Since its beginnings in 1994, the RSBF has pursued a dual objective: first, to bring MSEs, whose financing needs had not previously been met by Russian banks, within the scope of the formal financial system; and second, to contribute to institution-building within the banking sector by providing intensive training in sound credit analysis to as many partner institutions as possible, thus enabling them to diversify their client bases. These objectives have not changed over the 22 years of operations; however, the strategic focus has shifted due to changes in the environment where the RSBF is operating.
Over the course of its existence, the RSBF has provided technical support to more than four dozen Russian commercial banks.
The scope and variety of the technical support provided by the RSBF to build and further strengthen solid financial institutions has changed over time. Whereas the RSBF initially aimed to establish sustainable and competitive MSE lending operations from scratch through long-term institution-building, today the RSBF provides both standardised and individualised short-term support to banks as well as a variety of training modules. The RSBF currently focuses on capacity-building measures for the partner banks by way of knowledge transfer to banking specialists.
1994 – 1998: Pilot project and roll out
In the year of its inception, Russian banks were operating in an environment which gave them ample opportunities to make profit – for example, currency speculation or high-yield government short-term obligations (GKOs) – and there was no need to allocate resources to enterprises which were not perceived as a potential market. The typical Russian entrepreneur did not borrow from Russian banks but from the informal sector. Thus, the first 13 banks to become RSBF partners had to compete with the informal sector and despite this challenging environment, by the outbreak of the crisis in 1998 loans worth nearly US$ 100 million had been disbursed to 7,000 microenterprises. The dynamic trend of these early times was, however, then disrupted for a number of years.
1998 – 2001: Crisis response and recovery
With the crisis of 1998, the RSBF witnessed a financial sector meltdown, severely damaging the progress made during the initial years of the RSBF’s institution-building work. It took some time for the banking system to recover from the crisis and for potential customers to regain sufficient confidence in the local banking sector. In fact, the collapse of the rouble and the government short-term obligations (GKO) default meant that, at least on paper, many Russian banks were rendered insolvent within minutes on 17 August 1998, among them six RSBF partner institutions (PIs).
It became essential to safeguard the outstanding claims of the European Bank for Reconstruction and Development (EBRD) to the PIs to the greatest extent possible and to recover the RSBF funds due from the six former PIs which did not survive the Russian financial crisis (in fact a large portion of the funds was recovered). In parallel the EBRD and RSBF accelerated efforts to set up a specialised microfinance bank. Loan portfolios were transferred to this “Russian Project Finance Bank” (RPFB), which began issuing new micro and small enterprise (MSE) loans in December 1998. The process of converting the RPFB into a specialised microfinance bank – the Small Business Credit Bank or KMB Bank – began immediately after the onset of the crisis. This made it possible for the RSBF to continue lending operations without interruption in many Programme locations – even during the financial and banking crisis – thus enabling it to remain a reliable partner for local MSEs. In addition, the establishment of KMB Bank safeguarded the RSBF’s previous investments in human capital: many of the RSBF-trained loan officers, lawyers and other staff were hired by KMB Bank in order to enable it to continue the Programme’s lending activities.
Micro and small enterprises
Like all of the other sectors of the Russian economy, the micro and small business sector was hit by the financial crisis. Subsequent developments in the RSBF, however, demonstrated that the small business sector was in fact as resilient and flexible as it had often been assumed to be during the pre-crisis period. Many clients survived the crisis by rapidly restructuring and changing their product mix, or by substituting inexpensive local products for expensive imports. The vast majority of local borrowers managed to repay their outstanding loans even under very difficult circumstances. Thus, the post-crisis period also served as a kind of litmus test for the reliability of Russian small businesses as borrowers. By paying back their loans in the chaotic situation that emerged after the crisis, the Programme’s borrowers demonstrated that they valued their access to the RSBF and saw it as a means of developing a beneficial and long-lasting business relationship. The strong commitment that was shown by the borrowers was due to the fact that in many Programme cities there were very few alternative sources of funds. Therefore, despite the numerous setbacks and difficulties triggered by the crisis, RSBF borrowers made every effort to retain their eligibility to use the Programme’s services; as they looked to the future, they clearly understood that if they were no longer regarded as creditworthy by the RSBF, they would not be able to find another source of financing that could be relied on to meet their credit needs on a lasting basis.
At the end of 2000, shortly before the first new PIs joined the RSBF after the crisis, the RSBF had five PIs actively on-lending to MSEs. MSE lending started growing again and already by July 2000 the number of outstanding loans had exceeded the pre-crisis level for the first time.
2002 – 05: Regional banks’ expansion strategy
In mid-2001 a new development strategy was defined for the RSBF and the Programme started to focus on regional banks with a view to diversifying its portfolio and outreach channels. Therefore, the RSBF entered a new phase in its operations when four new banks joined the RSBF. Russia experienced good economic performance and the inclusion of more partner institutions (PIs) increased competition between the banks. This was not only to the borrowers’ advantage, it also supported the institution-building process at the PIs themselves.
Up until 2005, when the Programme strategy regarding suitable PIs was again revised, the RSBF followed the traditional institution-building approach aimed at changing the target institution on a very fundamental level and improving the corporate governance of the entire institution. Successful institution-building was the key component during the first 10 years of the RSBF, when sustainable access to banking services for micro and small enterprises basically had to be created from scratch.
During this time, the RSBF placed strong emphasis on changing the mindset and conduct of bank personnel at all levels in the PIs where best business practices were concerned, including the design and implementation of, as well as the attitude towards, policies, procedures and internal control, and personnel selection and development. This was not just a process of creating actual structures or developing a set of written procedures, but a process of transferring the technical know-how, as well as the acceptance, implementation and further development of this know-how, to the PI. The basic stages of this institution-building process always included the “initial implementation”, the “expansion” and the “graduation” phase.
When the four “new” PIs which had joined the Programme in 2002 and 2003 entered their graduation phase in 2005, the RSBF had already identified new opportunities.
2006 – 08: Extension to large-scale banks operating nationwide
During the fourth Programme phase, the Russian banking sector underwent an essential transformation and financial intermediation started to take off. Until the global financial crisis began to affect Russia in late 2008, at a practical level most local micro and small enterprises (MSEs) were no longer encountering high barriers to obtaining loans from banks. More and more banks were considering the MSE segment to be an attractive target group and apart from RSBF partner institutions (PIs), a number of other Russian banks had built up their own MSE lending capacities outside the RSBF. At this time, the RSBF opted for a change in strategy to enable more and larger banks, which already had some experience in MSE lending, to benefit from the Programme as well.
There were three main reasons leading to this strategy change in the fourth phase:
- The RSBF and many of its PIs, above all KMB Bank, had demonstrated over time that profitable and sustainable banking business can be built up through lending to MSEs, even in Russia.
- As a result, a number of large Russian banks realised that high growth rates and attractive returns could be achieved in the largely underserved segment of micro and small business customers.
- Equity investments in Russian banks (by Russian banks, foreign private investors and international financial institutions such as the European Bank for Reconstruction and Development) were a considerable spur to the growth of the Russian credit market, and as a result both the demand for and the supply of credit to the private sector increased substantially.
The tendencies described above show that the RSBF had made a significant contribution towards closing the financing gap that existed for Russian MSEs. Twelve years after the establishment of the RSBF, there was genuine interest in the Programme’s target group at more Russian banks than ever before, and many were seriously interested in expanding their MSE lending activities.
Against this background, between 2005 and 2006 the RSBF gradually adopted a new implementation concept that emphasised “leveraging” previously established MSE lending capacities through more targeted short-term support. The new strategy focused on three areas:
- Building additional and sustainable capacities for MSE lending in regions where only low-quality MSE credit services were available, or where the target group could not access credit at all.
- Empowering new and existing RSBF PIs with experience in MSE lending by providing them with short-term consultancy and training services to support them in their efforts to strengthen specific areas within their institutions (such as risk management, human resources or internal audit).
- Transferring know-how about best-practice approaches to the various aspects of MSE lending in Russia through centralised seminars, workshops and round-table discussions aimed at a high-level audience composed of middle and senior managers from several PIs.
Training on specific MSE-related topics emerged as one of the main components of the RSBF’s consultancy services. The majority of the training – both on a centralised basis in Moscow for all PIs and on an individual basis for specific institutions in the regions – targeted middle management staff. In addition to an extensive transfer of technical skills, particularly relating to lending, the seminars covered a broad range of leadership and organisational skills needed by employees with management and training functions, for example staff management, effective work organisation, programme financing, portfolio management and internal control.
In the period 2007-08 nearly 850 participants, more than half of which were middle management staff, underwent classroom training at the RSBF’s Moscow office and at regional branches of the PIs. In all, 41 targeted training measures were held exclusively for management staff, and a further 48 seminars were oriented towards loan officers.
The character of the technical cooperation provided by the RSBF changed following the strategic reorientation. Whereas in earlier years the RSBF had always approached new PIs with the same comprehensive institution-building approach aimed at developing sustainable and competitive MSE lending at the banks from scratch, in more recent years the Programme has provided mainly tailor-made, individual support to its PIs, many of which already had an existing MSE lending structure and corresponding credit products.
2008 – 11: Targeted crisis response measures
During all the phases of the RSBF to date, the Programme has always adapted the character of technical cooperation provided by its consultants to the prevailing challenges. The 2008 crisis in Russia required especially quick and flexible changes in the focus of technical assistance and the RSBF aimed its activities at meeting the partner institutions’ (PIs) most urgent needs.
In the time between September 2008 and August 2009 the RSBF conducted on average one monitoring mission per month at graduated, active and potential PIs on behalf of the European Bank for Reconstruction and Development. As a result of the monitoring missions and further support provided by the RSBF consultants, the actual situation in the banks and the impact of the crisis on their MSE lending operations became clear in the course of the first year after the outbreak of the crisis. The insights gained during the in-depth analysis of the banks meant that immediate short-term assistance or training could be given to individual banks.
Thus, in 2009–11, RSBF activities shifted from review and analysis to support and specific training. Once the impact of the crisis and the current situation had been assessed, targeted support, training and consultancy work tailored to the main needs of each bank were implemented.
Despite the post-crisis situation, the RSBF has succeeded in adding new PIs. These banks view the crisis as an opportunity to enter the MSE / SME (micro and small enterprise/small and medium enterprise) finance market, as the crisis has already reshaped and will further change the Russian banking sector.
The MSE market in Russia has changed since 2010. The MSEs’ demand for credit has decreased in scope because of the 2009 recession and the greater uncertainty about future developments. It has also decreased in terms of quality due to relatively high levels of unproductive debt that was taken on during the economic boom times and that could not be converted into productive assets to generate additional income. Another major factor affected the quality of the MSE market: the level of competition in retail lending. Before the crisis, the retail lending boom in the Russian banking market had created strong competition for microfinancing. The boom was particularly strong just prior to the outbreak of the financial crisis, with very small loans available practically on every street corner without any analysis. The RSBF has always rejected such irresponsible lending practices and it cannot be denied that the crowding out of microloans by consumer loans negatively affected the quality of the microentrepreneur market. However, as a result of market changes, banks have become more cautious when assessing potential clients’ creditworthiness and are rejecting more loan applications. The crisis has, therefore, resulted in a reversal of the lax trend and the share of microloans in the RSBF portfolio may change again, given that some banks are changing their aggressive consumer lending strategies due to a lack of funding.
As a consequence, the potential MSE credit market has narrowed for banks which had previously succeeded in building up significant MSE lending capacities and they are still trying to find their way in this new market situation. The main concern of most RSBF PIs has become the need to increase profits through loan portfolio growth. Therefore, they have been looking for support in developing a new and more sustainable client-oriented banking approach. The need for improved staff training in credit technology, sales techniques and human resource management was an important lesson learned from the crisis. Hence, the staff of the RSBF PIs frequently take advantage of the training courses offered and demand for training has been on the increase over the last few years. Since 1994, well over 8,000 bank staff have been trained at the RSBF training centre, including 1,700 in the post-crisis period from 2009 to 2011 alone.
2012 – …: Current phase. Capacity building
The successful creation of new opportunities to serve the MSE segment at Russian banks depends entirely on the people who will provide these services. At this stage the RSBF focuses primarily on staff training, since only competent staff can ensure the sustainable growth and development of MSE credit operations.
Since its inception, the RSBF has trained more than 10,000 Russian banking experts, thus contributing to the dissemination of the responsible lending approach promoted by the EBRD. Many banking experts trained under the RSBF have continued their impressive careers and now hold senior positions in Russian banks, with many of them responsible for the development of MSE lending in their institutions.
The RSBF specialists have developed a series of high-quality educational seminars on the various aspects of banking for small business customers. To take part in our seminars, RSBF partner banks should send a preliminary request for participation.
The RSBF has also implemented a Knowledge Sharing Platform, which serves as an additional tool to promote and implement the goals of the EBRD and the RSBF. The platform offers online training courses on the basics of the credit technology which the RSBF considers to be sound. The platform has turned into a knowledge transfer channel for many RSBF partner banks, who have already integrated it into their training programmes.
At the end of 2015, the RSBF implemented a certification procedure: successful candidates who have passed an online certification test are entitled to receive the EBRD-RSBF certificate.