposing to its donor committee that it finance up to $10 million per year over five years for this initiative, with no more than $1 million per single bank.
• This technical assistance would be provided on a cost-sharing basis to ensure banks have committed capital as well as capacity.

Second, assume a portion of the risks associated with this lending.Sharing the initial risk of lending to new, small business customers can help banks address the uncertainty and lack of knowledge about this new client base.

The Overseas Private Investment Corporation (OPIC), the U.S. government agency responsible for promoting social and economic development by mobilizing U.S. private capital, will offer risk-sharing guarantees and loans to eligible banks to extend/catalyze their financing activity for small and medium-sized businesses in the region.  OPIC will provide support through three vehicles:

Credit guarantees for U.S. bank loans to local banks to support on-lending (when one bank borrows from another bank and uses those funds to make smaller loans) to small business.

• Guarantees on bond issues to allow local financial institutions, including microfinance institutions, to raise funds to finance small and medium enterprise (SME) loans in the local capital markets.
• Guarantees to local banks on portfolios of small business loans in which OPIC and the local banks would share risk of loss.

OPIC currently anticipates $150 million will be available for SME lending through these vehicles.  The factors that will determine whether a bank qualifies for OPIC support are the potential benefit to economic development from the bank's SME lending activity, the bank's ability and commitment to build an SME loan portfolio efficiently and profitably, and the bank's ability to utilize OPIC support in a manner consistent with OPIC statutory requirements.

The Inter-American Investment Corporation (IIC) of the IDB Bank Group is focused on providing financing to SMEs in the region. The IIC will build upon its relationships in the region to offer a similar menu of options to banks under the initiative, particularly those that do not qualify for OPIC support.

Third, ensure that small business lending is not unnecessarily constrained by burdensome regulations or bureaucracy.In many cases, bank regulatory authorities perceive small businesses to be very high risk borrowers and impose heavy collateral and/or provisionary requirements. We will help introduce best practice regulatory models that ensure prudentially sound lending while avoiding requirements more suited to lending to larger firms.

• Treasury's Office of Technical Assistance – which has 33 advisors working in 16 countries in Latin America – will allocate one regional advisor to help identify regulatory changes needed for more credit to be made available to the SME sector.  
• MIF will engage the Latin American Association of Supervisors of Banks of the Americas (ASBA) and facilitate cross-border seminars and regional workshops to define and promote the adoption of best practices in SME and microlending among its members.

Measurable Results. Tracking of the small business lending results is expected to be overseen by a program manager housed at the MIF. A steering committee will be created to oversee performance under the initiative and meet twice a year to ensure the program's effectiveness in catalyzing lending to small businesses.

• Eighty percent of the volume of lending under this initiative will be composed of loans under $100,000. 
• Participating banks will also likely sign a policy statement, similar to a business plan, outlining a strategy for lending to small business.  The statement would incorporate several indicators of measurable results we would target for this effort, such as the total volume of loans disbursed to small businesses, the average loan amount and the number of loan officers trained.