Firms
Category: Bank Management
In the CIS, there are three kinds of firms: SOE’s, privatized firms and private small and medium sized enterprises (SME’s). As pointed out before, large SOE’s and many privatized firms that are controlled by entrenched management receive preferred treatment by those banks that have emerged through spin-offs of former state banks. This due to massive state intervention or to still functioning networks between bureaucrats, bankers and managers. More dynamic private firms are not provided with a sufficient amount of funds.
Consequence for strategy: In the case of former state banks, there is simply not very much scope for active strategic behaviour of managers. Their hands are tied by their loan portfolio. The only way to dynamize these banks is to reschedule their portfolio, for instance, by carving out bad loans and transferring them to “hospital banks”, and recapitalization. However, such a policy can only be designed and carried out by the government, possibly with the help of international donors like the EBRD.
Private banks however have some scope for development of new strategies vi-a-vis their potential borrowers. They should under all circumstances prevent any involvement in the allocation of subsidised loans, since this will in the medium term take away their freedom to develop new markets, instead emerging SME’s should be targeted. This may be a high-risk activity, but also a very profitable one:
However, due to the rapid growth of the private sector in many CIS countries, there are large opportunities and the return on investment of those projects that realise can be substantial. Moreover, those firms that will survive in the marketplace, will be interested to co-operate intensively with one (or few) house banks. Here, private banks can assure important business for the future by building up business contacts today.
To put it differently: Dynamic private banks can play a role that is comparable to the one of venture funds in Anglo-Saxon countries: finance risky, but (in terms of anticipation) profitable firms is much more worthwhile than to compete with banking dinosaurs for subsidized credits.
Consequence for the use of resources: Banks will have to invest in two types of activities: identification and acquisition of interesting projects and evaluation of investment opportunities. Bank managers must build up more intensive contacts with private firms. Many banks do already provide some services to private firms, for instance foreign exchange. These contacts must be intensified. One risk in this respect is that some of the new firms are controlled by the Mafia, and bankers take a risk (even a very personal one) if they get involved in these activities.
Project evaluation and screening of new firms is crucial since these loans are not covered by the same inefficient system of collective insurance through state interventions as loans to SOE’s and large privatized firms are. The screening process can indeed be very helpful for the firms that can utilize the advice of bankers as valuable input for their activities. It is obvious that these screening and consulting activities require skills that most CIS bankers do not have, but than can be acquired. Section 2.5. of the handbook is completely devoted to the question of human resource management.
Consequence for organization: The organization of a dynamic commercial bank that serves private SME’s will necessarily differ to a large extent from the organization of a large former state bank. In the former case, there must be a number of autonomous teams of specialists who have sufficient knowledge and contacts with the firms of the potentially most profitable sectors: trade, food industry, tourism, but also industry like car building. These teams must be able to act fast, but it is also crucial that there is a well-functioning monitoring system that assures that the overall portfolio of the bank is sufficiently diversified, and that corruption cannot take place.
The organization of state and privatized banks, however, has not yet changed sufficiently. Here, loans are mainly administered and not managed; banks are overstaffed and underqualified, and very often are de facto still acting like a government agency, and like a profit-maximizing financial intermediator.