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. Last Updated: 07/27/2016

EBRD to Form Bank To Boost Small Firms

Russia's largest direct investor, the European Bank for Reconstruction and Development, said Wednesday it was forming a new bank to lend to small businesses and inject life into a program hit by crisis.

EBRD senior banker Elizabeth Wallace said loans under a program of credits for small firms had fallen by more than half, to about 600 loans per month from 1,500 before economic turmoil was unleashed last August.

"The main problems that we are having are with the partner banks and not the borrowers," she said at a news conference.

"Some of the partner banks were obstructive about sending the payments on. ... Ones we are no longer working with."

The state-backed EBRD is best known in Russia for its disastrous investment in major bank Tokobank, now bankrupt, and has been roundly criticized by foreign bankers for not doing its homework, especially on Tokobank.

Now more cautious, the EBRD has said it does not expect to invest in Russian banks soon, except for the Russian Project Finance Bank, founded to carry out micro-lending programs, make loans to small businesses and take advantage of a $300-million revolving micro-lending fund.

Micro-lending programs, which involve granting very small loans on a short-term basis to entrepreneurs - usually ones starting their first business - have become increasingly popular as a means for helping bring about development in poorer countries around the world.

Under the program, loans average a few thousand dollars and it is a popular way to aid growth in developing countries among small entrepreneurs who have no other access to capital. It also aims to lend for a profit.

The Russian Project Finance Bank offers up to $50,000 in rubles at 55 to 70 percent for up to a year and up to $125,000 in dollars at 15 to 22 percent for up to three years.

Wallace said banks in the program were the best performing in Russia, benefiting from the fact that small borrowers who mortgaged everything from apartments to family pets worked hard.

The borrowers included clothes makers and processors of food and had a world class 99.7 percent repayment rate before the crisis, which the EBRD hoped most borrowers would survive.

"We think that around 95 percent of the small businesses that we work with will be able to survive and repay," she said.

But the program, from which at least six or seven banks have been thrown out or gone bust, is not going fast enough. "We needed to speed things up," Wallace said.

The new bank will give foreign shareholders a controlling stake, unlike other EBRD financial services investments, and two Western bankers will run the company and its credit department.