Latin America Shadow Finance Regulatory Committee
Recommendations
1. Fairly rate the risk of SMEs: Bank capital requirements as recommended
by Basel I (the proposed international regulation) penalizes SMEs since it
assigns the same risk weight of 100 % to all private sector projects. In Basel
II, risk weights are assigned according to ratings by credit rating agencies,
but with the peculiarity that unrated firms will continue faring a risk weight of
100 %. Since the cost of obtaining a rating is very high for most SMEs, they
will have no incentive to get rated and therefore will continue to have
difficulty borrowing.
2. Improve institutional infrastructure for lending: Adequate credit
information bureaus that provide a firm’s track record should be established.
Mobilizing collateral is difficult in Latin America, and thus, better property
registry systems must also be created and maintained. The need for large
collateral of lending will be reduced, if better access to information on firms is
made available.
3. Share the burden of lending: Mutual-fund-like institutions need to be
created, whose portfolio will be made up of the loans to SMEs, and whose
liabilities will be its shares to institutional investors. It basically asks for a
wider participation of institutional investors in the capital market. The
committee, however stressed the need to avoid relaxation of prudential
standards for investments by institutional investors and that the mutual fundlike institutions need to be rated.
4. Ensure long term funding: The Committee says that in spite of very little
success with second-tier banking in the region, there are conditions under
which they can operate efficiently in financing SMEs. Long term bank
financing is still scarce in the region and second tier banks can provide this to
SMEs. The Committee however, stressed a number of preconditions before
implementing these initiatives.
5. Improve provisions of guarantees to SMEs: Mutual guarantee societies,
as they exist in some European countries or loan investment funds can also
be created or reformed in countries where they exist to help SMEs access
bank loans. They can be set up in a cooperative manner, and in some cases
could have some initial support, albeit limited from the local or national
government.
6. Offer technical assistance in financial planning: The Committee finally
asked for the creation of programs designed to help SMEs prepare technically
sound financial statements when applying for bank loans. Technical assistance
and providing education to those employed in SMEs is critical in creating a
dynamic entrepreneurial sector.