Bank financing for SMEs from 2014 to 2019: effect of changes in the law on lending

The Law of 21 December 2013 containing various provisions on the financing of small and medium-sized enterprises, amended by the Law of 21 December 2017, aims to facilitate access to bank finance for those enterprises (SMEs). To that end, it comprises a range of provisions intended to correct any information asymmetries which could affect the commercial relationship between lenders and borrowers by specifying the transparency obligations incumbent on both parties.

Firms applying for credit have to supply sufficiently exhaustive data on their financial statements, among other things. For their part, lenders must make available to applicants standard documents corresponding to the various forms of credit which they offer[1]. In addition, a proposed credit agreement has to be accompanied by a brief information document setting out all the characteristics of the contract. The lender must also ascertain the most suitable type of credit, taking account of the firm’s financial position at the time of conclusion of the contract and the purpose of the credit. These provisions aim in particular to stimulate competition between credit institutions by making it easier for firms to compare the various options available to them. In the event of a refusal to grant credit, the lender must inform the firm of the essential reasons for that refusal or the factors influencing the risk assessment, and that information must be transparent and comprehensible for the firm.

The law also includes an article on the rules for fixing the prepayment penalty which lenders are entitled to demand from any borrowers who decide to repay their loan early. The loan agreement must explicitly mention the amount of the penalty, which is determined by a standardised procedure according to a method of calculation defined in a code of conduct, agreed between employers’ organisations representing the interests of self-employed workers (the SNI) and SMEs (Unizo and the UCM), on the one hand, and Febelfin on the other.

The law also states that its own effects must be reviewed by the Bank every two years. For that purpose, the Bank has relevant data which it can use to monitor lending by resident banks to SMEs: the movement in the volume of loans and the interest rates charged, and various aspects concerning lending conditions. This article summarises that appraisal which was ended before the effects of the COVID crisis outbreak could be analysed, in view of the statutory period in which it had to be conducted.

The main conclusions of the analysis of these data are as follows. Loans to SMEs – which are generally less procyclical than the volume of credit used by large firms – increased between 2014 and early 2020. During that period, lending to small firms went up at an annual average rate of 4.6 %, while for medium-sized firms the growth rate was 0.6%. This situation is due partly to the credit supply, which expanded throughout the period, supported by the various measures which the Eurosystem took to stimulate economic activity. In addition, up to the end of 2018, the credit expansion was also driven by rising demand from both SMEs and large firms.

Interest rates on business loans are determined mainly by interbank market rates, which are themselves strongly influenced by monetary policy. For some years now, the Eurosystem’s monetary policy has indirectly done much to facilitate access to bank finance for businesses (and households). The measures implemented since 2014 have cut the cost of funds for credit institutions. The latter also have access to loans at advantageous rates via the targeted longer-term refinancing operations. Furthermore, the asset purchase programme made it easier for them to free up liquidity which could be allocated to new loans. Finally, as a result of competition, the reduction in banks’ funding costs led to firms being offered lower medium-term and long-term borrowing rates, and caused short-term rates to stabilise at a low level.

These findings are confirmed by businesses themselves which – in various surveys - have indicated that their credit conditions have improved since 2014, and were particularly favourable between 2016 and 2019. However, owing to the increased risks, these conditions were tightened slightly at the end of the period, and that affected all categories of firms regardless of size.

However, the examination of these data is not sufficient in itself to determine whether structural effects emerged following the law’s entry into force; it needs to be supplemented by an econometric analysis which can separate any impact of the law from other effects. The chosen approach therefore consisted in examining business credit dynamics to identify any divergences compared to what might normally be expected in view of the economic situation and banks’ funding costs.

The econometric results do not show any significant structural change in the credit situation that could potentially be linked to the entry into force of the law. In general, the stock of loans to businesses follows a relatively stable trend although it is actually influenced by cyclical developments to some extent, and after a time lag. Moreover, bank loans to large firms seem to be the only ones influenced by interest rate changes, though the effect is not very significant. Part of the reason may be that, unlike most SMEs, some large firms are able to access market financing when the interest rates charged by credit institutions are deemed too high.

In conclusion[2], none of the information examined indicates any detrimental effect on lending to SMEs since 2014.


[1] Since 2018, this requirement no longer applies to loans of less than € 25,000, provided they do not comprise a penalty clause and are not covered by collateral or guarantees.

[2] However, it should be noted that the data taken into account for the analysis were available up to the end of 2019 for some variables and up to February 2020 for others, i.e. before the eruption of the Covid-19 crisis. That crisis is liable to result in fundamental changes in the situation from the point of view of both credit institutions and firms. The conclusions drawn here will therefore need to be reassessed in a few months’ time.