why do banks prefer alternative instruments to loans when working with SMEs?

The activation of small and medium-sized businesses (SMEs) against the backdrop of the crisis has attracted the attention of financial institutions. Banking groups are increasing financing of the segment, including by expanding the provision of leasing and factoring services. This form of work allows you to reduce risks, help increase business margins and retain a wider range of clients. At the same time, new schemes require the development of remote and scoring services.

According to the Federal Tax Service, at the beginning of 2024, 6.3 million small and medium-sized businesses were registered in Russia. Over the year, their number increased by 0.5 million. Against the backdrop of sanctions pressure on the large corporate segment, SMEs are seeking to occupy places in the vacated niches, which requires funds, including for the development of activities and maintaining working capital, Expert RA notes.

Bank lending remains the main source of financial resources for SMEs. Despite the projected decrease in the growth rate of the total loan portfolio relative to 2023, “a trend for further growth in lending in the segment in 2024 is visible, both in terms of the volume of financing and the number of borrowers,” VTB notes. Over the 11 months of 2023, Alfa Bank’s SME loan portfolio grew one and a half times, exceeding 25% of the total corporate business. According to the Central Bank, the volume of the SME banking portfolio as of November 1, 2023 was close to 12 trillion rubles. Over the course of a year, the growth was more than 31%; in two years after the start of hostilities in Ukraine, it exceeded 70%.

“State support programs continue to play an important role in lending dynamics, allowing even small and start-up SME companies in all sectors of the economy to receive financing on preferential terms. Another growth factor is the increased convenience and speed of obtaining a business loan,” VTB notes. In the near future, the market will see an increase in the share of SMEs receiving loans, largely due to the trend towards active digitalization of the banking sector, notes Alexander Chernoshchekin, senior vice president, head of the medium and small business unit of PSB.

However, classic bank lending does not always satisfy both the needs and capabilities of the business and the scoring policies of banks. A key trend in SMEs is the increasing speed and availability of financing.

In particular, in the microfinance market, the SME portfolio, according to the Central Bank, in January-September 2023 reached almost 77 billion rubles. (an increase of 12%). Mostly SME loans are issued by state-owned microfinance organizations. However, they work only with target areas of the economy for the region and with a certain amount of funding. In addition, the largest commercial microfinance organizations are entering the segment, which have a high level of digitalization and are ready to offer businesses quick solutions online (see Kommersant dated August 15, 2023).

Commercial microfinance organizations offer market rates for SMEs – 1.8–4.5% per month. “The purposes for which SME representatives primarily raise funds from MFOs are emergency needs. For example, urgently closing the cash gap, replenishing working capital,” notes Moneyman CEO Alexander Pustovit.

Large financial groups, trying to maintain and develop the marginal segment of SMEs, are looking for alternative methods of financing (see “Kommersant” dated November 16, 2023), mainly leasing and factoring.

Confident in instability

“This allows us not only to keep the client from switching to a competitor, but also to increase profitability per client. As a rule, factoring and leasing are more profitable instruments for banks,” confirms Mikhail Doronkin, managing director of the NKR rating agency.

“For banking groups, having their own factoring or leasing company is largely a matter of compliance with regulatory requirements,” explains Yulia Yakupova, director of banking ratings at Expert RA. “Leasing and factoring companies are not under the supervision of the Central Bank, so there are no requirements for them such as from banks, regarding the formation of reserves.” At the same time, the expert notes, the cost of market funding for such companies is higher than for banks, and individual players “in the context of rising interest rates began to carry out transactions from the balance sheet of banks in order to maintain margins.”

The margins of leasing and lending in working with SMEs, all other things being equal, are comparable. However, in practice, the situation has developed that leasing formats are often more profitable for lenders, explains Suren Asaturov, deputy director of the ACRA group of financial institutions ratings: “Companies often turn to leasing after they were unable to get loan approval. The profile of such borrowers is riskier, which leads to higher rental rates.”

In addition, higher-margin products are less sensitive to rising rates in the economy. Their risk premium was initially significant, making the relative increase in overall value due to monetary tightening less noticeable.

According to Expert RA, for the nine months of 2023, the share of SMEs in the total volume of new business in the leasing market amounted to a record 73%. This figure has been continuously growing over the past five years, from 48% in 2018. At the end of 2023, SME clients preliminarily occupy about 70% of the total volume of new business of Gazprombank Leasing. In Interleasing the share already exceeds 80%.

However, there are exceptions: the share of the SME segment in the SberLeasing portfolio as of October 1, 2023 was 38.5% (which may indicate active lending to the segment by the parent bank). In real terms, based on the results of three quarters of 2023, the volume of financing for SME clients in the market as a whole increased by 95% compared to the same period last year and exceeded RUB 1.8 trillion. (see “Kommersant” dated December 5, 2023).

Effective rates in lending, leasing and factoring in the small business segment are approximately the same – 20–28% per annum, notes Chairman of the Board of Directors of SME-Leasing Yuri Kolesnikov. However, the advantage of leasing is that it provides title rights to property, which significantly changes the risk model for the better compared to secured bank loans. This allows, in the case of liquid equipment, to significantly weaken the requirements for the borrower. As a result, leasing becomes the most accessible source of long-term business financing (modernization, expansion of fixed assets), he is sure.

“In 2024, the trend towards express solutions continues and there is an increasing transition to online transactions. Marketplaces of leasing companies are actively developing, where the purchase of a car occurs remotely,” says Maxim Kalinkin, General Director of Gazprombank Leasing.

In general, the SME segment feels most confident during periods of instability, which is also confirmed by demand from entrepreneurs, says Sergei Zharkov, commercial director of Interleasing. “We well understand the residual value of machinery or equipment, we can control its condition and have competence in remarketing in the event of default,” he notes.

The current trend has become a request for floating rates. Enterprises, especially medium-sized ones, do not want to stop their investment programs now, but they expect a decrease in the cost of funding in the second half of the year, Mr. Zharkov points out. It is proposed to include in contracts the possibility of reducing leasing payments and financing costs when the key rate is reduced.

Delayed risk factors

The most marginal from the point of view of working with SMEs is factoring, which involves higher risks – in particular, interaction with really small businesses, often fast-growing or recently opened, as well as the absence of collateral for financing, if we are talking about the classical form of factoring, without recourse and others superstructures, notes Suren Asaturov. “All this helps businesses not only receive financing, but also increase production volumes, increase the scale of supplies and expand the geography of transactions, growing to the SME+ segment,” says SberFactoring.

According to AFK, the volume of the factoring portfolio of SME clients at the end of nine months of 2023 exceeded 143 billion rubles, having increased almost 1.5 times over the year. The share in the total portfolio remained at 8%. At the same time, the volume of paid financing during the reporting period reached 567 billion rubles, which is 1.7 times higher than a year ago. At Alfa Bank, the share of SMEs in the factoring portfolio at the end of 2023 was 7.35%, while the SME portfolio over three years grew 3.5 times, exceeding 26.5 billion rubles.

Factoring is useful primarily for those SME organizations that use deferred payment in their calculations, and allows the client to quickly receive unsecured financing in exchange for receivables, admits Managing Director for Factoring at Alfa Bank Pavel Shishov. For the lender, the implementation of factoring does not involve high risks. According to Mr. Shishov, “as a rule, factoring is shorter money compared to leasing or credit.” Risk management is carried out due to the rapid turnover of transactions and their small size, which determines the diversification of portfolios for lenders.

“Factoring is trying to occupy the niche of short-term working finance, where the lender’s margin is no longer the “key” (key rate.— “Kommersant”) plus 0.1% per annum, but not yet the “key” plus 15% per annum, as in crowdlending. Above-average returns over a short duration distinguish the factoring business within banking groups,” explains Dmitry Shevchenko, executive director of the Association of Factoring Companies.

But there are also limiting factors. “In addition to generous treasuries, factoring subsidiaries within banking groups are forced to deal with risk takers. Referring to the Central Bank, bank risk managers are trying to tighten the screws in subsidiaries of factoring companies, equating factoring to a loan and destroying the business model,” explains Dmitry Shevchenko. VTB is not so optimistic about the prospects for SMEs in this segment. “The share of the SME segment in the total factoring portfolio of the market has not changed significantly over the past three years, remaining in the range of 8–10%. In the absence of incentive measures that would contribute to the accelerated growth of the factoring portfolio in the segment, an increase in the share of SMEs by the end of 2024 is unlikely,” the bank believes.

But in general, experts agree that key trends in SME financing will continue and intensify in 2024: sanctions pressure on the Russian economy continues, many product niches are being vacated or remain unfilled, creating new space for small businesses. The market is not expecting a quick easing of monetary policy. As a result, financiers admit, banks will have to adapt to working with SMEs, balancing between high risks and high margins.

Polina Trifonova