Central And Eastern European SMEs Dodge Disaster

Markets continued to grow despite harm caused by the Covid-19 pandemic.

By almost any standard, the Central, Eastern and Southeastern European region (CESEE, which includes the Balkan countries) has had a grim pandemic, suffering some of the world’s worst infection and mortality rates, with the bad news continuing as 2021 ended. Covid-19 impacted health systems, the wider economy and, by extension, the financing of small and midsize enterprises (SMEs) and mid-cap companies—the lifeblood of the region’s economy.

But a potential disaster was averted, due in part to wisdom gained from past experience. “After the 2008-2009 crisis and following the European sovereign debt crisis, there were strong deleveraging tendencies,” says Luca Gattini, head of the macroeconomic scenarios unit at the European Investment Bank (EIB) and lead author of its semiannual bank lending survey for CESEE, the latest published in November 2021. “This time, banks—encouraged and supported by governments—took a positive approach in terms of exposure to the CESEE region, a much more supportive stance.”

For many banks, the crisis afforded an opportunity to deepen relationships with smaller and more local clients. “After a few months of soul-searching on how to counter the grave consequences of Covid-19, we started to reach out proactively to SMEs and other clients, to help them understand and tackle the negative impact of the pandemic,” says Tibor Csonka, managing director for OTP Bank plc’s corporate directorate, stressing that the OTP Group saw this as the key priority. “In most markets, despite Covid-19’s negative impact, we managed to grow customer bases and extend market shares. This not only underlines our commitment to the segment, but also shows that our efforts and support resonated well with SMEs.”

Like other banks across the region, OTP worked closely with local governments, the EU and international financial institutions (IFIs) like the European Bank for Reconstruction and Development (EBRD) and EIB, to offer embattled SME’s moratoria on outstanding debt commitments; as well as loans, refinancing facilities, and innovations like remote advisory platforms and digital account opening to help them stay afloat. In some places, governments counterguaranteed bank loans to SMEs. Other support schemes guaranteed employment and eased or rescheduled tax payment obligations, enabling SMEs to maintain expenditure in other key areas. “In Hungary, very few eligibility restrictions were imposed,” says Csonka. “This allowed prosperous businesses to provide additional funding for short- and long-term liquidity management.”

As a result, an expected spike in nonperforming SME loans never materialized, despite the significant impact of Covid-19 on smaller local businesses. Bankers had worried that soaring delinquencies and bankruptcies among their SME clients would have a ripple effect on their own solvency; but due in large part to huge government support at local and international levels, with especially generous schemes in CEE, that outcome was avoided. “The proactive policy response really was critical,” says Gattini.

This approach was echoed throughout much of the region, with governments and banks determined to prevent the damaging deleveraging that, after 2008, led to major disruption in financing flows to the SME and mid-cap sector. Although initially demand by SMEs for finance did fall sharply, it soon recovered. Supply was another matter, with some recovery but not quite a return to pre-pandemic levels.


Gattini admits SME lending has been slower to recover than consumer and corporate lending. Banks and SMEs both seem wary of what might lie ahead, with uncertainty heightened by news of the omicron Covid-19 variant and by rising energy prices and a difficult labor picture.

“Banks are lending to SMEs but just not as much as the SMEs would want,” Gattini says.

The result in some cases has been a financing gap, but banks say they have been working hard to minimize this while broadly maintaining capital and collateral requirements. OTP’s risk department redoubled its commitment to finding new techniques to improve credit scoring under Covid, according to Csonka, with the result that “we managed to grow customer numbers and lending volumes, along with profitability, without a decrease in risk prudency.”

According to Charlotte Ruhe, of the EBRD and former head of its SME finance and development section, SMEs in CEE have been successfully seeking recourse to domestic banks. In the western Balkans, EBRD and other IFIs play more of a role, either helping finance SME projects directly or bolstering local banks.

Banks in CESEE countries that are EU members are the most SME-loan friendly, reflecting the fact these countries are now very much part of the EU value chain and expect to share in the economic recovery. In the Baltic states, market consolidation and and money laundering scandals have left the banking market in all three countries dominated by Swedish banks, which remain cautious. Ruhe describes Romania as profitable but underserved, with lots of room to expand SME financing. In the western Balkans, by contrast, “we have had a huge year of lending to local banks to support their financing of SMEs, with Serbia particularly active,” she says.

Right now, though, the overall regional picture is muddier. “Some SMEs seem cautious about investing,” she notes, “particularly about committing to large-scale capital expenditure in what is an uncertain environment, with inflation on the rise as well.”

The rebalancing of the banking model in the CESEE region in the years prior to the Covid-19 crisis represented a fundamental change. It led to more reliance by subsidiary banks on domestically generated funding. Now, they are no longer so dependent on cross-border financing from parent banks and increasingly act as if they were indigenous banks.

“Funding sources for many of these have shifted from coming from outside CESEE to being generated within it,” says the EIB’s Gattini. “At the same time, parent banks have been more than happy to see money being poured into the region’s SMEs because they get good returns.”

“The bank mosaic is changing,” reckons Ruhe. “Austrian and Italian banks are still very active in the SME market; but the likes of Slovenia’s NLB, Hungary’s OTP and Greece’s Alpha Bank are becoming more active. It’s a more diverse landscape and a more positive one.”

Structural changes within the region’s economies suggest that opportunities for SME finance are set to increase. Green and sustainability factors will increasingly be viewed as important criteria in funding decisions, particularly in sectors such as agribusiness/agriculture, where the impact is obvious, but also in logistics and tourism.

“OTP Group’s vision is to become the region’s leading banking group in sustainable financing. All of these efforts are coordinated by our recently launched, dedicated Green Program Directorate that has a very strong mandate,” says OTP Bank’s Csonka.

It is clear too that innovation is growing in importance, with trends such as e-invoicing, e-commerce and digitalization all playing increasing roles in SME finance, aided in some cases with support from IFIs.

Nearshoring has provided another boost, with SMEs increasingly awake to the opportunities presented by EU companies that are opting to move business activities away from the Far East to places closer to home. With generally lower wage levels than CEE, the countries of SEE have seen big capital inflows into SMEs in sectors such as manufacturing and logistics, with second and third cities (as opposed to just the capital city) also seeing major growth in SME activity. This decentralization, and the benefits it will bring to SMEs, is expected to continue.

Meanwhile, demographics have been playing a role in changing the face of the SME sector in CESEE. Many of those who set up SMEs in the wake of communism’s collapse are now nearing retirement age, suggesting these entities might become either mid-caps or targets for management buyouts.

So how does the future look? CESEE’s general growth trajectory can only be good news for SME financing, from both the demand and the supply side; while hopefully, an improved pandemic outlook for next year will remove at least one major uncertainty.

“Banks were initially too negative; but the worst didn’t happen, so they now assess the SME market as stable—although they are also cautious, given the continuing uncertainties across the region,” says the EIB’s Gattini.