Blažej Kuriplach, 50, blames the high cost of building his petrol station on Slovakia's strict rules governing collateral for bank loans, and says he welcomes planned changes to the Collateral Law.
Kuriplach, head of the small Kiba firm in the eastern Slovak city of Sobrance, says he was forced to raise the funds for the filling station from a private source at exorbitant rates after being turned down for a Sk1 million ($21,000) bank credit. He says the bank rejected him because he lacked the type of assets which banks are allowed to take as collateral for loans.
"I offered the petrol station as a future asset to back up my loan, I offered a machine worth Sk700,000, but they wouldn't accept them," he said. "They only wanted existing buildings, so I had to get the money from a private entity for much higher rates. A bank loan would have cost me less money."
In Slovakia's currently liquid capital markets, many small and medium sized enterprises (SMEs) are, like Kuriplach, surprised to be having difficulties getting a bank loan. Law experts say the main barrier is restrictions on the types of assets the Collateral Law allows companies to use to back their loans.
However, access to bank finances is soon expected to improve for SMEs after massive changes to the Collateral Law are passed by parliament. The law, which is about to be submitted to a cabinet committee, will be amended as a part of wider changes to the Civil Code that is scheduled to take effect in the first half of 2002.
"The changes proposed will radically alter the current situation because they will allow businesses to offer banks all assets that can be calculated in monetary terms as collateral," said Katarína Mathernová, an advisor to the Deputy Prime for the Economy, Ivan Mikloš. Mathernová was in charge of an expert team which scripted the Collateral Law changes.
"There is liquidity in the banking sector, and banks have sufficient resources to give loans, but they can't secure these loans sufficiently since the range of assets they can take as collateral is quite limited," she said. "They thus end up not lending as much as they could."
Under the current law, banks tend to secure their loans only with fixed assets such as buildings, production halls and offices. Although moveable assets such as machines are also allowed to be used as collateral, they cannot be used by the debtor during the term of the loan, and thus seriously reduce the production capacity of firms thus indebted.
The draft amendment would eliminate this obstacle and allow borrowers to offer their moveable assets as security without restriction. The bill would also enable many other kinds of assets to be used as collateral, including copyrights and trademarks, future assets and receivables.
"Increasing the range of assets should boost the lending activities of banks," said Marek Jakoby, an analyst with the Mesa 10 think tank.
The reform also envisages the creation of an electronic registry of all the pledges that have been used to back loans in Slovakia, which would prevent businesses from using an asset more than once as collateral, and would allow banks to check up on their potential borrowers.
"Without such a register, nowadays there is little control of what pledges have been taken," Jakoby said.
Needed change
Since economic transformation accelerated in Slovakia following 1998 elections, institutions such as the World Bank and the European Bank for Reconstruction and Development (EBRD) have stepped up calls for laws that would stimulate the country's stagnant corporate sector, and in particular support the growth of SMEs.
The EBRD and the World Bank in 1999 called for a new laws giving companies better access to loans in central Europe. While changes to collateral rules in Hungary and Poland took place in 1997, Slovakia, the Czech Republic and Croatia have yet to pass such legislation.
"Money and loans are lifelines for companies. The more money they have, the more they can expand, and in turn the better for the whole corporate sector. That's why we have been calling for this change," said Alexander Auboeck, the head of EBRD's branch covering Slovakia and the Czech Republic.
Jakoby added that the growth of SMEs was especially important for Slovakia's economic future.
"SMEs are important if the economic environment is to mature because if they expand, they can absorb the employees of larger Slovak firms which are reducing staff as a result of restructuring, and thus help to cut Slovakia's high unemployment rate [currently 18%]," he said.
Banks are key
The willingness of banks to accept new loan security policies may determine the impact of a revised Collateral Law, financial experts said.
"It's important that the banking community quickly adjust to these important changes in the law, and alter their fixed notion that fixed assets are the best way to secure loans. I think market competition will sooner or later force them to do this," said Igor Páka, a lawyer at the Allan & Overy law firm in Bratislava.
One bank official said lending policies would likely not loosen until the overall health of the corporate sector improved, and until the law enforcement community and the courts became more efficient in bankruptcy cases.
"Borrowing opportunities will improve as a result of the Collateral Law reform, but this environment still needs more than one change," said Martin Barto, the head of strategy at the largest Slovak bank, Slovenská sporiteľňa.
