Small and Medium-Sized Enterprise (SME) Development Project
sector: Industry and Trade | country: Uzbekistan
ADB should not provide plain credit lines. The achievement of fairly positive outcomes even in a complex environment proves the benefit of policy dialogue at design and during implementation. ADB’s policy dialogue with Government encouraged the introduction of policy interventions which helped to address distortions in the small and medium-sized enterprise (SME) sector. An enabling environment is a necessary albeit insufficient condition for the sector’s efficient performance.
Satisfactory performance of subprojects even in an improved enabling environment should not be taken for granted. The benefits of policy interventions that improved the sector’s productivity did not, however, percolate to all 31 subprojects financed under the loan. This asymmetry is attributable to the participating commercial banks’ (PCB) less than rigorous initial screening of subprojects’ technical and commercial feasibility and particularly their inability to monitor post-disbursement credit recovery with greater frequency and intensity. A covenant requiring PCBs to monitor subprojects’ financial performance on a quarterly basis and reporting on them to ADB could have provided both ADB and PCBs an early warning tool to deal with potentially problematic subprojects.
Efficient financial intermediation requires autonomous credit decisions by banks guided purely by sound banking considerations. Uzbek PCBs’ credit decisions by contrast are subservient to the country’s national development policies instead of being autonomous and aimed at maximizing their own profits. ADB loans’ conditions should therefore provide for the rigorous enforcement of sound and autonomous credit policies by PCBs.
Financial intermediation loans should include adequate and enforceable provisions for ensuring sustained financial and operational performance of PCBs. While the loan established covenants for PCBs’ solvency, liquidity, and profitability, there were no covenants in the Project Agreements to enforce compliance with the covenants established for the above measures. A covenant enabling ADB to suspend loan disbursements to banks whose financial ratios deteriorated and breached covenants could have disciplined PCBs to avoid the moral hazards cited above that were detrimental to their overall financial health.