No Way for a Good “Bulgarian Development Bank”

The Minister of Economy reactivated the public debate with information about eight loans granted by the Bulgarian Development Bank totaling BGN 946 million. Their amount is large enough to have a macroeconomic dimension – it represents 2.6% of all loans to non-financial enterprises as of March 2021 and 3.5% of all loans over BGN 1 million. The resentment must catalyze courage for a change; otherwise the topic will sink into petty piquancy, a focus on the individuals, that are affected and candid economic populism. We also need to take into account the criminal thread, and in an election campaign the temptation to make revelations about crimes is great. Of course, it is easy to forget that resolving disputes about the appropriateness of an economic policy in court in the lead role of the prosecutor’s office is a dead end – without entering into the discussion about the rule of law and the effectiveness of justice, we only need to remind that in a few weeks it will be 7 (seven) years since the crisis with the KTB.

Judging by comments and publications by politicians and economic analysts, the potential to do anything but a long-term and principled resolution of the case, is great. The questions about the “real” mission of the Bulgarian Development Bank are shooting at a moving target. In the deliberate structural law for the bank there is something for everyone – all the best wishes for development, support, encouragement have found their place. “Small and medium-sized enterprises” must be “supported” but also “to support the management of European funds, municipal projects”, other priority public investment projects, “export promotion”, but also “technological renewal” and even “combat with the regional disparities”. Of course, along with the increasingly ear-caressing purposes listed, the law allows the bank to carry out all other standard banking activities. So in practice everything can be beautifully packaged and placed in check boxes of the so skillfully and widely defined mission of the bank.

The search for expediency, effectiveness and accountability through narrowing, specifying the scope of the activity are initially doomed. First of all, because life is complex and the business is a set of operations that are difficult to simplify without affecting the essence of the business model used. Perhaps this also motivated such a broad description of the activities in the law and other documents governing the bank’s activities. The discussion then continues on the question of whether to limit lending to small and medium-sized enterprises and, at the same time, to put a ceiling on the loan granted. This opens up the topic of affiliated parties – how affiliation is defined, how it is proven, who has the capacity and responsibility to check, analyze and control. For the size of the enterprises, we can only say that any medium-literate accountant will make a half-billion-dollar metropolitan mall look like a ”medium-size enterprise”. As it turned out, a small enterprise can get a loan to buy a larger enterprise – apparently the bank is also used as a financing institution for mergers and acquisitions. Are we going to ban it, or are we going to write detailed instructions on when it’s permissible and when it’s not? And so on.

The obvious solution

It is time for a simple, principled and long-term solution – Bulgarian taxpayers and Bulgarian businesses do not need a state bank. The main argument, which always and everywhere in the world applies to the existence of this type of credit institution, is the limited access to finance for start-ups and developing companies. But if such a conversation had any place in 1999 – when the Encouragement Bank was established – in mid-2021 there is hardly a meaningful motive for the need for a state bank with assets of over BGN 4 billion in the credit market. It should be recalled that, at the end of 1999, the total bank loans to non-financial corporations was less than BGN 2.3 billion and for households – just over BGN 500 million. As of March 2021, the loans for the business reaches BGN 36 billion and for households – BGN 26 billion. The opportunities for access to finance when starting a small business are almost innumerable – from credit cards, through consumer loans, and for larger amounts and loans against a mortgage. If by the end of the last century the dwelling of the Bulgarian household was illiquid, “locked” asset – the home loans at the end of 1999 were only BGN 84 million – as of March 2021, they are now BGN 12.4 billion. The proposals for the state bank to deal with tens of thousands of loan applications for 20-50 thousand BGN loans to small companies reveal romantic naivety, but are far from the economic reality. As of March 2021, the banks had granted more than 136,000 loans to businesses, amounting to up to BGN 1 million with a total value of over BGN 9 billion.

Needless to say, it is impossible to have a hybrid between a state intervention scheme and seemingly market behavior embodied in a commercial bank. Otherwise, the state aid is a fiscal issue and should be seen as a budgetary commitment in the prerogatives of the national assembly.