[Recorded by Electronic Apparatus]
Tuesday, May 9, 1995
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[English]
The Chairman: Order, please. Good morning, ladies and gentlemen. Welcome to the resumption of our discussion and the consideration of a study with the major banks to devise performance benchmarks for small business. I apologize for the slight delay, but the House of Commons summoned us.
I'm pleased to welcome Alan Nymark, assistant deputy minister from the Department of Industry, and Mr. Frank Swedlove and Mr. James McCollum from the Department of Finance.
This morning you're hopefully going to shed some light on the discussion of performance benchmarks. Surely, Mr. McCollum, you may have in fact been the writer of that section of the minister's speech in the budget, so you'll have the answer for us, we can all conclude and we won't need to have any more of the hearing. That'll save us more time.
You can see we have a lot of eager people on this side of the table this morning who are ready to buffet you with a lot of questions. I understand you both have some brief opening remarks.
Mr. Nymark, do you want to begin?
Mr. Alan Nymark (Assistant Deputy Minister, Industry and Science Policy, Department of Industry): I think the Department of Finance, which has the lead on this file, would like to begin. Mr. Swedlove will speak first.
The Chairman: All right. Do you have remarks, sir?
Mr. Frank Swedlove (Director, Financial Sector Policy Division, Department of Finance): Yes. There are copies of my opening remarks.
The Chairman: Does everybody have a copy of Mr. Swedlove's comments?
Please proceed.
Mr. Swedlove: Thank you, Mr. Chairman and members of the committee, for this opportunity to meet with you to discuss bank performance benchmarks and how they might be used to foster increased small business access to capital.
Joining me this morning are Alan Nymark, the assistant deputy minister in the industry and science policy sector at Industry Canada, who'll also be presenting some brief opening remarks after I've completed mine; and Jim McCollum, who's a chief in my division and who has dealt with the banks on a lot of the statistical issues.
I'm director of the financial sector policy division in the Department of Finance. This division has lead responsibility for development of long-term policy for federally regulated financial institutions. This includes the 1997 legislative reforms, international and federal-provincial relations and consumer-related issues.
Our focus in the government's small business policy agenda has been on the role that financial institutions have played in the financing of small business. In this regard, we have been responsible for the Department of Finance's input into the consultations on benchmarks as referred to in the budget of last February.
In his budget, the Minister of Finance reiterated the government's determination to see that small business has reliable access to the financing it needs to continue being the number one creator of jobs in this country. He noted that while some progress has been made, there continue to be large gaps in the system which the banks have a special obligation to help close.
To ensure that this happens, the minister announced the government's intention to work with the banks to hammer out meaningful bank performance benchmarks before this fall, following which there will be a one-year period when bank progress against such benchmarks will be monitored.
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Following the minister's budget, we met with the banks to discuss a range of items that might be included in their benchmark package to address key policy issues. During these discussions, we emphasized that, however structured, the benchmarks must clearly demonstrate that the banks are achieving real progress in improving access to financing.
Much of the discussions that have taken place with the banks so far centres on the need for more comprehensive data on their financing and relationship-building with the small business sector. This means developing more innovative ways to obtain data, either internally or through surveys, and ensuring that it has a high degree of integrity and standardization.
The banks have shown a great deal of willingness to respond to the challenge and seem eager to deal with this issue quickly. It is clear that the committee's hearings have had a major influence on the banks' approach to benchmarks. Real progress is being made. The banks' benchmark package, submitted to the committee in late April, appears to go a long way in meeting many of the concerns that we had and, indeed, that members of this committee expressed in the hearings in March.
In the coming weeks we will want to explore with the banks, in some detail, what they had in mind. We will want to know, for example, the methodology that will be used for their surveys on customer satisfaction and loan turn-downs and the criteria used to determine the appropriate disaggregation of data on loan authorizations below $500,000.
We will also wish to discuss with the banks other areas that may be candidates for benchmarking. These include bank venture capital activity and an assessment of the value that small business customers receive for service charges. I understand that in its testimony in April, the CBA agreed to see what might be done in these areas.
Two other areas that it might be beneficial to consider are an assessment of the progress the banks are making in regard to higher-risk lending, price beyond traditional spreads, and statistics on the extent of bank non-credit relationships with their small business customers.
The Department of Finance believes the benchmark exercise to be a priority item and wants it to proceed as quickly as possible. There has been some very good progress, and we want to build on the momentum so that everything will be in place to permit the monitoring of the benchmarks according to the timetable set out in the budget.
I would now like to call on Mr. Nymark to make his introductory comments, following which I'd be pleased to respond to any questions.
Mr. Nymark: I too appreciate the opportunity to appear before the committee today.
As you know, Industry Canada has the primary responsibility for the government's micro-economic agenda and, together with Finance, has the primary responsibility for implementing the government's small business agenda.
Among my responsibilities at Industry Canada is to give direction to our department's role in the small business policy development area.
It's important to keep in mind that performance benchmarks for small business financing are one integral part of the broader issue of access to capital for small business.
For the last year and a half the government small business agenda, particularly that dealing with financing for small business, has been formulated in conjunction with this committee and other parliamentary groups, the small business constituency, including the Small Business Working Committee, and a variety of government departments and agencies. I am pleased to report that we are moving forward on a number of fronts related to access to capital.
A renewed mandate for the Federal Business Development Bank, new financing mechanisms for small business exporters, and the Canada community investment plan are all expected to be completed, or legislation introduced, in 1995.
The Small Business Loans Act review has been completed, with some revised rules introduced on April 1 and others to follow later this year.
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As you know, the government tabled in the House on March 17 the paper Small Business, A Progress Report. In the progress report it was indicated that the government feels:
- The banks have a special obligation to provide financing to small businesses and we'll be
working with the banks to establish benchmarks against which their performance in small
business lending will be measured.
I would like to make a few points, however, about benchmarks from Industry Canada's perspective.
As indicated in Minister Manley's comment to you on April 25, we espouse some basic principles in our approach to benchmarks. We favour voluntary compliance as a first approach, over that which is regulated or legislated. At this time we are not in favour of regulated quotas, since we believe the course we are now on should be pursued for a period, perhaps a year, to be followed up by an evaluation of the results. Only then should we determine if a new, different course is required.
Mr. Manley also indicated to you on April 25 that his initial assessment of the CBA presentation earlier that day was very positive. He encouraged this committee to press on with its work in this area. The interest of this committee in benchmarks has obviously spurred the banks to action.
But we, like the Department of Finance, believe other potentially useful benchmarks are not included in the bank's proposal and should be considered: bank venture capital activity, value received for service, charges by small business customers, bank non-credit relationships with small business customers, and finally the pricing-for-risk issue.
The committee's interest in knowledge-based businesses reflects the change that is transforming our world today. The role of knowledge is intensifying and knowledge is fast becoming the principal factor of production in a world driven by information rather than bricks, machinery, and smokestacks. Some recent initiatives by the banks give recognition to this transformation, but much remains to be done both by them and by us. How we in government and the private sector address this issue will have a major impact on the competitiveness of our country.
Knowledge-based businesses are closely linked to the pricing-for-risk issue I mentioned a moment ago and to which Mr. Swedlove made reference. Lacking traditional types of assets and operating in a fast-moving, quickly changing environment, these businesses require a new approach from old sources of capital.
On the banking side, the banks' aversion to higher price, higher-risk lending should be revisited, because it may be adversely affecting access to capital for small business. This needs a critical review and the application of some innovative thinking.
Another area worthy of study is international best practices in benchmarking bank services to small business. The banks' initial reaction to a suggestion by us for joint research here has been favourable. I think we need to look at what is out there, beyond Canada's borders, because our international competitiveness depends in part upon our banking practices. We need to ensure that these practices are not acting as a drag on our small businesses competing effectively in the global economy.
The banks' proposal for benchmarks includes an examination of lending practices towards women. Perhaps this examination should be extended to other segments of the small business community, notably aboriginal entrepreneurs. Our department, through Aboriginal Business Canada, has a number of years of experience and success in this area.
Studies of client firms have indicated that aboriginal companies securing financing in part through this program performed at rates at least comparable to the Canadian average and generated important economic impacts outside of their own profitability. Aboriginal Business Canada has tackled capital market failures on three fronts: by meeting critical equity and loan insurance needs of aboriginal businesses, as a lender through aboriginal capital corporations, and by increasing management capacity and improving the business climate for aboriginal businesses.
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But in today's circumstances, governments must increasingly look to private financial institutions to serve some of these needs, at least the financing needs. It will be of interest to you that Minister Manley has recently committed to a process in which the Federal Business Development Bank will be working with Aboriginal Business Canada officials to establish a new entity in the FBDB to focus particularly on aboriginal business clients.
Some of the major banks have already taken steps to address this opportunity by setting up specialized units under designated vice-presidents; indeed, some have set up branches on reserves. However, there is still much to be done, and given the growing potential that exists in the aboriginal population, and in light of our experience, which I mentioned earlier, we would welcome the banks addressing their performance in this benchmark initiative.
In conclusion, we at Industry Canada fully share the committee's view and that of the Minister of Finance that performance benchmarks are an important facet of the access-to-capital issue to small business, and we will continue to work with the Department of Finance and the banks to advance this initiative as quickly as possible.
Thank you, Mr. Chairman.
The Chairman: Thank you very much, gentlemen.
Mr. McCollum, did you have anything you wanted to say?
Mr. James F. McCollum (Chief, Industry Analysis Relations, Financial Sector Policy Branch, Department of Finance): No, I did not.
The Chairman: Okay.
I want to remind members that we were a little short on time. We'll run for another hour, if that's okay with everybody, but I want to urge you to keep to the subject at hand.
So we're going to just do five-minute rounds this morning, rather than ten minutes, because the purpose of this, I think, as I've listened carefully to both presenters.... I want to remind the committee members that Industry and Finance officials are here and we're just trying to find out the information that they've reacted to positively. I think we have lots here to deal with.
So, Mr. Rocheleau, do you want to begin?
[Translation]
Mr. Rocheleau (Trois-Rivière): I have two questions, one of which deals with recommendation 2 of our committee with regard to what we now call bench-marks, which would allow us to determine if access to financing has been reduced in the present economic climate.
I've been personally somewhat surprised by the government's reaction, which came either out of the Department of Industry as such or out of the government itself. I don't remember the exact wording used, but it was that, buried under a lot of nice words, they rejected the proposal made by our committee and that they would limit banks to surveys done among clients.
Why didn't you take up the committee's recommendation that called for statistics on gender, location and size of business, etc.? Why didn't you follow that recommendation, maybe improving on it rather than going the survey route? I also would like to know what exactly you mean by surveys.
I would also ask you about the Small Business Loans Act which was amended in order to restrict access to this program. I wonder if you have done any impact study to find out who will be excluded in view of the fact that we, from the Bloc Quebecois, had recommended the cost-benefit analysis before amending this legislation which is extremely useful and very much used in Quebec and in Canada. I would like to have your comments on this, please.
[English]
Mr. Swedlove: I'll certainly start off with the first question related to statistics.
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Previous to this year, the question of statistics that the banks kept with respect to small business was a very difficult one. Data was collected by the Bank of Canada and it was printed in the Bank of Canada Review, but the banks were the first to admit that there were a lot of inconsistencies in that data. I believe they referred several times in this committee to the difficulties they had dealing with the data issues and to concerns they felt that the data the Bank of Canada was providing did not properly reflect what was actually the degree of small business lending that they carried out.
So we did have discussions last year with the major banks and with the Bank of Canada, and we have developed a better base for data collection on small business. There have been changes made that will permit a better understanding of the small business lending situation. In our view, it was the best that could be done given the present structure of data collection that the major banks had in place. But it certainly fell short of what was recommended by this committee in their report.
I see that the banks recognize the need to improve the quality of the data. That has, I think, been the focus so far in the benchmark exercise, to work on finding ways of providing more information and more data. On the the issue of surveys, first of all, the data that will be collected by the Bank of Canada, the improved data, will not be survey data; it will be actual data, and it will be a time series that will be provided on an ongoing basis.
There are, however, other areas for which the banks will be introducing survey data, and in some situations that might be the best way to proceed simply because the kinds of questions that may be asked may be more oriented towards surveys. But the Bank of Canada data that is being collected, I understand, is the hard data of the small business lending in the appropriately sized categories.
On the FBDB, I'll ask Mr. Nymark to continue.
Mr. Nymark: I think the question was addressed to the issue of the SBLA. I think, as the hon. member is aware, that the program was costing the government in excess of $100 million a year, and in keeping with the general approach taken in the budget and by the government in general to make these kinds of programs pay for themselves, the government took action. I should say that it was done in the context of extensive studies and consultations with the stakeholders involved.
We recognize that there will be, with an increase in price, a reduction in demand. As you will recall, the program had grown by many multiples over a very short period of time; within two years it had increased from a $500 million program to almost a $4 billion program. This rate of growth, frankly, gave rise to very serious questioning as to whether the government was in fact providing a service to encourage incrementality of loans to small business or whether the government was simply through subsidization, replacing what banks might otherwise have been doing in terms of their loans to small business.
So it was our view, in consultation with a wide variety of stakeholders, that action was necessary.
I think we do expect to see reduced demand, and it may be significant. We will be monitoring this extremely closely. We are ready to discuss with stakeholders as we see what happens to the demand for these services. If there is something that arises that is unexpected, if the demand falls too sharply, we're quite prepared to reconsider and adjust to ensure that we're in fact providing services that are incremental to what is being provided through the private sector.
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[Translation]
Mr. Rocheleau: We know that a $4 billion envelope has been set aside for the Small Business Loans Act. Can you tell us how much economic activity is being generated by these $4 billion?
[English]
Mr. Nymark: I apologize to the hon. member. I came prepared to deal with the benchmarks issue this morning. However, I could quite easily provide the member with a written response to that kind of question.
The Chairman: That's fair.
Mr. Ianno (Trinity - Spadina): I'd like to compliment both departments on their presentation. It gives me a lot of encouragement to see that we're not far off where this committee was, or where I myself was, on the issue of a benchmark and where you're coming from. So that's very positive.
The Chairman: [Inaudible - Editor]...right now.
Mr. Ianno: Mr. Chairman, I will leave it to your interpretation.
I have several questions, though. I was encouraged to see, with Mr. Swedlove's point, that under $500,000 is going to be the determining factor for the authorization of SMEs. Is that correct? Is that where you're going to be getting the information?
Mr. Swedlove: That is what the Bank of Canada review data is now set up to do. However, we were pleased to see that the banks were giving consideration to lower numbers, and we want to discuss with the banks what some of those lower numbers will be.
Mr. Ianno: I don't know if you're familiar with the table I put forward. It had the amount of corporate loans, the amount of small business loans out of that, and the amount of large loans. On a percentage basis, I came up with 33%, and the Bank of Montreal having achieved that, along with the Hongkong Bank.
Will you be gathering the information on the amount of small business loans compared to large business loans? Will that be one of the pieces of data you will be compiling?
Mr. Swedlove: Yes, that does come out of the Bank of Canada review numbers.
I stand corrected. It will from the supplementary data. Yes, we will have that.
Mr. Ianno: So you will have that.
Mr. Swedlove: We will be in a position to make that calculation.
Mr. Ianno: I also, of course, like what was in the budget in terms of the one year so that we see the progress, starting in September with information that we are able to achieve, I guess, once you've sat down and determined an appropriate benchmark. Taking that into account, will we be able to get that information in terms of the data? Right now when the banks come before us, we ask them, but I have to somehow pull it out. It's not easily accessible. I'm wondering if, when you have that information, we will be able to get a copy of it on an ongoing basis.
Mr. Swedlove: I understand that in the session you had with the Canadian Bankers Association a few weeks ago there was some discussion about how the data would be provided. There was some reference to the possibility of an annual report by the Canadian Bankers Association that would provide numbers with respect to both their volume indicators and their service indicators. That's something we would like to pursue with the banks to suggest -
Mr. Ianno: Right.
Mr. Swedlove: - that there be a means of properly presenting this and to allow -
Mr. Ianno: Which is great, but -
Mr. Swedlove: - you and this committee to review it.
Mr. Ianno: Instead of giving them the leeway to determine whether and when and all the rest, considering that you're dealing with the Bank of Canada with their statistics and you will be compiling it, is there not a way in which this committee might be able to get some of that information from you as compared to waiting for the CBA to deliver it to us?
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Mr. Swedlove: With respect to the information that is provided to the Bank of Canada, if you're asking whether that could be provided on an individual bank basis -
Mr. Ianno: Yes. Otherwise, how do we judge the benchmark? How do we judge if each bank is achieving it or not?
Mr. Swedlove: As for the individual benchmarks, hopefully data will be available in some form coming from the banking community. We haven't had a chance to discuss what precisely they have in mind. We'll want to review that to see indeed if that's acceptable. There's no point in having benchmarks if indeed there's no way of actually seeing -
Mr. Ianno: Of monitoring it.
Mr. Swedlove: - the numbers and monitoring it. So as part of that monitoring process, I think that has to be an open process in which you have access to the data.
The problem is that with respect to numbers that are provided to the Bank of Canada for purposes of their review, this has generally fallen under confidentiality restrictions. There may be difficulty in providing those numbers to you.
Mr. Ianno: Could you not ask this of the banks from the finance and industry departments? If we were to set benchmarks that were for the public to view, then they could supply, for example, how much is loaned to small business and other business. We could have that information so that we then can judge which banks are moving toward achieving the goals we'd like to see.
Mr. Swedlove: Okay. Yes, we'd be glad to take it up with the banks. Our focus has been a desire to ensure that the banking sector provides sufficient funds to small business.
Mr. Ianno: Right. And that is ours.
Mr. Swedlove: Our objective is more in terms of the overall money or capital that would be available to small business. So we haven't really focused on individual contributions. I don't want to leave the suggestion that we would be looking for a certain percentage or a certain level. Every bank has its own asset mix.
Mr. Ianno: That's fine. But in order for you to see progress, you want to see an increased amount of capital that's available or credit that's available to small business. Is that correct?
Mr. Swedlove: Yes, overall. Absolutely.
Mr. Ianno: Some are doing, comparatively speaking, better than others. Is that okay?
Mr. Swedlove: Yes.
Mr. Ianno: In order for us to achieve an increase in that - there are others that have not achieved that - then I guess we have to somehow encourage them to achieve our goal, which is to increase the amount of capital to small business. So it's easy to say this overall, but if we're not seeing how individual banks are doing, then we in effect won't see a big change.
Mr. Swedlove: In discussions we've had with the banks, they have suggested to us that competitive forces will require them to make a lot of this information public in any event now. I don't know if that's the case or not, but I think your point is well taken, and it's something we will be taking up.
The Chairman: Mr. Ianno, I just want to remind the witness that we're developing or devising some information that's going to come out in a report. So presumably our report is going to contain certain criteria that in our view will form part of the benchmarks that people are going to want to consider.
It's not just statistical. As you know, our committee has I think generally agreed with the consensus on the code of conduct. It's not just volume numbers. I think Canadian bankers have divided it into volume and service. I think that generally speaking most of us subscribe to that. This is probably a good way to break it out. There are service indicators as well, how the code of conduct is going to be evaluated, and all that kind of thing.
Mr. McClelland (Edmonton Southwest): In your testimony I felt you had touched on the subject of the concern about benchmarks becoming quotas. Is this fair? Was I reading it appropriately that there is some concern about these benchmarks in fact becoming quotas? And there is a concern that we would be investing quotas into the system.
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Mr. Nymark: I did refer to the issue of quotas in my opening remarks simply in terms of our approach, which is one of voluntarism in the first instance. We are on a timetable and a process that will, after the introduction of this system, allow the opportunity for everyone to review whether it's working or not. If it's working, then presumably that's fine. The system can be improved upon.
From our perspective, if it turned out that it was not working, my guess is that the committee, as well as everyone else, would then sit back and look at alternatives.
We're comfortable with the general approach that is being pursued at this time. I think, as Mr. Swedlove has said, that we want to get into the detail of it to make sure it works.
Mr. McClelland: What are you suggesting? For instance, in the Small Businesses Loans Act, a one-year horizon to see whether or not there has been damage done to the economy by changes to the act is, in my view, not a long enough horizon. Are you suggesting that there could be quotas imposed on the banking system by government, based on their lending practices?
Mr. Nymark: No, I don't wish to suggest that at all.
Mr. McClelland: There's a broader area that we haven't, as a committee, really talked about at all, in my experience. It involves the fact that we're looking at investment in small businesses and businesses in general, specifically from banks and from government. Yet we really haven't approached the topic of tapping the potential resources that are there outside of banks and government in equity capital.
Has any thought been given by your department to changing the way...? Take, for instance, personal guarantees. Say I were to guarantee a loan for an emerging small business at high risk in an arm's length arrangement, and I did so not being a shareholder. Say that note was called and I had to pay the bank on this guarantee. I'm not able then to use that as a business loss because the money was paid to the bank. It wasn't paid to the company that in turn lost the money.
The Chairman: Mr. McClelland, I'm listening carefully, but my relevancy flag is starting to wave. Your point is a good point. I would just really try to urge you to try to stick with the issue of what we're dealing with or tie it back in, if you don't mind. I'll give you some leeway.
Mr. McClelland: What I'm trying to do is arrive at a way in which we could induce more private capital to get into small business. Patient capital would also bring in management ability from people who have been able to get a resource pool. But there has to be something in it for them. If there's more money in getting income from passive investment in the stock market....
I'm getting waved out.
The Chairman: You have time for a short last question.
Mr. McClelland: In the aboriginal community, if banks or financial institutions are not able to take a personal guarantee on assets or land owned on a reservation, how will that fare in a competitive situation in which a community exists next door to a reservation and those personal guarantees are taken? They do not take them on a reservation, but they do take them off the reservation.
Mr. Nymark: You've identified a limitation that the banks would very clearly point out is one of the reasons why they are not able to lend in those circumstances on the same basis as they would lend to other entrepreneurs. I agree with you that this is a problem.
Mr. Discepola (Vaudreuil): I want to thank you for your presentation.
Unfortunately, I'm the black sheep of the committee. I don't share the optimism that goes on in my surroundings.
The Chairman: Let's hear from Montreal. Is that right, Mr. Rocheleau?
Mr. Discepola: We're very optimistic on the future of Quebec and Canada.
I don't share that optimism, because I have the sense and the feeling that although the banks seem to have come on board, I have a very serious concern with where we're headed. Although we seem to have a focus on where we should be headed, which is to get that capital into the hands of the small business, I don't see how we're going to get to that end.
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As recently as last week, your department, I believe, Mr. Nymark, published statistics on personal and small business bankruptcies. Both of them have gone up significantly.
I don't want to blame the banks for the high level of bankruptcies, but I say to myself we're going to...and I hate to use the word ``benchmarks'', because to me benchmarks are something tangible, something you can measure against, and where we're heading is a data collection system. What data should be collected? Well, let the banks voluntarily set up that data collection system. We'll wait a year. We'll analyse that data collection system. Then we'll establish benchmarks.
Well, I put forth to you that if we don't come up with something very crucially and very quickly.... We've been in government almost a year and a half, soon two years. We may have another good year of economic growth. Some economists have been projecting a recession a year or two down the road. What we come out with from this committee isn't going to help the small business people a year or two down the road.
My question - and I'll repeat it for your benefit - is how does the collection of data...and that presumes an awful lot of things: that we can get the banks to identify what the small business target should be. I have a concern, because $500,000.... It has clearly been stated by the business community that it should start with the $25,000, $50,000, $100,000 ranges of measurement. The banks seem to indicate that's going to be rather difficult.
How will the establishment of these benchmarks, or the collection of these data, help get access into the hands of the small business people as soon as possible if you're against an involuntary system and if you're against establishing some form of...call it a benchmark, call it a quota, but some form of performance measurement criteria immediately, as opposed to a year down the road?
Mr. Swedlove: Obviously I couldn't give you any kind of definitive answer that the path we're on would lead to the ultimate objective. The ultimate objective is to get more money into the hands of small business.
I sense from the discussions we've had with the banks on this issue over the last year and a half that there is a very significant increase in awareness of the difficulty and the fact that they have to address the issue. That doesn't mean, in our view, they have addressed the issue, only that there seems to be somewhat of a shift in the mind-set, which this committee I think recognized somewhat in the session the CBA had here in April.
The intention of the benchmarks - and I guess one could debate what benchmarks mean - is to find a way of measuring the progress of the banks. At this time we really don't have the kinds of tools to make an assessment of the relationship between the banking community and small business. To my mind, what is needed as a first step is those tools.
What was being proposed by the banks - and in our view, as I've mentioned, we don't think it's sufficient; we think there's more to be added - with some additions, will hopefully provide us with the tools as early as this fall to start to make assessments of whether there are improvements or not in the services that are being provided to small businesses.
In a sense, the minister is saying once those tools are in place, there's going to be a year when we're going to monitor that, when we expect to see progress, a shift in attitude, and a serious attempt to deal with what we perceive to be gaps in the lending to small business. Over that year, if there's no change, then the minister has the option to take action.
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Mr. Discepola: As the Minister of Finance also clearly stated in the budget, the banks have an obligation to help small businesses. Where's that obligation? How do you directly translate the establishment of benchmarks into an obligation?
Mr. Swedlove: I think we're giving the banks the opportunity to respond to that challenge. If they don't respond, the minister will have to make his decision as to how to proceed.
The Chairman: Mr. Discepola, in all fairness, I think the Minister of Finance used a bit of a carrot with the banks with a tax and that was to let them know -
Mr. Discepola: If a tax was the carrot, a stick would perhaps have been.... A tax - is that the carrot?
The Chairman: Sure, that was the carrot. The stick would perhaps have been quotas, but he's telling you what he knows. He smiled, so I'm not sure he's really telling us what he knows.
Mr. McCollum has been strangely silent. Perhaps he knows what the secret really is.
Mr. Mitchell, please.
Mr. Mitchell (Parry Sound - Muskoka): Thank you, Mr. Chairman. I want to start by following up on Mr. McClelland's point.
Mr. Nymark, you brought up the issue of venture capital in benchmarks. What specifically would you see us doing to have a benchmark in that area? The banks have continually told us they don't want to be in that. You mention it as a possible area we want to look at. Could you expand on that?
Mr. Swedlove: Let me make some comments on this. The question about the willingness of the banks to get involved in venture capital has been around for some time. In the change in legislation that we brought in with respect to financial institutions generally in 1992, we provided an opportunity for banks and other federally regulated financial institutions to establish special financing corporations. That was going to be a vehicle for them to provide equity into venture capital activity. Generally the banks have not seized upon this, and frankly we're a little bit disappointed that they haven't.
Of course, there has also been interest from others, including provincial governments, in finding ways of getting bank money into the venture capital field. We have recently seen some improvement. I think a lot of it has occurred because of prodding by this committee.
We think it would be useful to monitor the growth of equity contributions by the banks to the small business market. That's why we, along with Industry Canada, have suggested the banks give serious consideration to including equity as a benchmark in any group of benchmarks that are established.
Mr. Mitchell: Let me get this clear in my mind. You believe the banks presently have the legislative ability to enter into the venture capital side of things and you believe it's appropriate that they do so. You're saying the fact that they've had the legislative ability to do it and that they've chosen not to do it is a disappointment and is something we should be focusing on with the banks.
Mr. Swedlove: As you mentioned in your first comment, the banks are of the view that it's not the kind of business they're in. We provided the opportunity if they determined it was the appropriate business they should be in. As a government interested in seeing as much investment as possible - that's why I made the reference to some disappointment - we recognize there has to be a significant culture shift that takes place in the banking community for there to be any significant amounts of activity in this area.
Mr. Mitchell: In your opinion, is it appropriate for government, in this whole issue of venture capital, to assume, either through the tax system or directly, a portion of the risk to encourage the banks to enter into the venture capital field?
Mr. Swedlove: Everything has to be considered in the light of a desire to reduce expenditures as much as possible. I really don't have a view on that comment.
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Mr. Mitchell: From the industry department, regional development agencies are exploring just that. They are going to provide government funding to lower the risk profile that banks have to accept to go into capital. I would assume the industry department believes it's an appropriate response and initiative.
Mr. Nymark: In the context of the review of the FBDB, we are certainly looking at that as an important issue. And as the budget indicated, the regional agencies will be looking at partnerships with whomever, including the FBDB, to pursue that course.
Mr. Mitchell: I have one last question. In your presentation, I think it was Mr. Nymark who used the phrase, ``benchmarks...pricing-for-risk issue.'' Can you expand on what you mean exactly as far as what we should be looking at in terms of the pricing-for-risk issue is concerned?
Mr. Nymark: It's interesting. We have found that banks will lend to small business at prime, prime plus one, prime plus two or prime plus three, but will really not go past that level. When we compare that to the situation in some other countries, where there is a willingness to do what we call lending up the risk curve to prime plus five and prime plus six - that is, take on a greater risk in exchange for a wider spread and more profit - this is an activity the Canadian banks have chosen not to do.
We have taken this up with them, and they have stated concerns about getting involved in this segment of the business because of the way the market is structured, but I can't explain the reasons for this in any kind of detail. All I can say is I think it's an area worth pursuing because it would assist in servicing a market that is not presently served.
The Chairman: Mr. Swedlove, I was just checking with the researcher here, and we were told.... I think we have had two recent demonstrations or people testifying. Obviously, the minister for the ACOA was here recently, and he talked about money that he may be negotiating with Atlantic Canada. I know the Royal Bank - I'm just looking here at our notes - contributed $25 million to the Neuroscience Partners limited partnership, which is something Mr. Axworthy talked about when he was here. So there is some out there as a beginning.
Mr. Swedlove: Absolutely.
The Chairman: You are saying that the banks might become more involved. Did you have a target that you might suggest to us? For example, I know the Royal Bank has put $125 million into a risk capital pot called the Royal Bank Capital Corporation.
Mr. Swedlove: Yes, and that's a special financing corporation that was permitted under the 1992 legislation.
I don't want to mislead the committee, but there has been movement in this area. I think banks are starting to look at venture capital possibilities and at how they may service that market.
The Chairman: But you're saying it's just one bank so far.
Mr. Swedlove: No. Several special financing corporations have been established, so I think the banking community in general is looking at this issue. What I'm saying is that I think it's something worth monitoring over a period of time, and that's why we're suggesting it as -
The Chairman: Okay.
Mr. Mitchell: Mr. Chairman, I think it's also important to note on these special financing corporations that, generally speaking, the limited experience has been that they have been primarily at the medium or upper end of the market. This has not been money that has successfully flowed down to the small business in the sense that we've been discussing it.
The Chairman: That's right.
Mr. Mitchell: I think a component of the problem is that although there are some venture capital funds out there, either through the banks or through other types of instruments - such as the labour ones - they're just not able to place them in blocks under $500,000. The types of businesses we're talking about are, therefore, just not getting access to that equity even though the tools might be there.
The Chairman: Do you want to comment on that before I move to Mr. Valeri?
Mr. Swedlove: No.
Mr. Valeri (Lincoln): I'm going to follow up on that.
There's a lot of interest in venture capital these days. Just to go back to Mr. Mitchell's comments about what type of information you are hoping to get from the venture capital activity, are you looking to track the types of placements going on out there - the start-up, the expansion and mezzanine financing? And with that information, what do you hope to achieve?
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Mr. Swedlove: I haven't had any detailed discussions with the banks as to how one could track the numbers. I think it would be useful to look at the amount of equity that's been provided by the small business community and divide it by the categories that it falls into.
Some of it, of course, is contributions to private or quasi-public venture capital organizations, which then would spend the money. So sometimes it can be one step removed. I am thinking of some of the Ontario government plans that are in place where there is bank involvement.
So I don't think you could track in detail precisely where all the money goes and to whom, but with respect to these special financing corporations, obviously there could be a better understanding of where the money goes.
Mr. Valeri: You also mentioned that the banks have not seized opportunities that may be out there in terms of venture capital. Given the policy framework that's out there, they can go forward and establish these funds. Your comment was that perhaps they haven't seized them as well or as much as they could have.
I'll go over to Industry as well. Perhaps you can comment on this.
Do you then see a role in the expansion of the mandate by the FBDB wherein the FBDB can become a funder of expert funds? Rather than banks, you can have private sector individuals who are going out establishing venture capital funds, expert funds, going to the FBDB, who can then fund one-third of the fund. Then they can go out to the private sector and take two-thirds and go out and manage those funds. Do you see that type of a role for the FBDB?
Mr. Nymark: I won't speak for the FBDB, but their role in this area is one that is under very intensive review at the moment. We expect that the Minister of Industry will be in a position to announce the results of the review very shortly.
We're encouraging the FBDB to experiment. We're encouraging the FBDB to seek partnerships with both government agencies and private sector financial institutions.
We are also looking at ways, at the community level, of trying to encourage stronger and more consistent grassroots approaches to this issue across the country. Some communities have very strong capacities in this regard right now, but other communities have almost no capacity.
One of the roles we see the FBDB playing, and perhaps more generally through the community investment fund, is to address that issue.
Mr. Valeri: When the Hongkong Bank was before the committee, I had an opportunity to discuss with one of their executives their experience with venture capital. I believe they have an arm that is a venture capital institution. My question to them was on the fact that venture capital and equity investment are great, but the placements that a lot of small businesses are looking for are not in the $1 million to $5 million area. The venture capital response is that it costs a lot of money for our due diligence, and in terms of the size of the investment it needs to be at that level.
He indicated to me that they have had placements of $150,000, $200,000, $300,000. When you're tracking this activity, will you be specifically comparing the various activities by these venture capital firms and trying to persuade then that the target for the small business placement is much less than the traditional venture capital placements today?
Is the intent of tracking this activity to try to move it towards the small business sector, if you can prove that the due diligence that's required for these equity placements doesn't always necessitate a $1 million, $2 million, or $3 million placement?
Mr. Swedlove: You've raised some good points. Our intention right now is to take this issue up with the banks and to talk about what may be possible in terms of establishing benchmarks and how one might divide up the numbers with respect to venture capital. I think this is an area that's worth pursuing with them.
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Mr. Valeri: So if you're able to see that the financial numbers show there are venture capitalists making these $200,000, $300,000, $400,000 placements, you'd be more convinced that it's a marketplace in which perhaps more financial institutions should play a role, in order increase access to capital for small business.
Mr. Swedlove: I think any movement down, in terms of the numbers, on the venture capital side would be a major contribution, and I notice there is increasingly a view out there that the middle market, the $1 million, $3 million, $5 million venture capital area, is very well serviced at this point in time. I noticed an article in the newspaper quoting several venture capitalists, saying that they are now giving consideration to the smaller equity possibilities and looking at how they may exploit that market.
The Chairman: Mr. Rocheleau, you have a last question, and then I guess we're out of questions.
[Translation]
Mr. Rocheleau: In our recommendation number two on data collection, there is an important number that is not very often mentioned, it is the one concerning turned-down loans. We should now whether there has been a shrinkage of credit or not. We must remember that this is one of the foremost concerns of the committee.
To make an in-depth analysis, we should note the number of loans, the number of turned-down loans and the number of accepted loans. We should also have some information on the nature of the application for loans that were turned down. Don't you agree? I think we are neglecting this aspecct of the problem. Do government officials agree?
[English]
Mr. Swedlove: Yes, we do consider it important. We think the numbers on loan turn-downs would be a very useful indicator of the approach the banks are taking toward small business. I also think it would be interesting to find out the reasons for turn-downs. If there could be some categorizing of those reasons, that would permit some census as to why the banks are taking whatever approach they're taking. So I do think that kind of number would be extremely useful.
Mr. McClelland: I'd like to return to the notion of a one-year time horizon in assessing the results of the change in the Small Businesses Loans Act.
One of the reasons the changes were made was because many people felt that the taxpayers in Canada were taking on the obligation that should properly fall to the banks. A one-year horizon really wouldn't tell if there were a substantial fall-off; that's exactly as it should be if it parallels a substantial take-up of these loans in the two years preceding.
During earlier testimony, the banks said that part of the problem in the loan activity to small business was not capital being available; it was a lack of applications. So we can't really judge whether or not a bank is doing an appropriate job strictly by the number of applications they refuse, because if the applications are not creditworthy, then they should be refused because they have an obligation to their shareholders as well as to the country.
So the direct question is, why and where did the one-year timeframe come from?
Mr. Swedlove: There's one year with respect to the benchmarks; that's referred to in the budget.
Mr. McClelland: Or the review of the changes to the Small Businesses Loans Act after one year, a one-year assessment. I think Mr. Nymark made that....
Mr. Nymark: I think the connection was drawn between: would you in essence be benchmarking the kinds of loans that are made under the Small Businesses Loans Act versus what the banks are doing. I think you're asking whether that's not too early in the context of the benchmarking exercise to bring appropriate judgment to bear on whether the changes in the SBLA have been appropriate.
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I agree that one year is awfully soon. But in the context of the benchmarking exercise, I'll let Mr. Swedlove answer the question from his perspective.
I think, simply, the Minister of Finance didn't want to let this go on too long. There is a desire to see action here, not just collection of data. Presumably at the end of one year there possibly will be some trends emerging that will allow one to start to reach preliminary judgments. I don't think it's the end of the story at the end of one year. It was just presumably to put a marker down that we will be prepared to review this in one year at the latest.
The Chairman: Gentlemen, if there are no further questions, that concludes your appearance. We appreciate your comments. You've given us lots to think about, and you'll certainly be helpful as we deliberate in preparing some comments that you'll no doubt get back through your ministers. Thank you.
I want to remind members that there is no meeting this afternoon. Mr. Martin is not coming today. The reason is that he's waiting to have the outlook document available. I think we've tentatively scheduled him for May 30, 1995.
The other thing is, you'll be getting a request for the steering committee meeting. Is Mr. Schmidt coming back to Ottawa sometime?
Mr. McClelland: Yes, he'll be back Thursday, if you're nice.
The Chairman: Okay, the reason is that I'd like to have a steering committee meeting.
Also, so that you know, the researcher advises me that he will be circulating to committee members today or probably tomorrow - it's going to translation - an index of the things that might go into a small report on this subject.
The two things for future business are that obviously everybody has received their package about the material we've considered, and the steering committee is going to look at a proposal. I'll bring it back to the committee probably next week.
Mr. Rocheleau: When is the next meeting with the steering committee?
The Chairman: The clerk is looking for a time right now - next week, May 16, 1995.
Mr. Rocheleau: I will not be there.
The Chairman: Okay, well, we're going to be looking for an issue on FDBD and for telemarketing. That is what I'm going to be recommending to you; I'll tell you that now.
The meeting is adjourned.