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Russia: Loan Program Boosts Small Businesses And Banks

For the first time since the August 1998 financial crisis, the Russian government this year has re-instituted a much-needed program to aid small businesses. In the city of Tula, a local bank has been disbursing loans to hundreds of modest entrepreneurs for some time -- and, perhaps surprisingly, making money on them. In the second part of a two-part series on small businesses in Russia, RFE/RL correspondent Sophie Lambroschini reports on the unusual loan program.

Tula, 29 June 2000 (RFE/RL) -- At first glance, lending money to small businesses in Russia may seem more like a philanthropic than a profit-making enterprise. But with a payback rate of close to 100 percent, Russian small businesses often turn out to be ideal clients for banks.

That, at least, is the view of Mikhail Chachin, head of the micro-financing department of the state-controlled Sberbank's office in Tula, a city 200 kilometers south of Moscow.

Tulsky bank -- as the branch office is called -- is a partner bank of the London-based European Bank for Reconstruction and Development, or EBRD. Under the EBRD's Small Business Fund program, Tulsky bank's small-business clients have grown considerably. Today, seven Tulsky loan officials handle from 30 to 80 portfolios each.

Chachin says that -- with Russia's economic prospects looking relatively good almost two years after the 1998 financial crisis -- Sberbank is now planning to extend its microloans and small-business loans. The crisis triggered the collapse of one-third of Russia's businesses and almost forced Moscow to default on all its foreign debts. But Chachin told our correspondent it did have some positive effects:

"There were multiple benefits. [For instance,] those who were involved in real production sometimes quadrupled their profits. But those who were merely speculators suffered seriously. That showed other entrepreneurs that you have to have a real business [to survive]. From a psychological point of view, it considerably helped many businessmen to rid themselves of illusions they may have held before the crisis."

Chachin says that Sberbank's client portfolio is gradually moving away from import-export trade and toward production. This, he says, shows a positive, stabilizing trend in an economy where small businessmen are now less worried about inflation and are investing more:

"More and more, our clients want to be real producers -- of course, always on a small scale. We have a client who used to sell cars but has now bought a small mill to produce flour. And companies that were already producing commodities are now expanding into new sectors."

In the textile industry, one of Sberbank's success stories is that of a company known as Ilina, Incorporated. Its owner, Tatiana Ilina, had several years of experience working in Soviet textile factories when -- like many others who lost their jobs in the early 1990s -- she had to get into private business in order not to starve. Six years ago, when her brother Alexander also lost his job in a state-owned company, he became her business partner. Alexander Ilin recalls:

"My sister got the original idea. She started dealing in cloth. Funeral homes always need cloth to dress up their caskets, so we started working with them. They we went expanded to factories that also need cloth."

At the outset, brother and sister would buy giant rolls of cloth in Moscow and transport them to sell in Tula. What began as a means of survival slowly developed into a real business. Today, Ilina has to shout over the din of seven electric sewing machines in the workshop she opened just a few weeks ago:

"In Soviet times, I never would have thought that I would have my own sewing business, that I would actually employ people and produce something apart from bedding."

But Ilina explains that expanding production is possible only with more capital, through a guaranteed loan. She says that's why, after several smaller loans, she finally took out a seven-month, $11,000 (300,000 ruble) loan from Sberbank -- the only bank that would help her:

"It's only thanks to these loans that I can expand. Where else could I get money? We get no support and it can be dangerous to accept money from someone. Now, I can sleep in peace because we have a contract, fixed conditions, a fixed date for repayment, fixed percentages. I know that no one will tell me, 'You accepted an interest rate of so and so but you're going to pay back by another rate.' I have stability. There's probably nothing more valuable in business than stability."

But for the time being, Sberbank's Tulsky Bank remains the only financial institution in the city offering small-business loans under $30,000 (under 750,000 rubles), known as micro-loans. Oksana Merzlyakova, a credit expert with the EBRD's Small Business Fund in Tula, helped train and oversee the Sberbank's micro-financing activities. She says that, apart from Tulsky's low interest rates, its credit managers are quicker in granting loans because they don't simply sit behind their desks:

"They know what to check and how to do it quickly. Whereas other commercial banks will spend a lot of time in administrative procedures, our experts go to the businesses themselves and see them with their own eyes -- instead of waiting for the client to get together the copies of all the [needed] documents. Clients now appreciate this -- although in the beginning it scared them off."

According to Svetlana Borisova, Sberbank's leading expert on loans, the bank's payback rate is close to 100 percent. In part, she says, that's because the bank's tough staff seldom takes "no" for an answer:

"I had one client who, we thought, would not be able to repay the loan. But when we went to him every day and simply took away his belongings -- furniture, television set, refrigerator. That forced him to pay."

Even so, Borisova admits, her bank sometimes still loses out to the shady loan sharks she calls bandits.

Still, the EBRD small-business loan program may actually be putting pressure on the loan sharks. The EBRD's Small Business Fund says that in some smaller Russian cities, the fund's loan program has created tough competition for the informal lenders, driving down the interest rates on the gray loan market.

In that way, supporting small business can contribute to cleaning up Russia's often ferocious business ways.