On 17 March 2020, the Ministry of Economic Affairs and Digital Transformation defined by Royal Decree Law 8/2020 the framework for the guarantees provided by ICO to provide liquidity to companies affected by COVID-19.
Financial institutions regulated by the Banco de España were identified as the only entities eligible for such guarantees, excluding de facto all other financial agents, such as participatory financing platforms (“PFPs”), despite being subject to approval and continuous supervision by the CNMV, with audited annual accounts.
Despite the difficult circumstances, the programme launched by the Spanish Government has been managed acceptably and correctly by the ICO within the framework established by the Ministry of Economic Affairs.
However, there are several aspects that can be improved in terms of the final beneficiaries of the funds:
- As of 30 June, it is estimated that 40 billion euros of the 100 billion euros have not yet been paid out to companies,
- The banks have used the guarantees almost exclusively with their clients already in the portfolio before the COVID-19, and with the best as a priority,
- A large part of this financing guaranteed by the ICO has not resulted in additional liquidity for companies, but rather in the replacement of cash lines previously granted by banks.
On July 3rd, the Royal Decree Law 25/2020 on urgent measures to support economic recovery and employment was published, whose article 1 provides for the “approval of a line for the coverage on behalf of the State of financing granted by supervised financial institutions to companies and the self-employed with the main purpose of financing investments”. The specific characteristics of this new line of ICO guarantees for a total of 40 billion euros will be approved by agreement of the Council of Ministers in the coming weeks.
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To increase the financing potential for the Spanish business fabric, it can be said that the programme would be more efficient extending competition– incorporating new financial institutions that would bring ‘new money’ and cover new clients affected by the crisis – if Fintechs – FPPs were included as eligible entities.
With them, the objective set out in the aforementioned RDL 25/2020 could be better fulfilled:
“It is necessary to extend the financial support mechanisms to the productive fabric, in order not only to guarantee the liquidity of the system but also to boost productive investment and the adaptation of companies”.
Why would it be good to have FinTech?
PFPs constitute a mechanism of financial disintermediation developed on the basis of new technologies: totally digital entities, with tools designed to give a rapid and agile response to SMEs, with a great capillarity, reaching those segments, regions and sectors that traditional banking does not usually cover adequately.
Having the PFPs would help, on the one hand, to promote Fintechs as a motor for the digital transformation of the financial industry, but also, by offering their investors the State’s guarantee for the loans they grant to SMEs and the self-employed, these investors would be given the necessary incentive to persevere and deepen their efforts, and the entrepreneurs (particularly SMEs and the self-employed) would be given the necessary confidence to diversify and complement their sources of financing, beyond the traditional banks. The scarcity of available financing is still one of the traditional obstacles for the small entrepreneur in our country, and a scourge in terms of competitiveness, especially in comparison with our European environment.
In that sense, it is relevant to note that in nearby countries such as France, Italy, the Netherlands or the United Kingdom, PFPs are eligible to grant loans with state guarantees to enterprises.
How to join FinTech?
There are mainly two paths that could be followed in parallel:
- To confirm that the participatory financing platforms supervised by the CNMV are eligible as “supervised financial institutions”, in accordance with Article 1 of Royal Decree Law 25/2020 of 3 July 2020 (see Annex 1), as opposed to the previous, more restrictive, wording in the list of institutions in Royal Decree Law 8/2020 of 17 March, which only allowed “credit institutions, financial credit institutions, electronic money institutions and payment institutions”.
A very similar precedent already exists in our immediate environment with the modification in France of the law 2020-189 of 23 March to include PFPs in the state guarantee on loans granted by them (see Annex 2).
- Modify the MGS paradigm.
The MGS operating model requires comprehensive risk analysis by MGS teams and sets a maximum interest rate paid by companies in exchange for coverage that can be up to 100% of the loan granted.
To face the situation created by Covid 19, agility, simplicity and speed are required. To this end, it is proposed to create a COVID19 space line by MGSs that would provide a risk sharing guarantee with PFPs without restrictions or conditions. The alignment of interest for shared risk together with the customer’s ability to choose, with interest rates freely set as the point of balance between supply and demand, would make it possible to grant financing to SMEs and the self-employed more quickly and flexibly.
CESCE has just created a Covid 19 line with a state guarantee, establishing in a few weeks an operational process to provide coverage for loans granted by financial institutions supervised by both the Bank of Spain and the CNMV.
MGSs could develop a similar process, arriving at a better distribution (territorial, sectoral and by segments of different sizes) of financing for companies that go either physically to traditional banks or digitally to PFPs.
The Covid crisis19 is a trend accelerator, which needs all the support of all financial actors in order to provide financial solutions to the greatest possible number of SMEs and self-employed workers – who generate most of the activity and employment in our country.
FintTech is already a significant part of the present and future solution to your access to finance and liquidity, but it can help even more with just a few small regulatory and operational changes, in line with what countries around us are already practising.
José Luis Moreno, Director General of Economics of the Madrid City Council, and Salvador Molina, President of the Madrid Capital FinTech (MAD FinTech) cluster and of the ECOFIN Forum.
Photo Caption: Members of the Board of Directors of Madrid Capital FinTech on 21 July following the General Assembly, where the ICO was asked to allow FinTech companies to collaborate in providing loans to SMEs and the self-employed through the guarantees managed by the public Institute.