Over the next 50 years, the economies of Brazil, Russia, India and China (BRIC) have a potential to become a leading force in the global economy, according to the Economic Research report presented in 2003 by Goldman Sachs. While India and China can become the dominant global suppliers of the manufactured goods, Brazil and Russia can develop into the dominant global suppliers of natural resources and raw materials. However, this development is possible only if BRIC countries maintain and support policies conducive to growth and economic development (O'Neill, 2003 and Cheng, et al, 2007). The creation and development of small and medium size enterprises (SME) is one of the main elements of successful economic development. It in turn requires access to borrowed capital for start-up and growth. This paper gives an overview of the small business lending environment in two of the BRIC countries, Brazil and Russia, and compares the recent trends in business credit granting practices. Due to the variations in lending policies in commercial lending across the countries and regions, this review concentrates on the credit granting practices to SME by the government sponsored financial institutions in Brazil and Russia. The U.S. Small Business Administration (SBA) lending policies and credit granting practices were used for comparison purposes in this review.
WHY BRAZIL AND RUSSIA?
Despite vastly different geo-political, economic, historical and cultural backgrounds, Brazil and Russia have similarities in some aspects of their recent economic development. Both countries were isolated from the rest of the world in the course of several decades in the 20th century. During the last two decades both Russia and Brazil went through political unrest, periods of high inflation and economic decline. The political changes in both countries in the mid-1980s eventually led to economic reforms (White, 2005). Presently, both Brazil's and Russia's economies are on the path of recovery and growth. The International Monetary Fund (IMF) ranks the economies of Brazil and Russia as the world's 9th and 10th largest (Figure 1).
According to the 2007 Doing Business Survey conducted by the World Bank, Russia ranks 112th and Brazil ranks 113th on ease of doing business out of 178 countries included in the survey. The United States is ranked 3rd, after Singapore and New Zealand. This ranking is a simple average of the percentile rankings on each of the ten topics which include the ease of starting and closing a business, getting business credit, dealing with licenses, employing workers, protecting investors, registering property, enforcing contracts, and trading across the borders.
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Some of these rankings will be discussed in more detail throughout this paper. Such proximity in overall "ease of doing business" rankings for Brazil and Russia suggests that there is a basis for comparison of the small business lending and credit granting practices in these two countries.
BRAZIL AND RUSSIA: ECONOMIC AND DEMOGRAPHIC DATA
After a long history of hyperinflation and fiscal indebtedness, Brazil now follows tight fiscal policies with strong economic growth and real wage increases. Current political reforms in Brazil emphasize building a more welcoming climate for domestic and foreign investment. Agriculture remains a major sector of the Brazilian economy accounting for 30% of GDP. Likewise, the Russian economy weathered the shock of the transition from a socialist to market economy in the 1990s following the collapse of the Soviet Union. The Russian economy was and remains mostly industrial with manufacturing as the prevalent sector. It still depends largely on oil and gas revenues. Russian exports consist mostly of petroleum and petroleum products, natural gas, chemicals, wood and wood products.
Brazil and Russia have similar size populations. Brazil's population of 184 million people is the largest in Latin America and fifth largest in the world. Russia's population is 143.5 million people. However, while Brazilian population grew 1.4% in 2005, the total population of Russia declined by 0.5% during the same year (Figures 2 and 3). The population decline in Russia is a worrisome demographic trend which, if not reversed, can become detrimental to its future economic growth.
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After years of economic decline, which were exacerbated by the 1998 financial crisis, Russia's GDP growth is now on the path of recovery. In 2005, it grew at 6.4% per year compared to Brazil's GDP annual growth rate of 2.9%. In comparison, GDP in U.S. grew at an annual rate of 3.1% during the same year (Figure 4).
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COST OF BORROWING
The rate of inflation is one of the factors determining the real cost of borrowed funds. Both Russia and Brazil experienced double and triple digit inflation in the early 1990s. Since then inflation in Russia declined from 197% in 1995 to 12.7% in 2005. Brazil's inflation rate declined from 66% to 6.9% during the same time period (Figure 5). At the same time inflation in the U.S. fluctuated in the range of 1.5%-3.4% per year.
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Although inflation rates in Russia and Brazil declined significantly in the past ten years, borrowing costs remain high. In addition to the relatively high inflation rate in Brazil and Russia, default risk premiums and credit administration costs contribute to high interest rates. According to the Emerging Markets Indicators summary published by the Economist, in 2005 the average annual short-term interest rates were 17.29% in Brazil and 12% in Russia. In the United States, during the same year, the prime interest rate ranged from 5.25% to 7.00%. Legal and institutional problems that lengthen debt foreclosure and recovery also contribute to the high cost of borrowing in Brazil and Russia.
FINANCIAL INSTITUTIONS AND SMALL BUSINESS CREDIT IN BRAZIL AND RUSSIA
Prior to the soviet regime collapse in the late 1980s, all banks in Russia were state owned. Until recently, state owned banks had the financial backing and guaranty of the federal government which gave them a significant competitive advantage over private banks in attracting deposits. The Russian government owns 61% of the shares in Sberbank, the largest state owned bank. International transactions go through another state owned bank, Vneshtorgbank. The Russian Bank for Development (RBD) deals with small businesses and smaller projects. Foreign banks cannot presently open their branches on the territory of the Russian Federation although they can own a Russian bank (ABA Banking Journal, 2006, p. S8).
In the 1990s, the proportion of financing provided to small businesses by Russian banks was extremely small due to the inherent risks and an absence of credit enforcement mechanisms. Financing activities were directed at larger businesses and government enterprises. The collapse of the banking system in 1998 reduced the total value of outstanding loans. It led to a further decrease in the amount of credit going to small businesses (Kihlgren, 2002). Since that time the total value of loans has significantly increased from $54 billion in 2003 to $213 billion by the end of the third quarter of 2005 (ABA Banking Journal, p. S6). Loan defaults, money laundering activities and the lack of a centralized database and credit rating agencies remain the main concerns of Russian financial institutions.
The banking system in Brazil has also experienced a dramatic transformation since the mid-1990s. Once dominated by state-owned banks, it went through mergers, acquisitions and bank closings. In fact, only 14 state-owned banks remained in existence in 2002 compared to 32 state-owned banks in 1994, when the stabilization Real Plan was introduced. Despite this decrease in the number of state-owned banks, they still account for 29% of total loans, and 43% of total deposits of the Brazilian banking system. At the same time, foreign banks increased their presence in Brazilian financial markets. After the first eight months the Real Plan led to an increase in lending activity by 44%. This increase in lending, however, was not supported by credit risk considerations which lead to a decline in a credit quality. Thus, the lower inflation rates and more stable pricing environment eventually led to a decline in lending volume and increase in non-performing loans (Nakane, Weintraub, 2005). Overall, consolidation of the banking system has not resulted in an improved availability of credit in Brazil. High lending rates and taxes are the main reasons for the high cost of credit, making it inaccessible to small businesses. The business owners often finance their business operations with personal savings or by utilizing consumer credit (Pfeifer, 2005).
The governments of both Russia and Brazil have established private or government sponsored financial institutions devoted in whole or in part to the support of small and medium businesses. The Brazilian Development Bank (BNDES), a federal public company associated with the Ministry of Development, Industry and Foreign Trade of the Brazilian government, was established in 1952. Its goal is to provide capital funding to private companies, support investments in agriculture, commerce and service, and finance exports. One of the priorities of BNDES is to provide funding support to micro, small and medium enterprises, and stimulate job creation and an increase of taxable income. BNDES manages Guaranty Fund which guarantees a part of the credit risk incurred by private financial institutions in granting credit to micro, small and medium businesses. The microcredit program was established in 2003-2004, with participation of several Federal ministries and the Central Bank of Brazil, in order to provide access to lower cost credit for micro, small and medium enterprises.
Similarly, the Russian Bank for Development (RDB) was established in 1999 as a national development bank. It is a joint stock company with 100% of shares held by the Russian government. In 2006 RBD introduced a program designed to support SME development in Russia. This program sets lending guidelines and, in participation with the regional banks and local authorities, assures a fair and equal access to capital for small and medium businesses. RDB extends loan funds to the regional commercial banks which in turn lend funds to small businesses. The ultimate goal of this program is to increase regional economic growth, job creation and tax revenues.
WHAT IS A SMALL BUSINESS?
The classification of an enterprise as a small business varies in each country. In the U.S., for example, the SBA defines a small business as "one that is independently owned and operated and which is not dominant in its field of operation." A numerical standard for a "small business" designation was developed by the U.S. Congress. This standard typically applies to the number of employees or average annual receipts of the business concern. Table 1 provides an illustration of numerical standards for small business designation in the U.S. within certain industries.
There are three main types of systems in place for defining a small business enterprise in the Eastern European countries including Russia. These include: (1) systems based on gross income, (2) systems using specific indicators to determine the size and output of a small business such as floor space, number of employees, or the location of the business, or (3) general patents for specific professions irrespective of the size, location, and turnover of the business. The definition of the "small business enterprise" is often designed to determine the level of taxation. Based on the revised tax regulations in Russia (2002), companies with up to 100 employees and an equivalent of US$352,000 turnover are considered "small businesses" (Engelschalk). This definition is still being discussed in Russian political and business circles. In 2006 the Russian Economic Development and Trade Ministry presented new proposals to support small businesses which included a change of a legal definition of SME (The Kommersant, 2006). RBD defines an SME as a business with no more than 250 employees calculated as a two year average.
Like Russia, Brazil is now in the process of developing separate tax legislation for small businesses. Similarly, there is a need to define a small business for tax benefit purposes with possible definitions similarly based on the annual operational gross revenues or number of employees. For example, in order for a business to be classified as a "micro enterprise", the number of employees should not exceed 19 workers in the manufacturing sector, and 9 workers in the service industry. "Small" businesses typically have between 20-29 employees in manufacturing, and between 10-49 workers in the service industry (White, 2005). BNDES defines a "micro" enterprise as the one with annual operating gross revenues of up to R$1,200,000, and a "small" enterprise as the one with annual operational gross revenues of more than R$1,200,000 and less than or equal to R$10,500,000 (1.00 Brazil Real (R$) = 0.5686 US Dollar (US$), www.bloomberg.com, 7 Dec. 2007).
Therefore, it can be concluded that there is no single and clear definition of a small business enterprise. While the U.S. has a well established system to define a "small business", Russia and Brazil have more fluid definitions which are often rooted in taxations codes. However, all definitions are based on either number of employees or amount of annual revenues. It can be expected that Brazil and Russia will develop more rigid definitions of a small business as their economic development progresses.
CURRENT ENVIRONMENT FOR SMALL BUSINESS ENTREPRENEURSHIP IN BRAZIL AND RUSSIA
Importance of Small Businesses in Economic Development
It is well known that small businesses in the U.S. have a profound impact on the national economy. According to the SBA, U.S. small businesses employ half of all private sector employees and pay 45% of total U.S. private payroll. Small businesses generated 60-80% of net new jobs annually over the last decade. Small businesses in most developing countries provide the majority of employment opportunities as well. They represent more than 90% of business operations and transactions (White, 2005).
Providing a stimulus to SME development is one of the main elements in the transition process to a market economy in Central and Eastern Europe including Russia (Zamulin, 2004). The Russian government recognizes that the development of basic industry branches mostly depends on the expansion of SME (RIA Novosti, 2005). However, the contribution of SME into the Russian economy is not fully accounted for due to the lack of reliable statistical data. It is estimated that the number of SME in Russia increased from 100,000 to 979,000 between 1999 and 2005 (RIA Novosti, 2006). Russia has several consulting organizations directed at helping small businesses. One such organization, the Russian Agency for Small and Medium Business Support, a private consulting company, was set up in 1992 under the initiative of the Government of the Russian Federation, with support from the Chamber of Commerce and Industry of the Russian Federation and other organizations. It assists SME with solving economic, financial, legal, organization and management issues. It also provides an information network, and sets business links with Russian and international partners.
The Brazilian government also emphasizes the importance of incorporating small businesses into the formal commercial sector. There are currently more than 4.5 million formal small businesses in Brazil. However, the number of informal small businesses in Brazil is estimated at 9.5 million (White, 2005). The Brazilian government created Brazilian Service for the Assistance of Micro and Small Businesses (Servico Brasileiro de Apoio as Micro E Pequenas Empresas, or SEBRAE) in the late 1980s to oversee all small business enterprise development issues. This agency was later privatized, and is now one of the largest and influential non-governmental agencies in Brazil. It provides assistance in training, consulting on credit and capital resources, entrepreneurial culture and local development (White, 2005).
Starting a New Business in Brazil and Russia
The ease with which countries allow a business start up determines the competitive advantage of that country in a global economic market and has an impact on its ability to attract local and foreign investment. According to the 2007 Doing Business Survey, Brazil ranks 120th and Russia 45th out of 178 countries on the ease of starting a new business. The United States ranks 4th following Canada, Australia and New Zealand. The factors contributing to this ranking include, among others, the number of procedures required to start a business, and time and costs involved (Table 2). The lack of centralized institutions overseeing small businesses, high variability of the local municipal laws and regulations, and absence of digital record-keeping increase costs and time associated with start up and operating a business in the emerging markets. More cumbersome procedures encourage bribery and corruption in an attempt to speed up the process through the system. This increases the cost of doing business, and such increases are passed on to consumers. Both Russia and Brazil have cumbersome bureaucratic procedures on the national and local levels, and bribery and corruption are common barriers to new business entrants. In contrast to the U.S. where the existing laws and regulations allow new businesses to begin operations in record time, emerging market economies lack structures favorable to small businesses.
For example, it currently takes 17 steps to register a business in Brazil, with about 7 different ministries involved. This process on average takes 152 days. The Brazilian government is attempting to streamline the start up process for businesses allowing some states to take on-line registration (Lewis, 2007). In Russia it takes 29 days on average to start a business, which is an apparent improvement compared to 37 days in 2004. In 2006 in U.S. it took about 6 days on average to start a new business. Although the cost of opening a new business remained relatively high in 2006 in Brazil and Russia compared to U.S. as a percentage of per capita income, (9.9% in Brazil and 3.9% in Russia), it showed a declining trend in both countries since the 2004 survey.
Like in Brazil, start up businesses in Russia must deal with confusing and cumbersome forms and registration procedures on the federal and local level. Not surprisingly, such a system pushes entrepreneurs to resort to bribery and corruption. In addition to bribes paid to the tax departments, local bureaucrats and officials, some Russian businesses have to pay organized criminal groups (Broadman, 2001). In order to reduce administrative oversight and overall business costs to businesses associated with registration, licensing and inspections, the Ministry of Economic Development and Trade in Russia launched a deregulation program in 2001 (Zamulin, 2004). The registration process for small businesses in Russia was simplified. New laws set clear and acceptable standards for small business registration, and called for additional reform steps in creating a one-stop window process. Additionally, Russia has adopted generous taxation regulations for small businesses by reducing the tax burden on small businesses by 50-70% which reflected a strategy to encourage small business development (Engelschalk).
Likewise, the Brazilian government is moving in the same direction regarding the taxation laws for small businesses. Currently Brazilian business owners pay one of the highest tax rates in the world. In 2007 the new tax law was introduced to the Brazilian Chamber of Deputies. Once approved by the country's president, this law is expected to reduce tax rates by 35 -50% for small businesses and legalize one million micro- and small businesses. In addition to tax provisions, it provides other measures to reduce bureaucratic procedures currently required for small businesses (Timm, 2007). Since most of the informal labor takes place in the small business sector, by streamlining tax regulations and the registration process, the Brazilian government also hopes to create new jobs for small businesses (P. dos Santos, 2005).
Ease of Getting a Business Credit
Brazil ranks 80th and Russia ranks 156th on ease of getting business credit, according to the 2007 Doing Business Survey (Table 3). This ranking includes a legal rights index, credit information index and public registry coverage. The legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending, on a scale from 1 to 10. The higher index indicates that collateral and bankruptcy laws are better designed to expand access to credit. Russia has a slightly higher legal rights index (3) compared to Brazil (2), with both countries trailing U.S. which ranks 7th.
The credit information index measures the scope, accessibility and quality of credit information available through either public or private credit registries, on a scale from 0 to 6. Brazil's credit information index is rated 5. It means that Brazilian lenders rely on both public and private registries during the credit evaluation process. As a way of further improvement, the Brazilian banks are starting to collect positive information including good payment history, along with more traditional information on defaults and delinquencies. Availability of positive information can contribute to lower risk premium spreads for eligible borrowers (P. Dos Santos, 2005).
Russia has a zero rating on its credit information index, indicating that its public and private credit registry is not operational or has coverage of less than 0.1% of the adult population. The absence of a national credit bureau or business rating agency presents unique set of challenges to the Russian lenders. In the credit granting decision process, they have to rely on in-house credit history databases and internal credit investigations.
Challenges Facing SME in Brazil and Russia
The research conducted in the late 1990s on small business development in Russia suggested that the following factors impeded small business development since its legalization during perestroika in the mid-1980s: (1) high levels of corruption, (2) strong income inequality, (3) legislative framework (4) general situation of instability caused by the lack of clear rules, (5) the scarcity of financing for small businesses, (6) the precarious state of large industrial enterprises, and (7) high level of crime (Kihlgren, 2002). A study by Harry G. Broadman (2001) describes such deterrent factors in SME development in Russia as weak mechanisms for resolving commercial disputes, lack of access to seed capital and competitively priced credit, difficulty of obtaining suitable business premises and real estate, and the complexity of business licensing, registration, and inspections.
Despite the fact that the Russian government made some recent changes to simplify laws and regulations directed at small businesses, and the Russian economy is on the path of recovery boosted by oil and gas revenues, corruption and crime remain deterrent factors to economic growth. Anecdotal evidence (Broadman, 2001) suggests that most firms pay bribes to tax inspectors, customs officers and local bureaucrats. In addition, most enterprises have to pay organized criminal groups. Brazil's small business enterprises are plagued by the similar problems. Due to the complicated bureaucratic laws and regulations, every point of contact with the system becomes an opportunity to extract a bribe (Doing Business in Brazil). A recent study by Leon Zurawicki compares the levels of corruption in Brazil and Russia (Global Corruption Report 2007, pp. 342-345). The study concludes that from the perspective of small Brazilian and Russian companies, the perceived need to make payments to get things done is higher in Brazil than in Russia. Another part of this study suggests that small businesses in both counties face more traps in the process of an operating their business rather than in the start-up phase.
CREDIT GRANTING PRACTICES TO SMALL BUSINESSES
The small business credit granting process in the U.S. typically involves an analysis of the borrower's ability to repay the loan, collateral evaluation, guaranties, and other specific terms and conditions, according to the SBA. As a rule, commercial lenders in U.S. want to see two sources of repayment: cash flow from business and collateral. Personal credit history of business owners is evaluated by obtaining a personal credit report through TransUnion, Equifax or other national credit bureaus. Commercial banks typically require a certain amount of owners' equity in a business, at least 20-40% of a total loan request. Collateral is required as a secondary source of repayment. Table 4 gives an illustration of the typical discount values given to different forms of collateral by U.S. commercial banks and the SBA.
Small Business Credit Granting Practices in Brazil
The Brazilian Development Bank (BNDES) has accredited financial agents which are responsible for analysis of credit approval and guaranties. Usually these agents are the local banks where the borrowers already established some form of banking relationship. BNDES or the certified financial agents follow the standard credit granting practices, such as an adequate guaranty and satisfactory credit history. BNDES microcredit lines can be used for fixed asset acquisition and working capital, leasing, and support of importing and exporting enterprises. In 2003 BNDES introduced the BNDES card which is a revolving line of credit with the maximum credit amount of R$250,000 granted to SME. The BNDES card can be used to finance a purchase of one of the 35 thousand items listed by BNDES. The bank analyzes the order placed through an on-line system, and determines the credit limit for the particular SME. A company can utilize other cards issued by the accredited banks, such as Banco do Brasil, Bradesco or Caixa Economica.
The credit granting criteria for the SME include (1) sufficient expected cash flows to cover debt service, (2) assignment of future project revenues to financing guarantors, and (3) at least 20% of the borrower's equity. The total BNDES exposure should not exceed 75% of a total borrower's assets. Businesses have to comply with the established debt service coverage covenants which typically should not be less than 1.3:1. The company's size also influences the terms and conditions of business credit. For example, the limits for the working capital portion of the project vary by the size of the business. BNDES limits the working capital portion of the financing to 70% of fixed assets for microenterprises, and to 40% for SME. The length of the loan repayment term for working capital loans is typically less than that for fixed asset financing. The interest rates charged on business loans in Brazil depend on the size of the firm. According to a report published by the World Bank (Brazil: Interest Rates and Intermediation Spreads, 2006), in 2003 a small business paid an annual interest rate of 43.93% (mean), and the medium business was charged 32.73%. At the same time the large companies were charged on average 29.35% per annum. The same report noted that interest rates declined with the loan size, i.e. the loans up to R$10,000 had interest rate on average 50.2%, and loans over R$1 million had interest rates of "only" 27.3%.
Small Business Credit Granting Practices in Russia
The Russian Bank for Development (RBD) has several eligibility requirements for SME seeking commercial credit. A business should (1) have no more than 250 employees based on a two year average, (2) have been in business no less than 6 months, (3) be current on tax payments, (4) not be affiliated with regional banks, large enterprises, or the federal government, (5) not have derogatory records, (6) have a good credit history (or absence of negative credit history), and (7) be located on a territory of the Russian Federation. Businesses applying for credit have to supply a loan application, borrower's questionnaire, and business plan. The business plan should describe the business purpose of credit, market analysis, sales and expenses projections, and debt service analysis.
For a start-up business, RBD provides up to 75% of the project cost, with 25% contributed by the borrower. The term of the loan has to be more than 3 months and cannot exceed 2 years. The amount of credit facility for start-up costs is limited to 6 million rubles (1.00 Russian Ruble = 0.0408 US$, www.bloomberg.com, 7 Dec. 2007). RBD also provides growth capital loans to the established SME. The maximum amount of the credit facility does not exceed 30 million rubles for a term of up to 3 years. Such loans can be secured by fixed assets, business assets, and third party guaranties. Working capital loans secured by business assets are granted for up to 6 months, with the maximum credit amount up to 12 million rubles. Collateral used to secure credit facilities is discounted at 3050% of market value. Additional guaranties of the third parties with established credit may be required to secure the loan. Upon approval of the credit facility, the RBD and regional bank sign a credit contract with the SME detailing the terms of credit and repayment.
The terms and conditions of the small business loans to SME in Russia vary from bank to bank and from region to region. An on-line information portal for the Russian banks (www.banki.ru) allows business owners to search available credit options. The potential borrower can view information from up to a 100 Russian banks offering loan products to SME. Several main factors influence the terms and conditions of business credit including (1) amount of the loan in rubles or in U.S. dollars, (2) number of months or years in business, (3) time to repay the loan, and (4) available collateral. For example, Bank of Moscow has a Small Business Development credit product, offering loans to the SME up to 25 million rubles for the term from 3 months to 5 years, with an annual interest rate from 11.25%. The collateral required for this type of loan includes personal property and fixed assets, as well as guaranties of the principals. Rosbank offers loans up to 9 million rubles, for up to 5 years, at 15-17% annual interest rates. The required collateral includes personal property, fixed assets, inventories, stock, and vehicles. In addition, Rosbank can require principal and spousal guaranties.
Based on the reviewed sources, Brazil and Russia have some similarities in the current small business lending environment and credit granting practices. Both countries have a recent history of hyperinflation. That, in addition to the high risk premium spreads and high loan administration costs, makes the cost of borrowing prohibitively high to small businesses in these countries. Weak collateral enforcement mechanisms in Brazil and Russia impact credit risk premiums and further increase borrowing costs.
Due to higher default risks, the typical length of business credit in Russia and Brazil is shorter than in the U.S. While Russia currently has more favorable laws governing a business startup process compared to Brazil, it lacks the nationwide registry of business and individual credit histories. Absence of centralized credit rating agencies for businesses and consumers in Russia add an uncertainty factor to credit decision making. In addition, both Russia and Brazil are plagued by corruption and criminal activities, with one of the studies suggesting that corruption in the business sector is more prevalent in Brazil than in Russia.
The governments of Brazil and Russia recognize the problems associated with business development procedures and practices and the need to support small business enterprises. Both countries have financial institutions designated by their governments to support SME by providing access to business credit with more favorable terms. While the Brazilian Development Bank (BNDES) was established in 1952, it introduced the microcredit program only recently, in 2003-2004. Similarly, in 2006 the Russian Bank for Development (RBD) established a program specifically designated to assist SME in getting business credit. Both BNDED and RBD established credit granting guidelines used by either the development banks themselves, or by the designated financial agents working directly with SME. The specific credit terms are based on the size of the business, past credit histories, project type (working capital or fixed asset investment), collateral and personal guaranties. Like in the U.S., commercial lenders in both Russia and Brazil evaluate business cash flow available for debt repayment and discount collateral at the predetermined rates.
Although some similar trends exist in the current small business lending environment in Brazil and Russia, these trends are dynamic and are closely related to the political and economic changes in the respective countries. For example, the 2008 Doing Business Survey by the World Bank projects Russia's overall "ease of doing business" to move up to 106th from 112th place, while Brazil's rating is expected to decline from 113th to 122nd place. These projected changes in overall ratings undoubtedly signal future changes in specific areas related to the business lending environment in these two countries. Furthermore, the scope of this review is limited to the publicly available information on SME lending policies mainly in Brazilian and Russian governmental financial institutions. Further research involving a wider scope of SME lending policies in Brazil and Russia as well as their development over time will be necessary to determine the future direction of these trends.
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Ronald P. Volpe, Youngstown State University
Natalya A. Schenck, Youngstown State University
Table 1. U.S. Numerical Standards for Small Business Designation Industry Group Size Standard (number of employees or amount annual receipts (US$)) Manufacturing 500 employees Agriculture $750,000 Retail Trade $6.5 million Business and Personal Services $6.5 million Source: U.S. Small Business Administration Table 2. Starting a New Business Ranking: Brazil, Russia and U.S. Country Year Rank Procedures Time Cost (number) (days) (% of income per capita) Brazil 2004 .. 17 152 11.7 2006 120 17 152 9.9 Russia 2004 .. 10 37 9.6 2006 45 8 29 3.9 United States 2004 .. 6 6 0.7 2006 4 6 6 0.8 Source: Doing Business Survey, 2007, The World Bank Table 3. Getting Credit Ranking: Brazil, Russia and U.S. Getting Credit Ranking Economy Year Rank Legal Rights Index Brazil 2004 .. 2 2006 80 2 Russia 2004 .. 3 2006 156 3 United States 2004 .. 7 2006 7 7 Economy Credit Public registry Private bureau Information coverage coverage Index (% adults) (% adults) Brazil 5 7.8 42.5 5 16.9 43 Russia 0 0 0 0 0 0 United States 6 0 100 6 0 100 Source: Doing Business Survey, 2007, The World Bank Table 4. Examples of Collateral Discount Values in Credit Evaluation Process in the U.S. COLLATERAL TYPE BANK SBA Personal Residence Market Value x .75 of Market Value x .80 Mortgage balance of Mortgage balance Trucks and Heavy Depreciated Value x .50 Same Equipment Office Equipment Nothing Nothing Furniture and Fixtures Depreciated Value x .50 Same Receivables Under 90 days x .75 Under 90 days x .50 Stocks and Bonds 50%-90% 50%-90% Mutual Funds Nothing Nothing IRA Nothing Nothing CD's 100% 100% Source: U.S. Small Business Administration…