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Rethinking funding opportunities

Rethinking funding opportunities

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Gergő Wieder

Senior Manager

KPMG Tanácsadó Kft.

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Based on the decisions of the Monetary Council of 7 April, the National Bank of Hungary supports economic agents with several measures. In line with the current economic situation, it restructured its Funding for Growth Scheme (FGS) to help small and medium-sized enterprises, setting an additional budget of HUF 1,000 billion for the program, and fine-tuned the Bond Funding for Growth Scheme, which will provide funding opportunities for large Hungarian companies as an alternative to bank loans. In addition, new risk management techniques can be introduced to support securitization.
 
FGS Go! program - support for small and medium-sized enterprises

In June 2013, the National Bank of Hungary launched its first Funding for Growth Scheme with the aim of curbing the decline in SME lending. According to the MNB's calculations, it contributed 2 percentage points to the growth of gross domestic product in the first three years of the program and could create 20,000 jobs. The FGS was mainly used by micro-enterprises, most of which borrowed for investment purposes, but working capital loans, pre-financing of EU subsidies and acquisitions were also among the loan targets. The program also reduced the regional concentration of SME lending, and companies operating primarily in the trade, manufacturing, and agriculture sectors took advantage of the opportunity. Between 2013 and 2017, the first three phases of the FGS operated with a total budget of more than HUF 2,700 billion.

The ongoing FGS Fix program has been rethought by the National Bank, creating a program called FGS Go!, which will provide SMEs with a wide range of resources for the economic crisis caused by the coronavirus. The central bank will increase the budget of the program starting on 20 April by HUF 1,000 billion, which, together with the remaining HUF 500 billion from the FGS Fix program, will provide HUF 1,500 billion to the SME sector.

The main parameters will be the same as in the previous phases of the FGS. The MNB continues to provide refinancing loans at 0% interest rates, and the interest rate to be paid by enterprises may not exceed 2.5%. The maximum loan amount is HUF 20 billion, the method of use can be:

  • Investment loans with a maximum maturity of 20 years; Working capital loans with a maximum maturity of 3 years;Pre-financing of European Union support;
  • Credit redemption to reduce debt service;
  • Acquisitions.

An important change is that only two weeks will be available for banks to make credit decisions, which is a serious requirement and requires significant preparation, both in terms of risk, front-office and back-office. In addition, this requirement expected to result strong competition in the market, as the press conference following the Monetary Council said that if banks are unable to make a decision within that time or reject the application, the MNB may ask a competitor to assess the loan, thus encouraging “a loan application should not be left without a quick assessment.” The details of this measure have not yet been published by the MNB.

Due to the longer maturity of the FGS and its usability for working capital financing, it can help many companies survive the crisis, and the central bank can offset the shortened credit assessment process with interest rate rebates for banks, as well as with opportunities from cross-selling generated by the program (e.g. current account management, foreign exchange transactions)..

Bond Funding for Growth Scheme  - Support for large companies

While the FGS seeks to support the finances of small and medium-sized enterprises, the Bond Funding for Growth Scheme  aims to help large companies by building new types of financing channels outside of bank lending for potentially 200 domestic large companies. The program was originally launched by the National Bank of Hungary in March 2019, in the framework of which the central bank buys high-quality bonds issued by domestic-based non-financial corporations. The program was based on the ECB's bond program, the primary objective of which was originally to increase liquidity in the corporate bond market. There are no industry restrictions on the application, the Central Bank stipulates that the balance sheet total of the companies exceeds one billion forints. A credit rating can be performed by any credit rating agency supervised by ESMA, the process is not significantly different from a pre-bank credit process.

In order to mitigate the effects of the coronavirus, the previously set budget of HUF 450 billion, of which more than HUF 200 billion is still available, will remain unchanged, but some parameters of the program will change:

  • The central bank increases its maximum exposure to a group of companies from HUF 20 billion to HUF 50 billion;
  • The central bank will increase the maturity of securities that can be purchased in the program from 10 years to 20 years.

From 4 May to the end of June 2021, the MNB will convert the preferential deposit into a banded interest rate, it pays 4% interest to banks for the increase in loans and bonds held after April 7 under the FGS Go! and Bond Funding for Growth Scheme, thus promoting the interest of credit institutions in maintaining their lending activity.

Further lending incentive: STS Securitization

Over the past year, the National Bank of Hungary has launched the development of the domestic framework for the STS securitization process designed to strengthen the European Union securitization market. The aim of the STS securitization regulation is to create a separate category for simple, transparent and standardized products, through which the securities market can be developed while avoiding the recurrence of problems leading to the financial crisis. Potential issuers have an incentive for STS securitizations by its more favorable capital requirements than traditional securitizations, however they must comply with stricter regulatory conditions. The special rules for the securitization of STS are regulated by Regulation (EU) 2017/2402. Based on this and the EBA's guidelines, the National Bank has recently published recommendations for its domestic application. For the National Bank, which intends to support the expansion of lending, the STS securitization represents an opportunity to partially release the capital resources of the Hungarian banking system. Therefore the regulatory side is expected to encourage practical implementation of STS securitization in Hungary in the longer term.

Further monetary support measures of the Monetary Council

Together with the rethinking of the FGS and Bond Funding for Growth Scheme, the central bank will provide a total of HUF 3,000 billion in new funds to protect and restart the economy, corresponding to 6% of gross domestic product. In addition to the above, the National Bank of Hungary announced that, in addition to the above:

  • pays a dividend of HUF 250 billion to the central budget;
  • leaves HUF 250 billion in liquidity in the banking system after granting an exemption from the 1% reserve ratio (MT decision of 24 March);
  • launches a HUF 1,500 billion government bond and mortgage bond purchase program.

In addition, the base rate remained unchanged at 0.9 per cent, similar to the O / N deposit rate left at -0.05 per cent, while the National Bank raised the interest rate on O / N and 1-week covered loans to 1.85 per cent. However, in connection with the one-week deposit instrument, it becomes possible to deviate from it within the interest rate corridor, this is determined by the central bank every week when announcing the current tender.

Summarizing the latest measures of the National Bank of Hungary, the central bank's communication and practical steps also show that MNB also considers the economic stability of economic actors outside the banking system important, and is ready to support their financial stability by developing new programs and instruments. Implementing these solutions is a significant task for banks (especially credit assessment in 2 weeks under the FGS), but as a result, banks' lending activity and earnings may improve, while real economic agents can obtain affordable, stable sources of funding. It is worthwhile for businesses to consider these options together with the elements of the upcoming government business financing package and to select the most suitable financing option for the given purpose, the latter requiring a more detailed analysis of the fortunately many options.

© 2021 KPMG Hungária Kft./ KPMG Tanácsadó Kft. / KPMG Global Services Hungary Kft., a magyar jog alapján bejegyzett korlátolt felelősségű társaság, és egyben a KPMG International Limited („KPMG International”) angol „private company limited by guarantee” társasághoz kapcsolódó független tagtársaságokból álló KPMG globális szervezet tagtársasága. Minden jog fenntartva.

A KPMG globális szervezeti struktúrával kapcsolatos további részletekért kérjük látogassa meg a https://home.kpmg/governance oldalt.

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