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. Last Updated: 07/27/2016

Banks Seen as Failing Small Businesses

Only one in 20 Muscovites works in small businesses, a new survey found, largely because bank loans are either too expensive or unavailable.

A lack of start-up capital, distrust of banks and tedious registration procedures are holding back the development of small businesses in the city, says the study, released by the Association of Regional Banks on Friday. It was based on a poll by state-owned VTsIOM and the National Agency for Financial Research.

"The main reason for not getting involved in creating businesses is the problem of access to financial resources," said Anatoly Aksakov, president of the Association of Regional Banks.

The association chose to poll Moscow residents because more than 20 percent of the country's small businesses are registered in the city, said Aksakov, who is a member of the State Duma's Credit Organizations and Financial Markets Committee.

The poll of 400 residents had a margin of error of 3.4 percentage points.

More than 60 percent of those polled said they were unable to establish their own businesses due to a lack of financial resources. Among other responses, 35.5 percent blamed competition from large businesses, while 33.3 percent of respondents said procedures to register small businesses were too complicated. Respondents could choose up to two answers.

According to the study, only 5.5 percent of Moscow residents age 18 and over are employees or owners of small businesses.

"We thought Moscow would give better results," Svetlana Saigadak, deputy head of the Russian Bank for Development, told reporters at the presentation of the study.

To set up a small business, 92 percent of respondents said they would either rely on their own savings (65 percent) or borrow from relatives or friends (27 percent).

Just over half of respondents said they would apply for a bank loan. Respondents could choose up to two preferred sources of finance.

"Entrepreneurs are afraid of becoming hostages" to repaying expensive loans, Saigadak said.

Another factor that could explain why so many people prefer borrowing from friends, rather than banks, is that most commercial lenders prefer to work with existing businesses rather than start-ups, said Natalya Potapova, who is in charge of product development for small, medium-size and corporate businesses at KMB bank.

"Most banks don't give loans to start-up businesses," Potapova said.

KMB, which recently placed a newspaper ad that included the slogan, "Small business is a big deal for us," does not get involved in lending to start-ups. A client's business has to have been running for at least five to six months before it can qualify for a loan, Potapova said.

Aksakov said loans to small businesses in the country accounted for about 3 percent of gross domestic product. That figure is 35 percent in the United States and about 30 percent in the European Union, he said.

Respondents' top difficulties with bank loans were hidden loan charges (54 percent); short repayment periods (38 percent); collateral requirements (34.8 percent); and the reluctance of banks to lend to small businesses (30 percent). Respondents could choose up to three problems with bank loans.

Aksakov said the Duma in May planned to introduce legislation to tackle the problem of hidden loan charges.

Saigadak said the Russian Bank for Development had agreed with Opora, a small business lobby group, to host a series of free-of-charge seminars aimed at helping small businesses.

The second part of the Association of Regional Banks' study, looking at the rest of the country, would be completed shortly, the association said in a statement.