Sergei Safonov Partner, EY Small and Medium Entrepreneurship in Russia Roundtable discussion SME financing in ENCA Luxembourg, 12 March 2014
Contents The role of SME sector in the Russian economy and the government attention to SME sector development The Russian SME sector structure, financing instruments and growth potential Financing needs of the SME sector and the role of development institutions both Russian and international in financing markets development Slide 2
Summary Development institutions can make a considerable impact on the Russian SME sector as SME financing markets are still in developing or emerging stage The SME sector in Russia has been steadily growing in recent years, both in terms of SME number and turnover Despite high growth rates, an international comparison shows strong potential for further growth of SME sector in Russia Low availability of banking and nonbanking financing for SMEs is among main constraints for the development of the sector SME financing markets demonstrate sustainable growth with emerging markets (factoring and microfinance) showing the highest growth rates The Russian government is active in shaping the business environment for SMEs both through legislative improvements and by providing direct financial support, e.g. from state-owned SME Bank (VEB Group) The government support for SMEs is primarily focused non-trade and non-resource sectors as well as on emerging SME activities across all industries SME financing markets attract various players including commercial and development banks key strength of development banks is funding tenor, while funding rates at commercial banks are still quite competitive Slide 3
Key components of SME classification in Russia are similar to those used in EU For the purposes of state support, legal entities, individual entrepreneurs and agricultural producers are considered as small or medium businesses if they meet three criteria, according to Law 209-FZ: 1 Ownership structure: SME s stake held by one or several legal entities, which are not small or medium businesses, should not exceed 25% 2 3 Workforce: Number of employees should not exceed 250 people Volume of revenue: Annual turnover should not exceed 25 euro mln. Revenue (eur mln) Russia Number of employees SME Segmentation Revenue (eur mln) EU Number of employees Registered SMEs (thousands) Russian SME statistics SME employment (mln) Medium 10-25 101-250 10-50 50-250 44 3 Small 1.5-10 15-100 2-10 10-50 616 8.5 Micro <1.5 <15 <2 <10 3743 4.6 = 4 403 = 16.1 Slide 4
SME sector in Russia has been steadily growing both in terms of SME number and turnover Number of registered SMEs, in thousands 4.104 4.248 4.269 4.342 4.403 2.742 2.653 2.600 2.490 2.390 1.362 1.594 1.669 1.852 2.013 = 17* per 1000 of population Starting from 2008 the total number of small and medium enterprises has grown by 7% and reached 4.4 mln. 2008 2009 2010 2011 2012 SME turnover, EUR bln 721 669 175 183 546 487 890 885 753 112 196 200 641 694 685 = 22% of GDP Turnover of small and medium enterprises has steadily grown during aftercrisis period (starting from 2009) and in 2012 reached EUR 885 bln. Average turnover per SME, EUR thousand, 2012 2008 2009 2010 2011 2012 Employment in SME, millions of people LE 340 84 IE 16.7 16.4 16.5 16.6 16.1 3.0 3.1 3.1 3.0 2.9 13.7 13.3 13.4 13.5 13.2 2008 2009 2010 2011 2012 * Number of active SMEs = 23% of total employment Total employment in Russian SMEs remained stable since 2008 and in 2012 is 16.1 mln. people. Average employees per SME, 2012 LE 6.6 Legal entities (LE) Individual entrepreneurs (IE) IE 1.2 Slide 5
Despite recent growth, in international comparison there is still considerable potential for further growth in SME sector in Russia Number of active SMEs per 1 000 of population (2011*) 88 71 70 70 63 59 59 58 58 54 53 45 42 41 40 40 38 38 37 36 35 35 34 32 27 26 25 17 12 The number of SMEs per unit of population is 2 times lower than on average in EU 52 51 51 49 49 49 48 47 47 45 44 44 43 43 42 40 40 40 39 38 37 35 35 32 30 29 25 23 Malta Estonia Portugal Latvia Italy Spain Cyprus Greece Czech Republic Denmark Slovenia Hungary Lithuania Austria Bulgaria Ireland Sweden Netherlands Czech Republic Malta Portugal Greece Italy Cyprus Sweden Hungary Luxembourg Spain Slovenia Belgium Europe Bulgaria Estonia Finland France Netherlands Poland Denmark Austria Latvia Ireland Lithuania UK Germany Romania Russia Slovakia Employment in SME (% of total employment, 2011*) Employment in SME segment is 1.7 times lower than on average in EU Share of SME in GDP Europe Germany Belgium Finland Poland France UK Romania Slovakia Russia 80% 79% 60% 60% 50% 50% In 2015 SME will produce quarter of Russian GDP which is still significantly lower than in other developed and developing countries 25% 22% Italy Germany China Brazil USA UK Russia 2015 Russia 2012 * Russian figures are for 2012 Slide 6
State support to SME sector takes different forms ( financial support, special tax regime etc.) with the focus on innovative SMEs LEGISLATION DESCRIPTION 1 Law No. 88-FZ on State Support for Small Business in the Russian Federation (adopted in 1995) Sets the framework for state support to small business, objectives, forms and methods of state stimulation and regulation of small business activity, definition and criteria for enterprises to be considered small-sized companies. Federal Laws 2 Federal Law No. 209-FZ on Developing Small and Medium Scale Entrepreneurship in the Russian Federation (2008) Replaced the previous 88-FZ. Introduced the terms medium entrepreneurship, microenterprises and infrastructure for support to SME. Defined methods of support for various forms of SME. 3 Federal Law No. 82-FZ on Development Bank (2007) Defines objectives and functions of the development bank, in particular states SME support as one of the main functions. 1 State s finance program on SME support Russian Government (2005) Declares the goals such as the increase of the volume of support of the innovative SMEs, medium enterprises, leasing development, grant support of the beginner entrepreneurs, creation of SME support centers etc. Government measures 2 3 President s Decree No. 956 on Long-term state economic policy (2012, May) The Ministry of Economic development - decree No. 143 on Selection criteria for Russian medium entities and their investment projects (2013) Sets measures and directions for improvement of entrepreneurship conditions, in particular through creation of mechanism of state s guarantees to secure medium-sized companies investment projects. Sets criterias for mid-sized entities (investment projects) selection for VEB guarantee support. State support of SME sector is focused on manufacturing sector with particular emphasis on innovative and technology intensive SMEs According to the definition, innovations include modernization and energy efficiency Slide 7
The Russian government is actively involved in shaping the business environment to intensify SME development Leaders of the rating 2014 (top-20) Russian Federation rating components* 1. Singapore 2. Hong Kong SAR, China 3. New Zealand 4. United States 5. Denmark 6. Malaysia 7. Korea, Rep. 8. Georgia 9. Norway 10. United Kingdom 11. Australia 12. Finland 13. Iceland 14. Sweden 15. Ireland 16. Taiwan, China 17. Lithuania 18. Thailand 19. Canada 20. Mauritius Components 2013 2014 Starting a Business 100 88 ( 12) Dealing with Construction Permits 180 178( 2) Getting Electricity 188 117( 71) Top-5 economies improving the most* Country 2013 2014 Improvement Philippines 138 108 30 Ukraine 137 112 25 Russian Federation 112 92 20 Rwanda 52 32 20 Kosovo 98 86 12 Registering Property 46 17 ( 29) Getting Credit 105 109 ( 4) Protecting Investors 113 115 ( 2) Paying Taxes 63 56 ( 7) Trading Across Borders 162 157 ( 5) Enforcing Contracts 10 10 (0) Resolving Insolvency 53 55 ( 2) Doing business report was chosen by the government as an indicator of SME sector development Government measures implemented in 2012-2013 helped Russian Federation to move up 20 positions being amongst the top-5 countries improving the most in the year 2013. The goal set by the government is to reach top-20 by the year 2018. Getting credit is one of the key areas for improvement in the medium-term perspective Source: World Bank Doing Business Report Slide 8
More than 20% of Russian SMEs outline low availability of finance as a constraint for SME sector development Key constraints for SME development Sources of finance 47% Shortage of qualified personnel 36% Bank loan (also for investment purposes) Borrowings from relatives, friends or other companies 19% 13% 27% 30% The most popular source of SME financing, according to the analysis, is bank loan (27%). Second and third by popularity are borrowings from relatives and friends (19%) and trade credit (17%). Leasing, factoring and credit lines are not popular. High taxes Trade credit 17% 32% 22% Low availability of finance 18% Decrease in demand Leasing, factoring Credit line, overdraft or credit card with overdraft Grants or subsidized bank loans 4% 12% 11% 13% 36% 40% Russia EU Europe There is substantial unmet demand for financing in SME sector in Russia. Slide 9
The markets of SME financing demonstrate sustainable growth with emerging markets (factoring and microfinance) showing the highest growth rates SME lending market, EUR bln SME leasing market, EUR bln 81 96 112 CAGR + 15% 171 In 2012 the loan portfolio of Russian banks in the SME segment is RUB4.5 trln (EUR112.4 bln). The growth rate in 2012 (17%) is lower than in 2011 (19%) and in 2010 (22%). CAGR +18% CAGR +22% 10.3 13.3 15.4 CAGR +18% 25.3 The SME segment accounts for about 35% of the total leasing market in Russia. In 2012 the SME share of total leasing market grew by more than 6%, reflecting the desire of leasing companies to diversify their portfolios. 2010 2011 2012 2015F 2010 2011 2012 2015F SME factoring market, EUR bln 1.1 1.8 3.2 CAGR + 56% 12.1 The factoring market is the fastest growing financial market in Russia. In 2012 its share of GDP grew to 2.3% (from 1.6% in 2011). The share of the SME segment in new deals (2012) is approximately 40%. CAGR +71% CAGR +32% SME microfinance market, EUR bln 0.4 0.5 0.7 CAGR + 52% 2.3 In 2012 the total portfolio of microfinance organizations (MFOs) was about RUB48 bln (EUR1.2 bln) with annual growth of 30%. The share of SME segment in portfolio is 54% with RUB26 bln (EUR0.65 bln) in absolute terms. 2010 2011 2012 2015F 2010 2011 2012 2015F Slide 10
Actually there are six main groups of players on Russian banking market Major banking clusters on Russian market Large Local universal player Market-dominant multilateral player А Sberbank VTB 24 А B State-owned commercial banks country wide market dominants headed by Sberbank. Foreign banks service and efficiency leaders with average regional coverage. Client segment coverage Small Small E Local niche player B Citibank Raiffeisen Unicredit Rosbank Banks that are not in top-100 in terms of assets Binbank Ural R&D Bank RosEvroBank D Probusinessbank Regional coverage Alfa-bank Ularsib Russkiy Standart MDM Bank Gazprombank C F Development institution Vnesheconombank Rosselkhozbank SME Bank AHML Large C D Large private commercial banks above average regional coverage with growing service and efficiency. Second tier private commercial banks below average commercial coverage seeking for product or channel differentiation. E Local players invisible on country level but may be leaders in some regions. F State owned development institutions specific segments or products. Price leaders in search of golden mean between profitability and development. Slide 11
Government and International Development Banks (IDB) are active in the market of SME financing Top3 government sources Top3 IDB players in Russia 1 Federal Budget/ Regional Budget Subsidies to regional programs for SME support Spent In 2012 Planned In 2013 1 475 mln eur 451 mln eur Supports SME in Russia with financing and advisory services Current investment portfolio in Russia 1.7 bln eur In 2012 invested in Russia 900 mln eur 2 SME Bank Lending: Provides loans through banks, leasing, factoring, microfinance companies Guarantees: 50% of a loan, 2-10 yrs, max 1.8% per yr By June 2013 2.3 bln eur 1.8 bln eur 0.5 bln eur 0.1 bln eur 134 bank-partners 140 non-banking organizations Infrastructure projects 2 SME financing is provided through a range of instruments, including debt, credit lines and equity. RSBF: Provides financing to SME and assists institutional development of banking sector for SME lending since 1994 (total EUR6.8 bln.) Current investment portfolio in Russia 9.7 bln eur In 2012 67 projects worth 2.6 bln eur 3 Regional guarantee funds 79 funds assist SME in obtaining financing by providing guarantees in regions Capitalization 0.8 bln eur 1.1 bln eur Guarantees portfolio Loans given under guarantees 2.4 bln eur 3 Provides medium-term finance for SMEs, stimulates entrepreneurship in the regions and supports banks that grant credits to SMEs Loans to Russian commercial banks 200 mln eur In 2012 environmental protection, innovations and modernization 82.5 mln eur While government pays attention to SME segment, SME supporting policies and laws and funding sources are not unified and synchronous. Which leaves a lot of space for IDBs which are already consistently expanding their presence in SME financing market. Slide 12
Most recent Russian government initiative in SME support is to create Federal Guarantee Agency Current situation State SME support mechanism through SME Bank (loans and guarantees) Vnesheconombank SME Bank Bank-partners Russian Government Ministry of Finance Ministry of Economic Development SMEs Commission for Distribution of Subsidies Regions Regional funds State SME support through federal / regional budgets funds (subsidies, guarantees) Key functions Key figures Possible positioning of Federal Guarantee Agency Federal Guarantee Agency to be Guarantees to medium enterprises Guarantees to regional funds Global management and control for regional guarantee fund system Reporting to the Ministry of Economic Development Capital size will be EUR 200 m to EUR 1 bn Will manage ~80 regional guarantee funds Ministry of Economic Development Vnesheconombank (focused approach) Federal Guarantee Agency (wider support approach) SME Bank Regional guarantee funds Bank-partners SMEs Agency is expected to be created in 2014 Slide 13
High borrowing costs are cited as the main obstacle for availability of SME financing Key obstacles for SMEs financing Obstacles from SME s side Obstacles from Bank s side High borrowing costs 20% 48% Inability to provide necessary collateral or guarantees Financing is inavailable in principle Decrease of control over company Other No obstacles 2% 6% 1% 3% 2% 10% 11% 22% 22% 34% high interest rates on loans inability to provide collateral or guarantee inability to provide necessary package of documents financial position is not sound SME financing non-transparency of borrower shortage of potential borrowers with sound financial position bad quality or absence of collateral higher loan reserves insufficient economical and legal literacy of most small entrepreneurs shortage of qualified personnel insufficient experience in the area of SME risk management Reject to answer 5% 14% Russia EU Europe High borrowing costs is the major obstacle for obtaining financing in the SME segment (48%).The next significant obstacle is the inability to provide collateral (22%) Bank loan is the main source of financing but there is a room for growth due to considerable share of financing received from relatives and friends Slide 14
Key reason for high borrowing costs on SME financing market is high level of non-performing loans Non-performing loans in different segments Loan portfolios of banks, EUR bln* 10.0% 9.0% 8.0% 7.0% 6.0% 7.6% 6.8% 8.8% 6.9% 8.2% 8.4% 5.2% 112 193 5.0% 4.0% 3.0% 2.0% 5.7% 4.2% 4.1% 3.7% 3.6% 411 Total 716 1.0% 0.0% 2009 2010 2011 2012 SME Retail Large 2012 SME Retail Large Slide 15
Local development institutions have about 10 times higher average funding tenor than commercial banks, while funding rates of commercial banks are significantly lower Development institutions State-owned commercial banks Private commercial banks Foreign banks Average funding rate ( blended ), % Average funding tenor,months Sberbank 2.9% AHML 110 Raiffeisen 3.1% VEB 98 VTB 3.3% SME Bank 47 Alfa Bank 3.5% Sberbank 16 Unicredit 3.6% Promsvyazbank 10 Vozrojdenie 4.0% VTB 9 Promsvyazbank 4.6% Vozrojdenie 9 Uniastrum 6.7% Raiffeisen 9 VEB 7.9% Uniastrum 9 AHML 8.2% Unicredit 6 SME Bank 10.3% Alfa Bank 3 Development institutions don t have access to funding sources available to Commercial banks (e.g. deposit portfolio, current accounts), which affects both average funding rate and funding tenor. * Rates are based on the average bond coupon rate. Source: cbonds.ru Slide 16
According to our estimations, about 1 million SMEs currently require external financing SME segment (turnover, EUR mln) Economically active SMEs, thousands Major industries Share of non-trade entities, % Major SME segments requiring external financing from institutions, thousands (%) Mid-sized (10 25) Small (1.5 10) Micro (<1.5) ~ 15 ~ 450-500 ~ 2 000 ~ 2 000 Manufacturing, Agriculture, Construction Services, Manufacturing, Construction Trade, Services, Transport and Communications 69% 65% 50% Competition and penetration of bank services and external financing ~150 ~600 2 ~10 ~90 ~150 1 = ~10 (~67%) = ~240 (~50%) = ~750 (~38%) = ~2 500 = ~1 000 1 Matured industrial SMEs 2 Emerging / developing SMEs of all sectors Slide 17
Each group of SME requiring financial support should be addressed with proper instruments of financing (either longterm or short-term) KEY DEVELOPMENT OPPORTUNITIES: 1 2 Matured industrial SMEs Boostering long-term financing Emerging/ developing SME (all sectors) Providing short-term financing opportunities Client segments Financing instruments Short-term Long-term 1 2 3 Bank lending Leasing Factoring 1 2 4 Microfinance Slide 18
The majority of SME financing markets in Russia is in the developing or emerging stage, and there is potential for EIB to make a considerable impact on the SME sector (1) Product for ultimate clients (SMEs) Scenario = (1) product + (2) appropriate distribution technology Three-level financing* (2) Distribution technology Two-level financing** Guarantee Securitization Market maturity level Impact assessment Potential market size Potential impact Short term loans n/a Developed Very large Low Long term loans Developing Very large High Long term loans to nontrade segment Emerging Large Very High Long term loans to innovative segment n/a Emerging Large Very High Leasing to SMEs n/a n/a Developing Medium High *Three-level financing implies work with local development institutions (e.g., VEB and its subsidiary SME Bank) which will supply financing to commercial banks (2 nd level) and after that commercial banks provide loans to SMEs (3 rd level). This option will give EIB the access to a broad client network without establishing direct relations with commercial banks and will significantly reduce cost and risk. This option, however, will lead to lower level of control and will limit the ability for direct SME market impact. ** Two-level financing implies work with Russian commercial banks (including State-owned, privately- owned and international banks) which will provide loans to their ultimate clients (SMEs). Leasing w/o railway and passenger cars n/a n/a Emerging Medium Very High Factoring n/a n/a n/a Emerging Small Moderate Microfinancing n/a n/a Emerging Small Moderate Equity n/a n/a Developing Large Moderate Level of technology complexity and risk exposure Low Moderate High High Technology capacity Very High High Low Low Slide 19
Conclusions The development of the SME sector is very important for the Russian economy Diversification from the current concentration on large companies and on natural resources Creation of new workplaces while one-quarter of the employable population already works in SME sector SME sector potentially is a considerable taxpayer a diversified income base for state budget SMEs output demonstrated high growth rates in recent years, about 19% p.a., and is expected to remain double digit in mid-term perspective The Russian government is making efforts on providing support to SME sector by improving business environment and financing activities but the system of state support is still fragmented and not fully transparent Many SME financing markets and financing instruments in Russia are in developing or emerging stage, e.g. long-term financing, financing of emerging businesses, securitization, etc. There is potential for development institutions to make a considerable impact on the Russian economy through enhancement of financial services for the SME sector Slide 20
Appendix Slide 21
Decrease of the growth rates, consolidation, and focus on retail sector are the main trends in Russian banking sector Expected changes in Russian banking sector: Market size and growth In 2013 the volume of total banking assets in Russia is expected to reach EUR 1 250 bln (at current exchange rate at year end) Market will continue to grow but with decreased growth rates of about 10-12% Retail banking sector growth rates are expected to slow down Market structure Market consolidation will continue, the total number of banks will continue to decrease A tendency of the growing pressure of the large state-owned banks will preserve Privately owned banks will focus mainly on retail, SME and MidCap segments as local LargeCap is predominantly covered by state-owned banks Future success factors Business scale, capital size and funding Innovative and technological business-models Network efficiency, right choice of product line and speed of entry in new market segments Small players without a clear focus will be squeezing out of the market Slide 22
Bank assets growth rate will substantially slowdown, the volume of banking assets will reach 1 693 EUR bln by 2015 Total bank assets in Russia: Assets, EUR bln. Assets % of GDP, 2012 г. Comments % of GDP 67.5% 74.7% 73.4% 75.3% 79.9% 85.0% +11% p.a. 1,693 France Germany Czech Republic 119% 309% 397% In the next years it is expected that the current trend of GDP growth rate slowdown will preserve The bank assets to GDP ratio will continue to grow, however it s growth rate will slowdown +20% p.a. 1,238 Poland 94% Bank assets to GDP ratio is expected to be 85% by 2015 +5% p.a. 700 735 845 1,040 Russia 2015 Russia 2012 85% 80% Average growth rate of Bank assets in Russia will amount to 11% by 2015 Ukraine 80% Kazakhstan 47% 2008 2009 2010 2011 2012 2015f Sources: EY, Bank of Russia Slide 23
For many small banks without distinct positioning a survival question arises Bank assets share in banking sector by types, % Comments 137 EUR bln 45% 5% 700 EUR bln 28% 11% 17% 1 237 EUR bln 19% 8% 20% Small and medium privatelyowned banks Foreign banks Large private banks (top-30) The structure dynamics of the banking sector indicate that state-owned banks are strengthening In particular it is connected with state-owned banks being preferred by consumers as their financial services providers This trend will increase in case of economic decline Foreign bank s share in Russian banking assets decreased due to the problems at their domestic markets A substantial decrease of Russian small banks share is observed 15% 32% 44% 53% State-owned banks 2003 2008 2012 Sources: EY, CEE Banking Sector Report Slide 24
Forecasted population income increase will assure the growth of retail sector share in credit portfolio Credits to legal entities, EUR bln % of GDP 31.4% 33.0% 460 363 33.4% 35.2% 36.4% 725 594 523 Comments Traditionally corporate lending significantly exceeded retail lending in Russia In the past years a significant growth of retail lending is observed, whereupon credit portfolio changes gradually approaching the indicators of the developed markets A further increase of retail credits share of 33.3% is expected by the end of 2015 2010 2011 2012 2013e 2015f Credits to individuals, EUR bln Share of retail loan portfolio in total loan portfolio, % % of GDP 8.9% 9.9% 138 103 12.3% 15.1% 18.2% 363 255 193 28.2% 33.3% 44.3% 50.7% 56.0% 65.8% 2010 2011 2012 2013e 2015f Russia 2012 Russia 2015 Czech Republic France Germany Poland Sources: EY, CEE Banking Sector Report, European Central Bank Slide 25