24.11.2023 The National Guarantee Fund of the Bulgarian Development Bank has secured over BGN 3.3 billion in loans for small businesses

Todor Todorov, Executive Director of NGF, for money.bg

“Mr Todorov, a special structure like the National Guarantee Fund attached to a banking group is something unique for the Bulgarian banking system. What necessitates its existence as a separate company within the Bulgarian Development Bank Group?”

“This is a natural result of the difference between our activities. We do not provide direct funding, but we provide incentives for lending by commercial banks and non-financial institutions by sharing the credit risk in new deals.

At the same time, unlike our direct lending partners, we do not examine each loan individually, but give them the right to automatically include the loans in portfolios guaranteed by us under parameters negotiated in advance. In short, the Fund acts more like an insurer in the BDB Group.”

“Am I to understand that you specialize in a specific area of financing, filling one of the major gaps that prevent companies from getting the financing they need - a lack of sufficient security?”

“Precisely. In order to negotiate the parameters of each guarantee scheme, we examine the behavior of small-company loan portfolios for each bank. This is a specific area of credit risk assessment and management that involves certain competencies and a certain organization. It requires equity capital and its management in order to generate investment income to cover expected payments on issued guarantees.

Therefore, the separation of this business into a separate company provides the necessary autonomy for quick decisions in the best interests of the business.”

“Do you provide such guarantees only to banks or can other lenders or financing institutions benefit from them?”

"They can be used by any financing institution. We launched a guarantee program for leasing companies at the end of last year. We are currently a guarantor of leasing transactions for a total of BGN 28.4 million - 237 transactions to 183 enterprises.”

“Do you provide guarantees on renovated or restructured loans or on existing ones whose limit the bank is ready to increase at the request of the company?”

“No, only newly granted loans.”

“What is the effect of the Fund's activities on the economy?”

“Our main objective is to allocate more resources to more small companies. This is directly linked to increasing competition in the sector and its sustainable development as an engine of economic growth in the country.

Since its establishment, the National Guarantee Fund has supported nearly 12,000 enterprises to receive funding for a total of BGN 3.3 billion. These are more than 12,000 individual transactions - loans in which the Fund participates as guarantor. One in five registered small and medium-sized enterprises has received a loan as a result of a guarantee issued by us. This is the immediate economic effect - an introduction of fresh resources in the economy that increases budget revenues.

In economic terms, the market behavior of the company during economic cycles is particularly important. It involves limiting underwriting by increasing guarantee fees at times of increased credit supply and aggressive underwriting at a lower cost during periods of limited resource supply. This countercyclical role is significant for the stabilizing impact of the Fund on access to financial resources, particularly in an adverse economic environment.”  

“Do you offer incentive programs to certain borrowers? How are the BGN 3.3 billion you mentioned distributed across sectors and regions?”

“Our activities are encouraging and inclusive. Our guarantee schemes aim to support as many businesses as possible, not a particular sector or region. Every incentive, whether the result of government policy or the consequence of market conditions, is reflected in the demand for resources through our network of partners.

Although it follows rather than dictating trends, underwriting speeds up access to funds and thus shortens the period until SMEs create added value. Sector-focused programmes are our joint initiative with the Ministry of Agriculture and Food with resources provided by them under the Rural Development Programme, and with the Executive Agency for Aquaculture for the fisheries sector.

The distribution of the granted loans follows the economic activity by sectors - the main share of the supported enterprises is in the trade, manufacturing, and agriculture sectors - nearly 65%, followed by transport - 12%, and construction - 7%.

More than 2/3 of the funds disbursed are concentrated in Southern Bulgaria, with the South-West region leading with 36% of the total disbursed resources.”

“Would you describe briefly the process of developing a guarantee scheme. What is the working principle with commercial banks and financing institutions?”

“Each new guarantee scheme undergoes a period of coordination. The main parameters, e.g. the general operation of the guarantee scheme, type of guarantee, validity period, coverage and maximum amount, are outlined after consultations with potential partners.

This is followed by a call for participation to all commercial banks with proposed common parameters. Then we negotiate individual terms within the proposed parameters of the guarantee scheme in a separate guarantee agreement with each bank that expresses interest.”

“How long does the process of coordination and negotiation take until borrowers can actually use your guarantees?”

“It usually takes between 4 and 6 months, with each bank starting the programme from the date of signing the agreement.  

We do not rush the alignment stage because it is important that the key parameters are well thought through so that the scheme is easy to implement and effective.

Individual negotiation requires a lot of analytical work. Banks provide detailed data on their loan portfolios, which our team analyses to suggest conditions for automatic inclusion of loans with similar characteristics in distinct sub-portfolios. Each agreement subsequently governs the terms of multiple portfolios of individual loans.”

“This sounds like narrowly specialized work, but where are the borrowers in this process? How does this affect them?”

“The biggest benefit is that many companies have been able to obtain financing thanks to guarantees from the National Guarantee Fund. Otherwise they couldn't. We guarantee newly issued loans up to 50% of the authorized amount, and the individual guarantee coverage is up to BGN 2 million.

The Fund's guarantees complement the collateral and contribute to easing the terms of the loans, as the Fund has shared the risk with the commercial lending bank.

The underwriting process is as simple as possible - an application for a loan at a commercial bank, a credit risk analysis by a bank expert and inclusion of the loan in the guaranteed portfolio in the absence of sufficient collateral, self-collateralization or expected proceeds. In practice, the issuance of a guarantee does not require anything additional from borrowers as part of the normal lending process, which is why our involvement as a guarantor often goes unnoticed by them.

The actual work - the management of the issued guarantees, monitoring of portfolios, renegotiation of terms and conditions and a number of other supporting activities are carried out between us and the financing institutions that we work together with to facilitate access to funding for small businesses.”

“What is the Fund's latest guarantee programme?”

“At the end of last year, we launched a new 6-year guarantee programme.

Our partners are 9 banks with whom we have agreed on a maximum total guaranteed portfolio of BGN 629 million. New loans to small businesses are expected to exceed BGN 1.2 billion within the next three years. Every quarter under this programme, we report about 120 million levs of new loans to 600-700 companies.”
“Are you experiencing solvency problems with the recipients of loans guaranteed by the Fund?”

“The activity of the National Guarantee Fund is secured by own capital or, in professional language, we trade at our own risk. Any guarantee programme must be self-sustaining, i.e. the income from guarantee fees and investment income must be sufficient to cover the amounts paid under issued guarantees and the administrative costs of the fund.

We do not monitor loan servicing individually, but manage credit risk on a portfolio basis. The solvency of borrowers is the responsibility of the partner banks who monitor the loans, renegotiate terms where necessary, and ensure that collateral is realized when other options are exhausted.

In the course of our work, have issued guarantees at a total amount of BGN 1.2 billion, with the amounts paid out under them being over BGN 15 million, i.e. we have realized losses of 1.3% of the guaranteed portfolio. This is an excellent result and stems from our partners' ability to manage credit risk individually and our team's ability to analyze portfolio behavior, differentiate between groups with similar risk, and determine the conditions for inclusion of loans in guarantee programs.”

“You mentioned that the Fund's partner banks take care of the collateral realization. What collateral is this about, since your guarantees are a compensation for collateral shortages? In fact, upon activation of the guarantees that you have provided, does the fund not become the owner of the assets of the company that is having problems servicing the loan and how do you collect the amounts owed in that case? Or do you just write that debt off directly as a loss, provisioning accordingly?”

“We underwrite investment and working capital loans with varying degrees of security, including unsecured loans. Loans are included in separate sub-portfolios depending on the level of collateralization, each with a different annual guarantee fee.

When a guarantee is claimed, we pay the guaranteed amount, but the assets remain the property of the bank, which continues to manage the loan - realizes the collateral, etc. The amounts recovered are divided equally between us after the bank's costs in the collateral realization process have been repaid. The write-off of the amount paid takes place after all possibilities for reimbursement of the credit have been exhausted.”   

“You said that the amounts paid under the guarantees provided by the Fund are over BGN 15 million. And how many of those repayments have you been able to recover on behalf of bad debtors whose loans you guaranteed?”

“BGN 6.5 million, 43.8% of those paid.”

“Your business is highly specialized, you operate at a profit, what is the reason why the loan underwriting is not done by a private company?”

“Excellent results are actually the result of management, not ownership. Private investment management seeks profits which, in absolute amounts, can be made at various combinations of volumes and prices.

Our financial objective is to maintain low profit levels within a narrow range, which we achieve by pricing guarantees close to their expected losses. As a result, we are also pursuing the company's strategic goal of higher volumes.”  

“You are talking about keeping profit margins tight. However, there is no free lunch. Can you tell us the average fees that your partners pay for the provided guarantees and how are these fees are reflected in the cost of their loans?”

“We have a wide range - from 0.6% to 1.8% of unsecured amounts in the total guarantee amount - that is, half of that to the loan amount, because we guarantee 50% of the principal. This is a range from the entire lifetime of the fund. I cannot go into specifics on current programmes because we are talking about commercial relations. The current weighted average annual guarantee fee is 1.02% of the guaranteed portfolio, i.e. about 0.5% of the loan amount.”

“What are your vision and plans for the future of the National Guarantee Fund?”

“I believe that sustainable growth requires a strong and comprehensive foundation.

Our main guiding principle is to provide the widest possible range of micro-, small, and medium-sized enterprises with equal access to financial resources. We believe that small businesses need affordable financial instruments with easy administration. This is what we have built into our programmes. It is remarkable that over the years we have managed to take up risk of BGN 1.2 billion with resources amounting to BGN 80 million. As a result, 12,000 small businesses received a total of BGN 3.3 billion in funding. Each of the fund's guarantee schemes is cost-effective, delivering an average annual return on capital of 2%.

Our intentions are to continue on this path.”

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NGF Executive Director Todor Todorov is a graduate of the American University in Bulgaria and Thunderbird University in Arizona, USA. He started as an investment banker in JP Morgan's New York office. Upon his return to Bulgaria, he established the consumer finance unit at Hebros Bank before joining UniCredit. He led Deloitte's corporate finance for Bulgaria and was a partner in the company's Central and Eastern Europe branch. Under his leadership, an international team of Deloitte assisted BNB in the implementation of the largest asset quality assessment project of the banking system in the country.




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