Argentina’s president Mauricio Macri (pictured above) earlier this week announced new measures to support the country’s SMEs, including raising the obligatory percentage of loans that banks must make to the sector, from 14% to 16% of net credit.
This will ensure that about 137 billion pesos ($9.6 billion) will be channelled over six months to SMEs, when it comes into effect in July.
The measures are intended to offset Macri’s vetoing of an earlier measure introduced in Argentina’s congress to ban businesses from firing employees for three months.
Under the banks initiative (línea de inversión productivo) introduced in 2012 by Argentina's central bank, banks must set aside a certain percentage of loans to the productive sector. The measure is similar to another in India (see this earlier post)
A number of other tax and finance measures were also announced by Macri to support SMEs, including the creation of fund (Mi primer crédito) by Argentina’s Bank for Investment and Foreign Trade (Bice) to finance SMEs who have never received bank finance before.
Ratcheting it up
The banks initiative obliges financial institutions, whose average private sector deposits over the last three months is equal to or greater than 1% of total bank credit, to allocate in the form of loans at least 16% of these deposits to SMEs to fund productive investments. The funds can’t be used to fund land or to finance working capital.
The obligatory percentage is reviewed by the central bank every six months and requirements adjusted if necessary.
When it was launched in 2012 banks were obligated to provide 5% of all their credit to productive sectors - with half of this to go to SMEs.
From 2014 the central bank changed the rules to ensure that the entire 5% target was applied to SMEs. The target was hiked to 5.5% in the second half of that year, then to
6.5% at the beginning of last year, to 7.5% in the second half of 2015 and 14% for the period January to end of June this year.
So far so good
So far most banks have been able to meet the targets and under the measure credit to SMEs has increased - from 28% of all bank credit that went to businesses (excluding credit advanced on credit cards) in 2011, to 45% of credit in 2011, reveals a central bank report.
Central bank rules however allow for banks that fail to adhere to the targets to be fined or have their banking license revoked, under Section 41 of the Law of Financial Entities.
Need for intervention
There's a strong argument for the central bank's intervention. Argentina only channels 17% of GDP worth of finance to the private sector, compared to 69% in Brazil, 109% in Chile and 196% in the US, in 2014, according to a 2015 report.
In addition a report in March last year by the University of Avellaneda suggests there is space for more credit to be channelled to SMEs, as just 11% of small businesses use bank loans to fund investment, compared to 20% of large companies.
However an earlier 2013 report by Observatorio PYME noted at the time that the Central Bank initiative was not enough to spur lending to SMEs, with many small manufacturers holding off on investing because of the poor economic climate and unavailability of funds in the country at the time.
However while the economy is still struggling and expected to contract by 0.7% this year, the new administration's move to settle Argentina's international debt and open the country's markets to global producers, bodes well for SMEs.
With the economy set to soon rebound, small businesses will need all the help they can to get finance. Such an initiative should get other countries interested too.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a