Basle Convention reforms to put squeeze on small firms

Date: 25/10/01

The Belgian EU presidency has warned of dire consequences for small companies from new global rules designed to make bank lending more efficient.

Belgian industry minister Serge Kubla said planned changes to the agreement on lending rules, known as the Basle Convention, were already creating a 'credit crunch' for small firms.

The new Basle Convention would result in banks having to hold up to 12 per cent in reserves when making loans to small firms. It could also mean they would have to charge a higher rate of interest in such cases.

Kubla, who met with senior industry executives this week, warned: "SMEs [small and medium-sized enterprises] form an important nursery of entrepreneurship that generates both major initiatives and creativity and guarantee local employment. The application of the new Basle Convention, however, has already led to a reduction in the credits allocated to SMEs."

In stark contrast, the rule changes would be a boon for 'AAA' rated groups such as multinational corporations which are not likely to default on their loans. In future banks would only have to hold 2 per cent reserves on such loans, and would be able to offer far cheaper lending terms.

Kubla aide Rudy Aernoudt said alternatives, such as venture capital, were not a ready option to bank loans for small firms. "If you look at the traditional sector [of the economy], they will not get venture capital," said Aernoudt, adding that venture capital funds often seek 80 per cent returns on their investments. "The butcher's shop will never make 80 per cent," he added.

EU industry ministers will discuss the issue on 5 December in Brussels.

The Belgian EU Presidency has warned of dire consequences for small companies from new global rules designed to make bank lending more efficient.