|Ernesto Medina Villaveirán|
By CubaStandrad.com, November 29, 2011
Communist Party daily Granma interviewed Ernesto Medina Villaveirán, president of the Banco Central de Cuba (BCC), about the intention behind Decreto-Ley 289 and three additional resolutions, under which private business owners can soon obtain loans from three Cuban state banks. Following is a translation by Cuba Standard of the verbatim interview.
What do the new regulations change?
M. The old norms established several limitations for natural persons in their financial operations: Obtaining loans for amounts not exceeding 3,000 pesos (CUP), impossibility to open a checking account in the case of small farmers and self-employed workers, and a very low maximum payment the latter may receive from state entities when those receive a service or good. Based on the approval of Decreto-Ley 289, the Banco Central de Cuba published the resolutions No. 99, 100 and 101 regarding obtaining loans, the opening and operations of checking accounts, and bank norms for charges and payments, which broaden the possibilities in each of these services. Because credit policy is, due to its complexity, the area that demands most attention to detail, the dialogue begins with the other two topics I mentioned.
What changes in charges and payments does Resolution 101 introduce?
M. This norm repeals a previous one that limited to 100 pesos cash the payments of state enterprises to self-employed workers when they have commercial interactions. The price will be defined by the parties, depending on the services or goods traded, for which the state entities must take into account their approved spending. This relation will be established by way of contracts. In this case, several payment instruments can be used that avoid the circulation of cash and provide more protection: Checks or cashiers’ checks and bank transfers, which are the two most practical methods, and furthermore the magnetic card, when it will become possible as this service will expand.
What are checking accounts, and what advantages do they provide?
M. Checking accounts are used in function of an economic activity, where income is deposited and from which payments — such as tax payments — are made, without the need to handle cash. When the new regulations become effective, the Banco Metropolitano, the Banco de Crédito y Comercio, and Banco Popular de Ahorro will be able to open checking accounts for private farmers, licensed self-employed workers, and other natural persons authorized to exercise other non-state activities, in Cuban Pesos (CUP) or convertible Pesos (CUC). These accounts have the advantage of making operations more agile. They particularly facilitate commercial relations between government entities and non-state workers when it comes to making payments. They also help the financial institution to check on the progress of productive activities, thus evaluating loan applications. In fact, the opening of a checking account could be a prerequisite to applying for a loan, and its cash flow could be granted as a guarantee. The opening of a checking account is obligatory for any self-employed person with gross annual income of 50,000 pesos (CUP) and more. I want to clarify that checking accounts differ from savings accounts, in which persons deposit resources that are temporarily free, that won’t be used in the short term, and for which they obtain interests.
Who will be eligible for loans?
M. According to the new regulations, small farmers, licensed self-employed workers, people who want to buy construction material and pay authorized construction workers, and those who want to build or renovate their home by themselves. Although the regulations also allow the granting of loans to persons in general to buy goods and satisfy other necessities, initially the financing offers will be for the development of the non-state economic sector, to increase agricultural production, and to promote renovation and repairs to homes by their owners. These are the three most pressing necessities in the country. As economic and financial conditions improve, the offerings will expand.
How are the credit offerings to farmers different from those that existed previously?
M. In effect, credit for farmers is a policy that has been used for several years, incorporating land tenants with Decreto-Ley 259 of 2008. These tenants of state land will continue to benefit from financing for the purchase and repair of equipment, the protection and rehabilitation of plantations, and other actions that contribute to increasing agricultural production. When the new regulations become effective, they will also be allowed to use financing to buy goods and supplies in the network of domestic trade stores that are sold as part of the Programa Campesino. The new norms establish minimum loan amounts, but no maximums. In the case of farmers, the loans start at 500 pesos (CUP), according to Resolution 99. The total amount depends on the capacity of payment of the applicant and the guarantees provided, among others. Farmers who receive financing to build their own homes can buy construction materials in the network of domestic trade stores. These loans begin at 1,000 pesos (CUP). If the construction materials are only available in hard-currency stores, they can obtain CUP loans for the equivalent of CUC prices. The construction loans can also be used to buy construction materials from self-employed persons or to contract construction workers. Self-employed workers will be able to receive loans starting at 3,000 pesos (CUP) for the purchase of supplies and goods that guarantee a better work performance. The duration must not exceed 18 months if the credit is used for work capital, such as supplies and labor, or five years when it is used for investment such as in equipment or construction.
What aspects determine the approval of a loan?
M. As a rule, applicants must demonstrate they can obtain future income that will be used to pay the loan, demonstrating their capacity to return the borrowed money within the agreed time with the financial institution. They will also offer guarantees that will assure the contracted obligations. To grant a loan, which will always be in Cuban pesos (CUP), the banks will perform a risk analysis that takes into account these elements, as well as the amount applied for, among others. Also, the planned economic activity will be evaluated, the merit of the operation and the feasibility of the business. Applicants must convince the bank that they have the conditions to receive the loan; furthermore, they must contractually agree to assume the obligation to respect the commitments of return, and provide the guarantees that compensate the bank in situations that entail the non-compliance of the agreement.
What mechanisms do the banks have to assure repayment of the loans?
M. A first step in that sense is accomplished by performing an appropriate evaluation of the economic and financial circumstance of the applicant. But it is essential to get guarantees. These are legal mechanisms that assure the repayment of the loans in case of non-compliance on behalf of the debtor; they are alternative sources of payment. Depending on the loan amount, they could consist of bank deposits of the applicant or third parties that agree to offer them. Any savings account can be granted as total or partial guaranty, without any loss of interest income for the owner. It will also be possible to formalize, by agreements with the bank, support bonds by third people to pay the loan amount if the applicant is unable to do so. In this case at least two guarantors, which can be a person, bank or insurance company, are needed. Also, the bank can accept present or future personal retribution or income. Likewise, the forfeit of a vacation home or undeveloped land could be considered guarantees. Finally, agricultural Credit and Service Cooperatives (CCS) that want to support their members can act as guarantors, as can (state) entities that rent commercial space or other goods to self-employed workers, when the tenants want to use a loan to improve them.
What consequences can the use of a loan for a different purpose have?
M. When obtaining a loan, the applicant signs a contract with the financial institution in which the use, amortization and guarantees are stipulated. This contract has legal validity. Generally, the loan is granted in tranches, not in its entirety. This allows the bank to observe, with visits to the place where the activity is performed or other mechanisms, the results of the use of the funds. That is the bank’s right. If the client shows a favorable financial performance, the bank can grant a new facility or increase the original loan. But if the bank determines that the information offered by the applicant is inadequate, that his economic and financial situation doesn’t assure repayment, or violates contract stipulations, it can cancel the credit and execute the guarantees, or reduce the loan amount.
Who determines the granting of loans, interest rates, amounts and duration?
M. The credit committees at the subsidiary level, provincial level and headquarters that have decision power within the loan amount. It’s important to point out that the persons who tend to loan applicants in the financial institutions, the bank officials, are not the ones who have the decision-making power. The amount and duration are agreed between the applicant and the financial institution, according to the terms and conditions of the bank. It’s necessary to clarify that maybe the client hopes to receive the full amount for a business startup, but if he doesn’t totally convince the bank regarding the feasibility or his payment capacity, he will be advised to start with a simpler activity, one that requires less capital. Each case will require a different analysis. That is why we talk about taylor-made suits; a sense of pragmatism must prevail. It will be necessary to thoroughly check the feasibility of a business, to investigate the possible guarantees that maybe even the client doesn’t recognize he might have. All this will be done in the fastest possible time, but without neglecting the detailed study the process requires. The process may even include more than one meeting with the client to obtain the necessary data and documentation. In that sense, it is important that applicants come to the interview prepared, with all documentation that might be relevant, even with an projection on how the business may evolve, how much it will need to undertake a certain activity, expenses and revenues, and more. The Banco Central de Cuba is charged with establishing the minimum and maximum interest rates to be used by financial institutions. As a principle, rates cannot be lower than those paid by the bank to depositors.
Which banks will work with loan applicants?
M. In each precinct of Havana there will be at least one Banco Metropolitano office to perform loan operations. In the other provinces, this service will be offered by the Banco Popular de Ahorro and Banco de Crédito y Comercio. In order for everything to operate smoothly, a general training was performed and instructions about procedures were written. Loan specialists will play an important role, but we also emphasize the role of head managers, who will have to make sure that everything is done according to the rules. Equally to familiarizing a new generation of bankers with this topic, it will be a challenge for the loan specialists to increase the knowledge among the public.