Fund Offers Small Businesses $87.7 Million in Financing

Encouraged by federal authorities and international organizations but hampered by a lack of collateral, Russian banks are gradually wading into the practice of offering small business loans.

Vyacheslav Prokhorov, head of the state committee for support and development of small business, told a press conference Friday that the Federal Fund for Small Business has 500 billion rubles ($87.7 million) in loans ready for dispersal to entrepreneurs, much of the money to be channelled through provincial banks.

But the fund and the banks need guarantees that the money will be returned.

"Problem number one for small businesses isn't the lack of money at modest rates of interest, but guarantees for loans," Prokhorov said. "Problem number two is the failure of small businessmen to draw up proper business plans."

According to Andrey Orlov, deputy head of the committee, money from the federal fund is lent at annual interest rates no higher than 20 percent for periods of up to two years.

Acting as an incubator, the fund encourages banks to lend 3 to 4 rubles for every ruble supplied by the fund, Orlov said, a difficult task given that Russian legislation does not allow land as security and aspiring businessmen often lack other forms of collateral.

The European Bank for Reconstruction and Development and the Group of Seven leading industrialized nations are using Russian banks as a conduit for a $300-million small-businesses fund.

To date, the fund has loaned about $90 million to traders and producers in 11 cities throughout Russia, according to Martin Holtmann, head of the technical team for the credit in Moscow.

Holtmann refuted Prokhorov's contention that small businesses are a security risk, noting that his fund has a less than a 1 percent default rate.

"We want to prove to Russian banks that you can loan this money to people and they will pay it back," he said.