EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, June 19, 1996

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[English]

The Chairman: I'd like to call the meeting to order. We are going to continue today with our study on rural economic development and the natural resources sector.

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Today we have a number of panellists, primarily on the issue of capital in rural Canada. As I mentioned, we have a number of witnesses. We have John Ryan and Don Layne from the Business Development Bank of Canada.

Welcome.

From the Canadian Bankers Association we have a number of panellists: David McInnes, John Leckie, Craig Rothwell and Paul Toriel.

Welcome, gentlemen.

With us, as well, from the Credit Union Central of Canada, we have Mary Pat MacKinnon and Michel Poulin.

Welcome.

The way we have been doing this is to ask our panellists to start off by making a presentation. We'd like you to limit that to around 10 minutes. Then we have a round-table discussion with the members of the committee.

I would ask that the Credit Union Central of Canada begin.

Mr. Michel Poulin (Member of the Board, Credit Union Central of Canada): Thank you, Mr. Chairman.

I'd like to take this opportunity to present to you Mary Pat MacKinnon, who is our director of policy with the government affairs office here in Ottawa.

Just to put things in perspective, I represent a federation of caisses populaires located in northern Ontario.

Thank you very much for the opportunity to come and speak to you about rural Canada. We will touch on rural development in general, but our presentation will focus on access to capital in rural Canada, which you will appreciate is an issue that credit unions and caisses populaires are well equipped to deal with.

There are over 10 million Canadians who are members of credit unions and caisses populaires. With assets of over $100 billion, credit unions and caisses populaires provide complete financial services for 35% of Canada's population. For over 900 communities in Canada, the local credit unions and caisses populaires are the only source of financial services.

The Canadian credit union and caisse populaire system has formed provincial central organizations in all the provinces. The Credit Union Central of Canada is the national trade association and the central finance facility for credit unions and some caisses populaires in Canada.

We work very closely with our counterparts in Quebec, Le Mouvement des caisses Desjardins, which includes 1,485 caisses populaires concentrated in Canada or in Quebec, but also located in Manitoba and New Brunswick. There are also some in Ontario.

[Translation]

Because they're community-based, credit unions exist through and for the communities they serve. They play a primary role in local development by reinvesting members' savings in their communities in the form of personal and business loans and rebates.

Because they are guided by co-operative principles and values, such as community spirit and mutual co-operation, credit unions and caisses populaires are better able to focus on the special needs of the local and regional community.

[English]

Credit unions and caisses populaires play an important role in the rural communities. In Saskatchewan and Manitoba, credit unions and caisses populaires are the largest non-government agricultural lenders. In many cases, loans to agriculture and businesses account for over 50% of the credit union and caisse populaire loan portfolio.

[Translation]

Thus the primary responsibility of communities is to ensure that local savings are reinvested locally in the name of those committed to economic development.

[English]

Credit unions and caisses populaires were established by community leaders to fill gaps in the financial service sector. They are an integral part of their communities. Credit union and caisse populaire boards reflect their communities. They are farmers, fishermen, or small business people with a goal of improving the economic viability of their communities.

[Translation]

For instance, the Kapuskasing Caisse populaire played a prominent role in a project that made it possible to save 1,000 jobs in a municipality with a population of only 10,000. Under the leadership of the Caisse, people in the community raised $12 million to invest in revitalizing a paper mill. Two years later, that mill is now highly profitable and has seen the price of its shares go from $1 to $7.

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As for the Caisse populaire, its investment amounted to $5.3 million.

[English]

One of the emerging competitors for the credit unions and caisses populaires is the Farm Credit Corporation, which has evolved substantially over the last 40 years from a corporation set up to deal with a huge gap in the availability of capital following the Second World War to the lender of last resort to the present, where it is seeking an expanded mandate to operate beyond its present restrictions to provide financial and management services to the agricultural and rural sectors. The observations of credit unions and caisses populaires are that SCC is now operating as a direct competitor.

Credit unions and caisses populaires are very liquid in some areas of the country and are able to support the agricultural sector's capital requirements. It is our view that gaps in the access to capital in rural and agricultural sectors have less to do with availability of capital and more to do with the type of capital required and the need for equity. The sector is very interested in working with SCC and other financial institutions, such as the Business Development Bank of Canada, to ensure the viability of rural communities.

One example of a partnership in the west interlake region of Manitoba is the partnership between the Ericksdale Credit Union and the Super Six Community Futures Development Corporation; they've established a joint venture to create an alternative source of financing for small and micro-businesses. The CFDC will contribute $250,000 and the Ericksdale Credit Union will contribute $750,000, for a total of $1 million. CFDC will guarantee 75% of any losses and Ericksdale Credit Union will administer the loan program targeted to tourism, value-added agriculture, and forestry.

In June of last year a conference was sponsored by Industry Canada on economic development for northern Ontario. One of the results was a partnership proposal between the caisses populaires of this region and FedNor to provide financing to small business and micro-businesses. The proposal is for $40 million to be available over a period of three years, with FedNor contributing guarantees of $12 million. As well, the caisses populaires operating in northern Ontario will participate in the wholesale of funds for the various CFDC operating within the regional communities.

Credit unions and caisses populaires are well placed to deliver financial services on behalf of FCC and BDBC. It is important to build on what already exists rather than duplicating services offered by credit unions and caisses populaires. In our view, the federal government should be looking at ways to create a climate of education and understanding and a spirit of entrepreneurship among farmers to take action on value-added opportunities. Farmers do recognize the benefit of value-added processing, but require assistance in identifying opportunities and support through grants and favourable loans. The federal government must play a key role in this area.

There are fiscally and socially responsible approaches to creating opportunities for rural Canada. New-generation cooperatives have had significant success in the northern States in the creation of value-added processing enterprises. These cooperatives are community driven and supported, ensuring that projects meet the needs of individual producers. This approach would serve to tap into capital by having individual producers pool their money and ensure market for produce via the value-added cooperative.

It is critical that the government look to alternative mechanisms for the promotion of a value-added agricultural industry. Credit unions and caisses populaires could play a key role in delivering services and programs for the federal government, as community owned and operated financial institutions, credit unions, and caisses populaires already promote rural development. Our network across rural Canada could only benefit the federal government as it works with farmers towards a vibrant and healthy rural economy.

Thank you.

The Chairman: Thank you very much.

Mr. Ryan, Mr. Layne.

Mr. John Ryan (Executive Vice-President and Chief Executive Officer, Business Development Bank of Canada): Thank you, Mr. Chairman.

[Translation]

Good afternoon, ladies and gentlemen. I am very pleased to have this opportunity to take part in the committee's hearings on rural development.

[English]

I'm accompanied by Don Layne, our senior vice-president of corporate affairs.

I want to begin by saying that we agree with the statement that was in the throne speech that rural areas do face different challenges than those of the urban areas do. We are encouraged by your commitment to address these issues. I'm especially pleased to be here before you today, because I've spent over half of my 24 years with the BDBC serving small business throughout Atlantic Canada.

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The issue of developing non-metropolitan Canada is an important one, which, along with access to capital for small business, is a major preoccupation of the Business Development Bank of Canada.

I would like to briefly sketch out our overall role and mandate at the BDBC, how we believe our activities are in many ways already meeting some of the objectives laid out in the throne speech, and how we're moving to sharpen our focus on supporting small business in non-metropolitan areas.

I'm sure members of the committee well know that the Business Development Bank of Canada was created one year ago, a successor to the Federal Business Development Bank and its predecessor, the Industrial Development Bank.

[Translation]

The Business Development Bank of Canada is now one year old. It was established by the Parliament of Canada last June to replace the Federal Business Development Bank.

[English]

For over fifty years now we've established a tradition and a reputation for partnering with Canadian small and medium-sized businesses. With the recent change in our name we've also received a new mandate. The new mandate of the BDBC is to provide financial and management support to entrepreneurs throughout Canada and, more specifically, to help businesses take advantage of growing opportunities in the global marketplace.

BDBC's financial services are required to operate profitably. For the past seven years we have not received from the federal government any appropriations, grants, or contributions for our financial services programs.

[Translation]

Our new mandate sets out the following priorities. First, we intend to increase funding to knowledge-based and export-based industries, although this definitely does not mean we will be abandoning traditional activities. This is an area where we have been particularly active in metropolitan areas.

[English]

Under our new mandate we're also increasing the number of smaller loans and investments and putting greater emphasis on quasi-equity and working capital financing. Another goal is to increase the availability and financial and management services to aboriginal-owned business.

One of our specific obligations under our new mandate is to increase the bank's visibility and to continue to serve small businesses, including those in metropolitan and non-metropolitan areas. This commitment, I believe, is a tangible sign of the importance given by the bank to its performance in rural Canada and the development of rural Canada in general.

The BDBC is currently very active in supporting small business in smaller communities throughout Canada. To differentiate our urban and rural customers we use the Statistics Canada definition of what's metropolitan versus non-metropolitan. According to the 1991 census, 61% of all Canadians live in metropolitan areas, which are defined by populations of 124,000 people or more. The remaining 39% of Canadians live in the non-metropolitan areas.

Our bank has what's considered to be one of the most extensive delivery networks in the federal government. Our 84 field offices are geographically distributed throughout the country, with 50% being located in non-metropolitan areas. We employ some 950 people and have a significant presence in smaller, more remote communities.

Nationwide, 55% of our customers, representing approximately half of our total portfolio, are located in the non-metropolitan areas. In other words, while 39% of Canadians live in non-metropolitan areas, fully 55% of our clientele is located in these areas. If we take a more detailed look at these numbers we see, for example, that in Atlantic Canada 35% of our clients are in areas with populations of 5,000 or less. If we look at it in the prairies, 29% of our clients are in areas with populations of 5,000 or less.

In terms of the bank's management counselling and mentoring services, these activities are geared towards entrepreneurs in non-metropolitan areas. Some 62% of our seminars and workshops, 54% of our counselling, and 66% of the mentoring as carried out in these areas are in populations of less than 100,000.

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As you can see, we're already favourable to rural non-metropolitan areas, and we intend to continue to serve those needs in the best way we can to fulfil our overall mandate.

I recite all these numbers to also make the point that the BDBC is considered a significant player in the financing of small business in both urban and rural areas. About 20% or one in five of all small businesses in Canada has either used our services or is presently utilizing our services. We currently have 15,000 customers, and we have a total portfolio outstanding of about $3.3 billion.

In addition to our regular term loans, we also have developed several other innovative forms of financing that contribute to filling the market gaps that have been identified repeatedly by so many others.

One of our newest products is what we call patient capital, which has been designed for new businesses with high growth potential. This equity-type financing provides long-term capital on flexible repayment terms. For example, BDBC recently provided $200,000 in patient capital to a young, innovative company based in the prairies. This company employs 12 local people and manufactures safer spray applications for fertilizers. Our financing provided the working capital necessary to help this business penetrate markets in the United States and Japan and will support further new product development. Although the firm has not yet shown an annual profit, it expects its forecast sales to triple over the next three years.

We've also very recently launched our micro-business program for the very small and early stages of development firms. This program supports the growth and development of some of the smallest innovative businesses by combining personalized management counselling and term financing of up to $25,000 for the start-up businesses and up to $50,000 for existing businesses. To further support growth during the critical early years, the program also features two years of follow-up mentoring for entrepreneurs who are in the early stages of start-up or growth.

One good example of the micro-business client is a Quebec-based firm that received $25,000 in BDBC financing. The company develops computer software to generate high-quality 3-D images. A BDBC loan provided the business with working capital to expand its local and international markets. The number of employees has already increased from five to seven and the business has just completed its first year of operation.

In addition, we also provide venture capital, which is focused on equity financing for the fastest-growing small businesses. We are also working in partnership with other institutions and organizations such as the regional agencies and Industry Canada, as well as other public and private sector institutions. Some of these cooperation agreements are already in place, and activities are already under way in Atlantic Canada with ACOA, in the west with Western Economic Diversification, in Quebec with FORD-Q, and in Ontario with FedNor. We also have a strategic alliance with the Royal Bank of Canada to help the knowledge-based small businesses in Ontario, and we're about to announce comparable agreements with other key financial institutions.

As I mentioned, we provide more than just loans to our clients. Entrepreneurs today find a lack of time and in-house expertise to respond to all the needs of their operation. The economic changes, the increased competition, globalization, and new technology have increased the need for specialized know-how. We are the only institution that offers an array of counselling and mentoring programs that are designed to strengthen the skills of entrepreneurs across the country.

Our experience tells us that the great majority of small businesses that stay small do so primarily because of the lack of right guidance on proceeding with growth and expansion into existing or new markets here in Canada or indeed around the globe. This is no less true for businesses in rural Canada than it is for businesses in urban Canada.

Where we also think we make a real difference in serving rural Canada is the care we take to give the training to our people to be responsive to the needs of the region they operate in. To demonstrate our commitment to customer service and satisfaction, we recently introduced a detailed charter of client rights and we've appointed an ombudsperson.

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Our philosophy at the BDBC is that rural Canada deserves the same services as urban Canada, and we're proud of our achievements in this regard. Whether you deal with our Toronto branch or our Red Deer branch, our goal is to ensure the same high level of quality service.

In conclusion, I want to stress that although we can provide a statistical breakdown showing that a great deal of our activity already serves rural Canadians, the principles we follow in determining eligibility for support are the same for everyone. The entrepreneur has to present a viable business plan and has to demonstrate the possibility for growth, no matter whether that entrepreneur is located in a rural or metropolitan area.

Again, thank you very much for inviting us to participate, and I welcome any questions you may have. Merci beaucoup, mesdames et messieurs.

The Chairman: Thank you, Mr. Ryan.

Mr. McInnes.

Mr. David McInnes (Director, Government Relations, Canadian Bankers Association): Thank you very much, Mr. Chairman.

I would point out that the copy of our translated remarks that we're going to read today will be forthcoming to the committee.

At the table with me today is Paul Trawl, senior manager of small and medium-sized enterprises, for the Royal Bank of Canada; John Leckie, senior vice-president of business banking services for the Toronto Dominion Bank; and Craig Rothwell, vice-president of the agriculture division of CIBC.

The CBA represents Canada's 54 chartered banks. Mr. Leckie is chairman of our independent business committee; Mr. Rothwell is chairman of CBA agricultural advisory group; and Mr. Trawl is chairman of the association's knowledge-based industries working group. You have a panel of chairmen here with you today.

We'd like to assist the committee in documenting the contribution made by the natural resources sector to the rural economy. Our remarks will highlight the banks' contribution to rural economic activity, according to a number of measures, and the committee is also exploring ways to enhance economic growth. We will make some broad suggestions towards the end for bringing about positive changes to rural Canada.

Depending on the bank, up to one-third of Canada's 8,000 bank branches are located in what many people describe as rural Canada; that is, outside the larger cities. This figure varies according to the definition of rural and is substantially different from that raised earlier by the BDBC, by another measure. Nevertheless, thousands of Canada's 170,000 employees work in these communities.

The branch network and, increasingly, the many forms of banking electronically offer rural Canadians access to financial services. As discussed later, government must also be aware of the ways to enhance these important distribution channels, which in turn can help to maintain the viability and vitality of rural communities.

Clearly, the one challenge facing this committee is to find the contribution of the natural resources sector to rural economic development. We've had our set of challenges, as you know,Mr. Chairman, in collecting meaningful statistics on the banks' small business lending activity. Thanks to a constructive working relationship with the Standing Committee on Industry, we spent well over a year developing what is currently the most comprehensive set of statistics on small business lending in Canada.

Although we have not categorized lending by rural or urban, we have a reasonable indication of the extent of rural bank lending. Total authorized bank lending to small and large businesses in several major resource industries was over $54.9 billion, close to $55 billion as of December 1995. We include natural resources to mean agriculture and related services, fishing, trapping, logging, forestry, mining, quarrying, and oil wells.

There's a footnote here. These statistics are indicative of the lending done to rural Canada. Many other types of business operate in rural Canada that do not fall under one of these resource headings. The converse is also true. These activities can take place within urban areas.

We recognize there are limitations to any statistics-gathering exercise, but we have recently complemented this picture with a fairly thorough and independent customer survey on lending practices. Thompson Lightstone & Company Limited conducted an over 200-page survey on behalf of the CBA and the industry. Its results were delivered to the industry committee several weeks ago. We will table a copy of that survey with you. In fact, I left a copy with your clerk.

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Certain findings may be of interest to you, given that access to capital has come up before this committee in earlier testimony. The survey found that agricultural small businesses had 85% of their loan requests approved in the last year. That's over 8 out of 10. This compares with a 79% loan approval rate for all small businesses. These figures include loan requests still pending.

There's a similar story for the other primary industries. In logging and forestry, and mineral extraction industries, businesses had 86% of their loan requests approved in the last year.

The statistics from this independent survey also show that Canada's banks have extended more credit to the agricultural sector than to any other sector. Interestingly, a significant amount of this credit is not being used. Agricultural businesses are only using 74% of their authorized credit. The same figure holds true for those other primary industries.

Incidentally, relating to the agricultural issue, we have just presented a brief to the government on the Farm Credit Corporation's prospective expanded mandate. We made several recommendations that should be relevant to your inquiry, and we also tabled a copy of the brief with the committee.

For example, we suggest the best way to improve the availability of credit is to fully assess how any remaining gaps in the market can be filled. We also highlight ways to lever private sector funds, such as developing alternative program delivery through the private sector branches. This was picked up by earlier testimony.

Getting back to our survey, we think there are some positive indicators, but we are the first to state that the survey identifies areas that need improvement. Small businesses want banks to be flexible in meeting their credit needs. They also want banks to better understand their businesses. Finally, banks need to improve their communication with customers. The banks have made a commitment to the industry committee to improve in these areas.

Importantly, the industry confirmed that credit decisions are made on the basis of the merits of the business case presented to the account manager, wherever he or she is located. The analysis confirmed that the region has no effect on the loan decision.

This raises one central question likely of interest to the committee. What is being done for rural customers specifically? Individual bank initiatives designed for customers generally can be particularly useful to rural customers. The use of toll-free telephone numbers, banking by phone, the PC or personal computer, and the Internet bridge the distance between service providers and customers. Our Canadian banking ombudsman, for example, has a 1-800 number, as do the other banks, to help facilitate access to redress service from anywhere in the country.

Bank employees serve communities in ways that statistics do not easily reveal. Bankers participate in entrepreneurship training and mentoring programs to local boards of trade or to schools. They are advisers to many local economic development organizations. The branch managers are often the first stop for local charities seeking support for fund-raising campaigns.

There are, of course, particular challenges facing rural Canada, including the closing of rail lines and grain elevators. Post offices, hospitals and business services are going down the road to larger communities designed to service a wider geographic area.

There are a host of other problems, but in our experience communities are looking to alternative ways of doing things, and tailored solutions seem to be the best.

In the situation where a bank branch is closing, for example, banks consult with community leaders to explore whether basic banking services can be delivered through a partner. For instance, one bank has arrangements in place with the local post office and even in a town hall. There may be an opportunity to install a banking machine, or banks do consider setting up part-time operations in very small or remote locations.

These are alternatives, but they can be supplemented by a key development. As noted earlier, banking and financial services are becoming increasingly more accessible because of technology, and technology will increase access to such services. Also, technology doesn't mean that new branches aren't opening. One bank has been actively setting up branches in aboriginal communities, for example.

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In going forward, we suggest that facilitating economic growth in rural Canada should take into consideration a number of elements. We pulled out six for you that could form the basis of a discussion.

There should be ongoing, broad consultation, as this committee is doing, before government develops new policies for rural economic development.

Solid research is needed to scope out the true nature of problems facing rural Canada and to ensure that any new government programs or initiatives are truly necessary, well targeted and efficiently delivered. This is often described as a gap analysis.

We should also recognize that many of the initiatives will be very local in nature and that full local participation is necessary for success.

However, a model for one community may not necessarily be transferable to another, which reinforces the point about consulting locally with all the relevant players.

Partnerships and strategic alliances, being complementary, should be the catchphrases of government business community activities. These pursuits can be highly constructive, as several banking industry arrangements with crown lending agencies have shown, which can lever the banks' extensive branch network as a delivery channel to Canadians.

Finally, information sharing is central to helping rural Canada's growth prospects. Canadians are learning how to capitalize on so-called business networks. These are new ways of doing business, and they emphasize cooperation among businesses to help each other grow.

The Canadian Business Networks Coalition, which was sponsored by the Canadian Chamber of Commerce and Industry Canada, is helping to launch these across the country. Rural Canadians should have every opportunity to be aware, at the very least, of the numerous programs and initiatives available to facilitate economic growth. Industry Canada's Strategis, a new on-line business information source, which many of you may already be aware of, should be a plus for Canada in this regard.

Mr. Chairman, we've also tabled with the clerk a number of documents on our statistics, our survey, and so forth. We hope that will be of use to you. We're open to your questions. Thank you very much.

The Chairman: Thank you very much, Mr. McInnes.

We'll begin our questioning with Mr. Canuel.

[Translation]

Mr. Canuel (Matapédia - Matane): I want to thank you for appearing before the committee today. It is always interesting to hear the views of people involved in high finance. I have a couple of comments to make, and then a few questions.

The comment I am about to make is not so much my own as that of the people in my region - the riding of Matapédia - Matane in the Matapedia Valley - an area with very strong rural representation. Back where I'm from, people tend to say that when it's sunny outside, the banks start handing out umbrellas, but when it starts to rain, they snatch those umbrellas away.

I myself have seen that happen fairly often. I certainly understand that a bank wants to make money. There is nothing wrong with that. Earlier, I was listening to one of the witnesses talk about credit unions in Ontario. I identify more with credit unions because in Quebec at least, when Mr. Desjardins founded the "caisses populaires" years ago, his aim was to assist the rural areas, something he in fact did for years.

I have a couple of questions about credit unions or caisses populaires. I'm sure you're aware that for the past 40 years, rural areas have been suffering considerable hardship. You probably know as well as I do that young people do not return to the rural areas. When a young person comes into a bank after finishing his schooling, whether he is an agrologist, veterinarian or whatever his line of work, he is already in debt, as I'm sure you know. He has spent three or four years in university and has borrowed $15,000 or $20,000. After finishing school, he goes into a bank, still in debt, and tells them he is an agrologist and would like to start a career in agriculture. But the bank manager tells him he has a $15,000 debt and that he should go and see his father instead and find three or four people to back him. It's the same story over and over.

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The federal government established the Canada Deposit Insurance Corporation program in the regions. That's where the young man I referred to earlier is supposed to go to get venture capital, because the banks have rejected his application. Once CDIC has granted a loan, the banks often show greater openness. It seems to me banks play such a marginal role in rural areas that I wonder whether we need them at all.

You described a whole range of services that you provide. At the same time, you always expect something in return; that's perfectly normal. Now I don't know who is going to tackle my question, but I am wondering why a certain amount could not be set aside as venture capital, particularly in rural areas? I suppose you will say that once in a while you give $7,000 to such and such a charity, but that's not what I mean. I'm talking about a fairly substantial amount of venture capital that could be used to help people.

The Royal Bank makes about $3.5 billion in profits. Could it not put some of that money back into the regions? I don't really think that's asking too much. The other banks could do the same.

I know for a fact that the caisses populaires Desjardins try to do even more. Actually, I should not say "try"; they really do do more.

Since you are full of good intentions and claim to do quite a bit, I am inclined to ask that you do even more. You quoted some figures earlier that I do not intend to challenge. You say that you are very involved in rural areas, but when you do get involved, it is always from a position of total safety, where there is no risk of your being hurt in any way.

Do you suffer heavier losses in the rural areas than you do in the big urban centres? Couldn't all the banks invest a substantial amount - although I'm not saying they shouldn't lend money - and accept greater risk? Young people today have a tremendous amount of talent, and very often all they need is $50,000 or $100,000 to get them started for life. Yet all the banks seem determined to keep the money under lock and key, and when a young man comes to them for a loan, they tell him he should ask his father, his grandfather, his grandmother or his aunt to guarantee his loan. That way, there is no risk whatsoever.

I don't really know how banks in Ontario and other provinces operate, but I do know how they operate in Quebec. And I deplore the fact that even though their managers may be very pleasant and polite, the banks always say no and demand so much security.

It seems to me you are not really doing yourselves a favour by refusing to take more risks. Although I keep referring to risk, you will recover 40 or 60 per cent of these amounts. The successful firms will deal with you and rural areas will tend to have more stable economies and greater confidence. I am speaking mainly on behalf of our youth. Whenever I talk to young people, they all say there is no point in going to a bank because it will just reject their application unless, as I was saying earlier, they have someone prepared to guarantee two or three times the amount they are asking to borrow.

Are you prepared to show greater openness to people in rural areas? Are you also willing to invest more venture capital there? If not, what do you see happening to our rural areas over the next ten years? Thank you.

Mr. Paul Toriel (Senior Manager, Small- and Medium-sized Enterprises, Royal Bank of Canada, Canadian Bankers Association): I will try to respond to that fairly lengthy series of questions as best I can. As I see it, you have raised three separate issues. You are quite right to say that what we do for the young people of this country is extremely important for the future of our economy.

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Two banks in particular, which are in fact represented at the table today, have made quite a significant contribution to a new program, called the Canadian Youth Business Foundation, that has just been launched with the participation of other organizations. It is a non-profit organization that will be providing loans to young people who want to get started in business. Because it has just begun, it is still very new. I know the program is not yet available in Quebec, but it soon will be.

Mr. Canuel: And what conditions do young people have to meet to take part in the program?

Mr. Toriel: Well, they must have a business plan. This program is aimed at young people under the age of 29 who are getting started in business, but who are real novices and have never had credit extended to them before. So, this is something directed at beginners.

Mr. Canuel: Even the ones who have just finished university with a $20,000 debt?

Mr. Toriel: Yes, people who are just starting out. It's almost like venture capital. But the Foundation is a non-profit organization.

In your comments just now, you stated a couple of times that we do not grant loans to farmers or people in rural areas.

With all due respect, the figures Mr. McInnes gave earlier are statistics that were gathered by a firm that interviewed people all across Canada. Those statistics indicate that more than 85 per cent of loan applications are in fact approved. It is therefore not accurate to state that all loan applications are automatically rejected.

Mr. Canuel: No, that's not what I meant. If that's what I said, I take it back. Big farmers have no trouble borrowing money. They are practically already millionaires, or at least very rich. As far as they are concerned, there's no problem whatsoever; you are not in the least reluctant to lend them money. It's when you're dealing with people who are having problems that things hit a snag.

Mr. Toriel: Our policy is to try and look at the individual circumstances of every farmer who comes to us, to see whether there is any way we can do business with him. I can assure you we would not reject someone's application simply because he is young or having some problems. If we can, we will try to solve his problem.

Recently, venture capital has become a problem that we must pay more attention to. Especially for businesses that are just getting off the ground, venture capital can mean shared ownership. Many small companies are not willing to do that. They are young entrepreneurs or people who are just starting out and they do not want someone coming along to tell them how to run their business. The reason they became entrepreneurs was to be independent. So, venture capital does not offer a solution to every problem.

Mr. Canuel: But surely to some of them.

Mr. Poulin: I would just like to respond to the member's comments. I fully understand his concerns, because in Northern Ontario, we are also trying to come to grips with the migration of our youth to urban areas. You are right that we should consider setting up development funds, but we also have to give our young people the tools they need to succeed. We need to develop a culture of entrepreneurship and encourage young people to start networking in college and at the post-secondary level, so that they are sure to have the kind of access and resources they need to develop their expertise. What I have in mind is a mentoring program that would be available from the time they entered a post-secondary institution and would continue to track their progress once an actual business was in place.

One of the major challenges facing not only us but the institutions, is to assess an idea's potential. We are determined to do what we can to ensure that young people with lots of ideas who show tremendous potential can succeed, even though they may not have the appropriate expertise. What they need are the proper tools and appropriate financing to make their dream a reality.

[English]

The Chairman: Thank you very much. Mr. Stinson.

Mr. Stinson (Okanagan - Shuswap): Thank you, Mr. Chairman.

First, I'd like to thank you for coming.

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Mr. Ryan, I want to commend you. You say you supply counselling. I'd like to know how many of the other banks are doing that, and if they're not, why not?

It seems in rural areas - or at least I've run into this more times than enough, and I'm from a small area. I've been in small areas all my life. Sometimes it's not all that hard to get your first loan. Then you go back to continue your loan a second time and you find out you have a new loans manager who doesn't understand at all the problems of the valley or where you're from. They don't realize that there are peaks and lows. It seems it plays no part in bringing your loan further around.

I guess this is my main concern. Why do you change your loan managers so suddenly, so quickly, without letting them stay in the area for a given number of years so they can understand the ebbs and flows?

Mr. Ryan: Perhaps I can briefly comment on your first point on the movement of the account managers. It is a goal or objective of ours at the BDBC to try to keep our account managers in place as long as possible. We try to target for about three to four years. Often that's not possible; other opportunities come up, they're advancing in their careers, and we move them to another location.

What we try to do very clearly, though, is to provide a continuity to the people in the branch so that when the account manager leaves, somebody else clearly has an understanding. So there's a second person on the file at all times, and you don't have to start from square one. There is a continuity there per se.

There are peaks and lows in any business. I think our counselling program has certainly paid off in spades from the point of view of the small business entrepreneur that when they're having particular problems they often don't have someone else to turn to from within their organization. We're able to put a counsellor in to work with the business and try to work them through the individual problems they may have.

The other important point, too, is that from the BDBC perspective we try to be with the business in good times and bad. There's a continuity there from the point of staying with that business. Often the first thing we can do is lift the payments so that if the client is having individual cashflow problems you lift the principle payments. You relieve some of the strain on that individual business.

Mr. Stinson: Just to follow up on that, say there's a personality conflict - and this does happen - between a loans manager and a customer. Do you have an appeal system in place?

Mr. Ryan: Yes, we do. It's a customer complaint process. If a thing is not settled with the account manager and the branch manager, it goes through to the area vice-president. It's their objective to solve the particular dispute or problem, whatever it might be. If it doesn't get solved there, it goes directly through the ombudsman we have in our head office, who reports directly to the president. I can assure you, they don't want too many going to the ombudsman. If it needs to be settled, it's most appropriately at the local level.

The Chairman: Mr. McInnes, do you have a comment on that?

Mr. McInnes: I'll pick up on the counselling and then leave it to one of my colleagues to address the other issue the member raised.

I think it would be safe to say that the chartered banks have really focused on business education as a priority in the last couple of years. We've held a number of small business seminars across the country to provide education and information on how to approach a bank, how to write a business plan, how to understand the different types of capital and what is needed to succeed. In fact, we held a very successful small business seminar on Parliament Hill about a month and a half ago. The Hon. John Manley appeared to make a few remarks and to take advantage of the opportunity to speak to over 100 entrepreneurs in the audience.

As an association, we've also developed a very innovative program to get information out to entrepreneurs and young students. A CD-ROM is available. In fact, we've tailored that for the aboriginal community as well, which perhaps has some particular relevance to this committee. The CD-ROM can be plugged into any machine across the country.

So education is getting out into all areas of the country, which really helps develop skills and education and entrepreneurship. It's so successful that we are actually exporting this product abroad. We've sent a copy of this CD-ROM to every single school across the country.

The other thing is that sometimes it's hard to measure this. Our local bankers participate in local economic development offices. They speak in a class or at an entrepreneurship training session held in local community halls or local colleges or schools throughout the country. So education's very important.

.1625

The primary reason for this is that bankers, credit unions and lenders want to get good business plans to help them facilitate the credit process. It's in our best interest and it's in their best interest.

Mr. John Leckie (Canadian Bankers Association): I think the good news for the rural area is that there is a hell of a lot less turnover in the rural areas of account managers than there are within the cities. That has been quite a serious problem, in my view - turnover in the cities.

In the rural areas, I wish I could say it was good planning that we don't have a lot of turnover there, but it probably has a lot more to do with the fact that it's very expensive to move people around from one town to another. So they do in fact tend to stay in place longer. That's not to say we can't do more in that regard.

In terms of the counselling, I feel, at least, that inherently, in getting the loan and working with a branch, hopefully you are getting some sort of perpetual counselling from an experienced banker over time. Perhaps I could just share with you an experience I had in the last six weeks.

I was in Winnipeg doing a little management by walking around. I met with a woman who runs a little retail outlet in Winnipeg in a mall. She's so near, but yet so far. She's a great merchandiser - and she doesn't deal with us - but when I looked at her books, I saw she was borrowing $20,000 from an individual at 15%. She puts up $15,000 in GICs. So she's really only getting $5,000 of real money unsecured, and she's paying 20% for that. Three or four other things were also going wrong in her financial affairs.

I talked to her. I asked her, how much would you pay for good counselling? Would you pay a bank $200 a month, for example, if we were to put in place a counsellor? Retirement bankers came to mind. She had trouble with that at first, yet she'll pay 20% for the money.

Our margins, believe it or not, are 2% to 2.5% on the loan. That's $500 a year we make before overheads and people and so on. So there isn't a lot for us, believe it or not, to play with in terms of providing overhead and counselling.

I think you're right. I think there's something that could and should be done. I'm just sharing with you the analysis going on in my mind at this point.

The Chairman: Thank you. Mr. Thalheimer.

Mr. Thalheimer (Timmins - Chapleau): Thank you, Mr. Chairman.

In any economy, to sustain it or grow it you need capital. You need money. The problem as I see it, particularly in rural areas, is the security aspect of it. You're afraid to lend because you're going to lose it. That's what Mr. Canuel was alluding to; you can't get any money out there because you're afraid of risk and so on.

I'd like to hear from people on what role a government can play in making capital available. I know there's capital available; capital is important, along with advice and information and guidance, but I want to treat only the capital aspect of it.

It seems to me, from my experience, particularly in rural areas, farming and so on, that capital is not available. Capital's available anywhere where you have the security. If you find a gold mine in Timbuktu - incidentally, they didn't, but if you did - and you have to prove an ore body, you'll get the capital. I'll walk into any bank and tell them, here, I have so many million ounces of gold. They'll tell me, fine, here's your cheque; go and develop it.

The problem in rural Canada is this. Say I have an idea, and I want to start a chicken farm or whatever it is. They become skeptical: what security do you have? Nothing. You have an idea. So whether you like to say it or not, your problem is security out there, isn't it? That's your problem out in rural Canada. You have no security.

Should government play a role in absorbing some of the risk for the capital needed to develop or sustain an economy? Do you see government playing a role in that? What are your thoughts on that?

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Mr. Leckie: I'll jump in on that. Security should be, in theory, a second way out for the bank. It shouldn't be the primary reason around which a decision is made to provide a loan or not to provide it. It should be the way out.

If you think of a farm loan and the issues that went on in the 1980s, perhaps in retrospect far too much emphasis was placed on the security versus the cashflow the farm would be expected to produce. As a result, banks loaned too much on the basis of security, I think, to the point that it kept driving up the price of land beyond its economic value.

Going forward, the way we have to learn how to lend better is by having bankers do more analysis on the evaluation of a business based on its cashflow. That is really the only thing that counts. Possibly the government can help with this with small businesses as they have with medium-sized businesses through labour venture funds and so on. To the extent that we make mistakes on that evaluation and times change and the cycle changes, you sometimes need security to take you out when we bankers screw up.

The issue that really worries me is that in a knowledge-based economy there isn't going to be any security. The security goes home at night, hopefully, to their family. The issue is around people. The assets and resources are human resources, and so far we haven't - touch wood - taken security on that. So we're going to have to learn more about cashflow lending and business evaluation lending.

We're going to have to do something along the lines of the working venture labour-sponsored funds that are subsidized by the taxpayer currently at about 70¢ on the dollar - a 30¢ subsidy. If you want to get into start-up issues that the gentleman from Quebec mentioned, it needs start-up, patient capital, which some people here provide. If you want to get more of that, you're going to have to push the labour-sponsored fund idea further down market.

Mr. Thalheimer: Of course, as in any economy, people are very important. You need people. They have to be there physically.

For instance, as Mr. Canuel mentioned, a young doctor starting out in a community and so on...you know, I want to start a men's wear store in this little community, because there's none in town and here's my idea. You say, well, you have a community here of 3,000 people and you want a loan and you want to start up this men's wear store. Do you have the people in place to dissuade such a person or handle such a person who has this idea? Can you actually assist him by saying, hey, you're way too large in your ideas or thoughts? If you're going to do it, size it out; or you'd better not do it at all, because this is obviously a losing venture. Do you have the expertise, the way to deal with these people when they come up with these ideas?

I know a lot of people are frustrated, and they go out and they yap that the bank won't give them any money. There's a damned good reason for this. It will fail.

Mr. Toriel: Several of the banks are giving out software, for example, that helps a client, a prospective borrower, to prepare the business plan, because that's what we're talking about here. By self-analysis, using that software, the client can find out if it has a chance to succeed or not, because there are several questions. It's a self-taught type of device.

Definitely, we are trying to explain to our client wherever we are...and that's nothing to do with rural or urban. That's part of our role. If we think there are risks, when we go through a business plan with a client, we try to point out where there are weaknesses and where, for example in your case, that business will not succeed.

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But now let's look at some positive stories. We were talking about the difficulty earlier to develop loans in the knowledge-based field. Let's look at some success stories - for example, the enormous increase and growth in the Saskatoon area of the agro-biotechnology field.

Those are all small firms, and they are growing and they're getting loans and they're doing good business without having those famous assets that we're talking about. They have very few assets because most of the assets are really new technology.

We're talking here of an industry that is very long in bringing actual cashflow return, but the banks are competing for that business in Saskatoon. They are giving the money to the company that has a good business...where we think that two, three, four, five years from now there will be a possibility for us and for the company to succeed.

So it's not all black. There are some good stories in the market and there are some enterprises that succeed. I know in the Guelph region in Ontario you have a lot of agro-biotech, too, that is doing very well. People have to come with new ideas and to really work them well. When there is a good idea, a good plan and good management support around that, then we can play the game.

Mr. Thalheimer: But you're talking about Saskatoon and Guelph. Those aren't rural, in my mind.

Mr. Toriel: No, but the people come here.

Mr. Thalheimer: I'm talking about Timmins. I'm talking about Kapuskasing. I'm talking about Wawa.

The Chairman: Mr. Toriel, Mr. Ryan wants to jump in there.

Mr. Thalheimer: I'm sorry.

Mr. Ryan: The hon. member raised a very good question. I would like to draw your attention to the CASE program, the counselling assistance to small enterprises. It is basically run by retired business executives. One-third of all the assignments they do on an annualized basis are directed towards start-ups. They work with the client and do an assessment of whether the idea makes sense or not.

The other program I touched on in my opening remarks is the micro-business program. Basically, it's a six-step process that starts out with a self-assessment. The potential client looks at it and asks, do I have what it takes to be a successful entrepreneur?

If you get through phase one and we say yes, we go into a diagnostic where you basically go through and look at your strengths and weaknesses as an entrepreneur and the areas that need to be developed to get the next step, which is the development of your business plan.

You complete the business plan and then you move into what I'll call ``eligibility for obtaining assistance''. It ranges anywhere from probably a low of $5,000 to a high of $50,000, depending on the type of business, whether it's new or it's existing.

The Chairman: Any other comment?

Mr. McInnes: I have two quick comments. The first is that each bank has developed in the last couple of years centres of excellence and expertise in various centres across the country in the high-tech, in the knowledge-based area. But those individuals will go to where the customers are. So if there's a proposal in this rural community which requires an agri-specialist or a high-tech software specialist, provided you shop around, they could get someone there to assist you to evaluate that proposal. Rural customers can get access to the expertise.

The other small point with respect to the BDBC and the crown financial institutions is that this perhaps highlights a gap where they can play a very useful role. In fact, I know BDBC has a debt-equity product on the marketplace. They can act as a sort of R and D centre for the marketplace.

These are new, emerging, high-risk areas, and we're trying to figure out how to do business in these areas. We like to work with BDBC and the other crown agencies to try to pinpoint where they can make a very real contribution, notwithstanding that the individual banks are also trying to compete in this area.

The Chairman: We have to move on.

Mr. Leckie: Very quickly, I would like to add that the CASE program that John Ryan mentioned is a great example of how BDBC complements what we're doing. We use that CASE program they have set up. It's a good example of a crown corporation that doesn't compete head-on...but we do complement each other, and that's a good program.

The Chairman: Mr. Reed.

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Mr. Reed (Halton - Peel): I'd like to centre on two areas, if I might. One is this business of access to expertise. There are thousands of bank branches and many thousands of people who work in the banking system. There are maybe as many different and unique kinds of businesses out there that are looking to be serviced in one way or another.

We as a customer of the bank can't expect the local branch to have necessarily all the expertise that might be needed for our particular enterprise. Yet, in my experience, the local branch has not seemed to be able to call upon the expertise that may exist and probably does exist somewhere within that banking system.

I'm speaking from a certain amount of personal experience here. It doesn't matter whether it's high risk or low risk. It's just that a business may be quite unique and relatively low risk, but maybe the local corporate banker has never had his hands touch that thing before.

There is some frustration I can share with you...I think the banker can play an important role there in saying, oh yes, you have a certain kind of enterprise. We have a person in such-and-such a town who has had experience or who has shepherded two or three of these projects in the past, and we'll put you in touch. There doesn't seem to be a mechanism in the banking system to give that easy access.

I understand what you're saying, Mr. McInnes, about the centres of excellence and so on. But they're either very, very new and haven't circulated down through the system yet as well as they should have, or they are just excellent in some of the more traditional kinds of enterprises. Am I making any sense?

Mr. Leckie: Yes.

Mr. Craig Rothwell (Canadian Bankers Association): Yes, you are. Maybe I'll just make a comment or two on that.

Mr. Reed: Sometimes I don't know my own strength.

Mr. Rothwell: It sounds a bit like a communication problem. I think I can speak for all the banks. Our managers are generalists, and within certain branch operations they might be agricultural specialists or oil and gas specialists, or whatever. But by and large, our account managers are generalists. If they don't know about a certain industry, they are definitely encouraged to phone their risk management department where that expertise lies, or in fact the specialized groups within the banks, such as agriculture.

Most of the banks have a group of agrologists spread across the country. We have mining departments, oil and gas departments, forestry departments. The people in the Maritimes and the west coast have fishing experts, and so on.

So that expertise is available, by and large. And if you're telling us this isn't always getting through, then I would say there's a bit of a communication problem. I think I'll bring that up with our committee to make sure the managers know that, because they are encouraged to get help when they don't know.

Mr. Leckie: If I could pick up on that, it's a communication problem that Toronto Dominion wants to capitalize on. We think we have an advantage over our competitors in that we didn't buy a broker dealer; therefore, our corporate bank is more integrated into our normal bank. We feel there's a huge resource of talent and information in that corporate bank that we can bring downstream.

Utilities come to mind. Ontario Hydro is being busted up, I think.

Mr. Reed: How did you guess?

Mr. Leckie: The former Liberal finance minister is recommending that, in any event. There might be as many as 302 utilities in Ontario when that happens.

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We have 40 utility specialists. I would bet most of our 943 branch managers would never guess that we have two. We are working very hard to put in place specialists in the middle to small market to marry up with the corporate specialists. In this case, frankly, many of them happen to be in New York, because Canada has had public-owned utilities. So we didn't need them here. We needed them in New York, where we'd built a portfolio.

Now we know a lot about utilities. Our plan is to translate that knowledge and information down to the field, into Mississauga - not that we'll ever make the Mississauga branch manager a specialist. But I do have to make that branch manager aware that we have these specialists and that he or she is entitled to tap into that specialty.

So that's a big opportunity for us and our customers.

Mr. Reed: Well, you just won the gold star. I don't know how you ferreted out what was in the back of my mind. That is a case in point - exactly - where there is some small utility construction going on in Ontario, but the only existing expertise exists through the occasional experience here and there, and it doesn't seem to get communicated through the system.

Mr. Leckie: I'd like to see you after.

Mr. Reed: Thank you very much. I'll speak to you afterwards.

Mr. Thalheimer: For a loan?

Mr. Reed: You never know.

I just wanted to ask the Business Development Bank how your parameters compare with the parameters the traditional banks assume. In other words, do you consider yourself in competition with the traditional banking system, or do you consider yourself somewhat apart? How do you make the differentiation?

Mr. Ryan: We're very much referred to as a complementary lender, not in competition with the chartered banks. We work very closely with them.

In a typical case, we'd receive an application from X, Y, Z customer. We would be in contact with that customer's principal chartered bank to say that we've received an application of x number of dollars; here's the program and financing. If that particular chartered bank was so interested in providing the funding, they'd put us on notice and we wouldn't provide the financing. If, for whatever reason, they decided not to - and in many cases they have good reason to make those decisions - then we would do our own due diligence, our own assessment, of the proposal.

I guess there are a couple of important distinctions. We don't do lines of credit. The chartered banks are very active in lines of credit. Term financing: with our new mandate, we have much more focus - and I talked about this earlier - on working capital-type financing, where we actually top up what's available from the chartered banks. Let's say they have a $100,000 line of credit but they need an extra $50,000 or $100,000 to support their sales, to go to another level. We would top up what's made available from the chartered banks.

In addition to that, we have much more of a focus on what we call ``quasi-equity'', the capital made reference to earlier, which is really funds going out to what we consider very high-risk companies but companies that have a tremendous opportunity for growth in the future. So we put it out on a quasi-equity basis as compared with a regular term loan.

From a competition point of view, just to the contrary, when we talk with the chartered bank - because as I've mentioned, we do have some strategic alliances in place with the Royal Bank - we work in unison to bring the best services from the chartered bank and the BDBC together to support that client.

Mr. Reed: Thank you.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Reed.

I have a number of questions to ask, which probably comes as no surprise. The first one is to the Business Development Bank of Canada.

I want to draw your attention to a report issued from the other place by the honourable Michael Kirby and the honourable David Angus in a report from the Senate banking committee. Recommendation 3, which I'm sure you're probably familiar with, says:

The Committee recommends that, in order to achieve a more efficient delivery of programs to business and to simplify access to government institutions by their private sector clients, the Business Development Bank of Canada and the Farm Credit Corporation be merged.

We will have an opportunity as a committee to discuss the FCC at a later date, but I'd be interested to know your organization's opinion on that recommendation.

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Mr. Don Layne (Senior Vice-President, Corporate Affairs, Business Development Bank of Canada): Mr. Chairman, the Senate banking committee, as you know, held extensive hearings. They have a lot of objectives in mind.

The organization of government agencies, however, is the prerogative of the Prime Minister's Office. I think their objectives can be achieved with or without a merger. We do have basically separate markets. By merging Farm Credit and BDBC, you'd be merging two different markets. There's very little overlap, in other words. There's less than two percent overlap between the two.

In terms of efficiencies, the jury's out on that. No one has proven that there are actually going to be efficiencies, but generally you'd have only one president, one chairman, for example, so there could be some cost savings.

Some of the skeptics, and I'm not saying this is within the BDBC - it is being debated within the government itself - are questioning the lack of focus that could result if you have one organization focusing on farmers and another focusing on small business. You'd probably get a better result by having one organization that's bifocal, so to speak.

Definitely what the Senate committee is trying to achieve in terms of objectives I think is well supported by the bank. As for how it can be achieved eventually, I think that is really the policy of the government.

The Chairman: Mr. Ryan, do you have a comment?

Mr. Ryan: No, I think that sums it up quite nicely, Mr. Chairman.

The Chairman: I would like to change gears for a second. I think it was Mr. Leckie, or perhaps not, who made the comment. It was a reference to the Lightstone report, which indicated that credit decisions were being made not on region but rather on risk. Somebody said that. That's in the report.

Given that it's true, that the credit decisions are indeed being made not on geography but on risk, I suspect we'll find that structural things exist in rural Canada that by their very nature make lending riskier. An operation in a rural area that is similar to one in an urban area is probably a riskier loan proposition because of the geography. It could be the fact that there's a smaller market, it could be the fact that the population is less dense, it could be a number of things; but the fact is that it is riskier to lend in a rural area than it is in an urban area.

Because of that, you end up with more availability of capital in the urban area than in the rural area. That's not because you are prejudiced against the rural area, but structurally it's riskier in the rural area. Would you accept that as a proper synopsis?

Mr. Leckie: I don't know whether it is or not. I happen to recall from the standing committee that the member for Mississauga, looking at Roseanne Skoke, representing the Maritimes on that committee... Mississauga felt a little cheated relative to the Atlantic in terms of the granting of credit. So it was exactly the opposite.

I'm talking, Andy, about the Thompson Lightstone presentation. It was around that.

I don't know whether that's so or not. It could be the opposite, but it's a worthwhile question.

Mr. Toriel: To complement what Mr. Leckie said, Mr. Chairman, it's really difficult to make such a generalization. For example, in the small community people know each other a lot better, so you would have a type of rapport. It's a lot easier to have a rapport with your banker in a small community, where you know the banker and see the banker in many different circles within the small community, than it is in the suburbs or in a big city.

You have that closeness. You often have less competition. If you are putting a new hardware store in a village or town that doesn't have one, you don't have to worry about a big chain coming in and taking over your business, because a big chain is not going to come into your village unless you are close to a major community.

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So there are pros and cons, and it's really an individual thing. I would not like it to be left on record that we think it's riskier to be doing business in the rural... It depends on the community, it depends on the business, and it depends on the situation. Really, each case is on its own.

The Chairman: So you don't think any inherent structural things exist in rural Canada, such as the distance from market, the transportation costs to bring goods -

Mr. Leckie: I think they may exist, but they may be counterbalanced by... It's easier to character lend, if you will, as Paul was saying. It's becoming more and more difficult in big urban areas to assess character and integrity.

The Chairman: By definition, would you then be putting it on the record that the issue of access to capital is no different in rural Canada from what it is in downtown Toronto?

Mr. Leckie: I don't want to judge. I don't feel capable of that.

The Chairman: You don't know.

Mr. Leckie: I think there are a lot of dynamics going on here. The smaller markets raise the risks, but that's offset by something else. I think you have to look at it on a case-by-case basis, which is what we ask our local branch managers to do.

Mr. Rothwell: Could I please add to that?

The Chairman: Yes, Mr. Rothwell.

Mr. Rothwell: I agree. I think it very much depends on industries. For example, if you're going to make cornflakes, it's cheaper to ship the corn somewhere close to the population, blow the corn up or inflate it into cornflakes, and distribute it there than doing it...and shipping the added-value, larger-sized product. So it's very dependent on what the industry is, as I think they suggested.

The Chairman: Let me change the topic for a second. It has to do with the rural branch closures, which is an issue that comes up to members of Parliament from time to time. If a particular branch in your system is making a certain level of profit, has been making that level of profit for a number of years, and will continue to make that level of profit in the years coming up, would it be safe to say that you'd be prepared to leave that branch open?

Mr. Leckie: Yes, because we're of the belief so far - although the delivery channels are changing, so this point may change - that when we close branches and reduce our market share of branches, we lose market share.

The Chairman: So why do you close branches?

Mr. Leckie: That's a very good question, and we look at it more and more closely all the time. Sometimes it's how it's closed. Obviously they are closed only because they're under water. Something has changed in the town or the small community, and they now go down the road to the bank just as they do to the John Deere outlet and so on. I just wanted to underline, Andy, we do recognize that when we close branches we tend to lose market share.

The Chairman: There's no intention, then, of moving the yardstick. If there's a branch in XYZ rural community in Saskatchewan and it is producing $500,000 worth of profit, which has been acceptable in the past, as far as you can envision it's going to be acceptable in the future. You're not going to come back and say that next year the yardstick for branch XYZ is now $700,000.

Mr. Leckie: No, but in the year 2005 the Internet may change that yardstick. That's a reality.

The Chairman: Mr. Toriel, did you have a comment on that?

Mr. Toriel: I think, Mr. Chairman, we have to look beyond the profit the branch makes. What we look at is an evolving situation whereby we have open and closed branches and continue to do over the history of banking in Canada... Sometimes they were open in one place, closed, and opened again at the same place where they had closed. Situations change.

We look at trends. We look at trends, and we look at the request that the clients make. If our clients are telling us they want to be served from the farm and prefer to have telephone banking, Internet, as John mentioned, or computer banking, that to us is a clear message we have to change our way of doing things. We have to go to a new way of doing things at whatever the cost may be, but it may mean that we will close a branch that may have made some money at the time. That's what the market is requiring from us in that region, and that's the way we see the evolution.

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I think those things are happening. You know very well that we are not the only ones. Every supplier of service today is changing their way of accessing the market. We have to be very conscientious that brick and mortar is something that is maybe not what is needed in this community tomorrow. We may do a lot more - we were talking about some of the services - and help the client more closely. Maybe then we'll achieve things a lot faster and a lot better through computers.

The Chairman: But I think you're going to need an appreciation for those of us who come from rural Canada. You're quite right that the way you deliver your product might change. For example, you might centralize your account processing into a central location.

Say you take an area like northern Ontario, as an example, and a particular chartered bank decides that it is going to centralize its processing so that it's out of the branches and technology is going to allow it all to occur in one central location. As a result, you take a complement saving of 40, let's say, for across northern Ontario and replace it with 20 people in a central location. You're saving a complement of 20, so that's obviously in your interest.

But say we find out that those people, instead of being centralized in northern Ontario, are centralized in downtown Toronto or Hamilton. That's a genuine concern for those of us who come from rural Canada.

That's what we see happening all the time when we come from rural areas. Nobody's going to complain that you have to make these savings and use technology to make yourself more efficient. It's when we see that use of technology result not just in your becoming more efficient but in those jobs going out of a rural area like northern Ontario or rural Saskatchewan and ending up in the downtown core of a major centre.

Mr. Leckie: But we have to put something back. It's probably going to go back in the form of advice. Bricks and mortar and the investment, so far, has been around transactions, for the most part. That's been the big expense for banks.

In the end, it's around the questions you've been asking: how do I get advice? That's where the future lies. We need more people back in the community who may not even be in a branch. But the hydro specialist needs to cruise through La Ronge occasionally, or wherever, in Saskatchewan, and offer advice on utilities. That's where it's going. But it won't look even to you, probably, as that happens.

Mr. McInnes: Just so you know, Mr. Chairman, the actual number of branches over the last 10 years - these are 1995 figures - has gone up by more than 1,000.

I think, however, the discussion around the table seems to beg the question: what can we do, as banks and as governments, to ensure the viability and the survival of these very important distribution channels in rural Canada? We are in more towns across the country than any of our competitors. Yes, branches will be reconfigured, but what's driving that is consumer demand and the changes in the marketplace. But there's a very real question as to what we can do to ensure that the branches remain viable and profitable.

The Chairman: I have one last question, and then I'm going to send it over to Mr. Canuel to close it off.

My one last question is for Mr. Ryan, or Mr. Layne. It has to do with your partnerships with the regional development agencies.

This sort of answers part of the question I was asking the bankers earlier. The reason why you're entering into those agreements is because you're accepting the fact that you're going to do higher-risk lending. As for the fact that you're doing that, you enter into an agreement with a regional development agency who, in one form or another, creates a loan loss pool for you to backstop the loans you're making. You've entered into that with a number. The one I'm most familiar with is from my own area, which is with FedNor.

The question that I have for you is this: how do I, as a public policy individual, somebody who is dealing with public policy, evaluate whether in fact you, as a business development bank, are moving up the risk curve in return for receiving that backstop from the regional development agencies? How can I quantify that you're up on that risk curve?

Mr. Ryan: I think your positioning or your question is very appropriate from the perspective of where one is on the risk curve per se and where one is trying to get to or how far can one go with the backstop, which you referred to, with the regional agency.

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I think the proof will be in the pudding, in the actual loss rates. I don't think you can actually decide today. You can look at it and say, that's a normal proposal, how come you didn't do that on your regular portfolio? But I think you will see over time the risk curve has moved or the line has moved up, and you'll see the losses associated. It's not that they're all bad businesses being financed or that we've been in the grant business per se, but I think it will be demonstrated in time.

The Chairman: I thought the bankers might have fallen off their chairs when you said that your success will be when you have a higher loan loss rate.

Mr. Ryan: No, I think what we're saying is that if you look at the types of proposals that'll be in finance, they're clearly higher risk. Some people will look at them today and say that's a normal risk, but I think you have to evaluate it on a project-by-project basis.

Over the course of time, we'll look at it and ask how much risk we have taken and what the loss rate has been. If, for example, the loss rates ended up to be lower than what we are doing today, somebody could come back and say you haven't changed your approach at all. That's not to suggest that we want to have big losses in this process, because we really want to back the winners, not the losers.

Mr. Layne: I don't think that'll happen. That's because, intuitively, the process would be to grant that financing under one of our regular programs. You'd only get into these special sorts of regional partnership programs if we can't fit it into one of our regular term loans or a venture loan itself. I think it is going to be naturally a high risk.

Mr. Rothwell: I would like to get back to the question about the branches, if I may, for just a minute.

We gave you a copy of the brief we submitted to Mr. Goodale on the Farm Credit Corporation. Unlike the Federal Business Development Bank, the Farm Credit Corporation is a direct lender of ours, as our colleagues in the credit union mentioned, and as David did.

We're concerned not only about their existing mandate, but the expanded mandate they seem to be seeking. A lot of our branches in rural Canada are very fragile, at best. In our view, because the FCC plays from an uneven playing field, if they go past the farmer kind of lending, we think they would have the ability to underprice, and therefore cherry-pick, some of the deposits and the loans from those rural branches and perhaps put some of those branches at risk.

We've asked Mr. Goodale if we could get the players together. I think this would be part of your area as well: looking at rural development.

On the one hand, we're trying to find ways to build up rural Canada, and on the other hand, if a government financial institution is going to duplicate what's already there and cherry-pick the good things, then those branches are at risk, particularly the smaller ones.

The Chairman: Is it happening now, or with the potential changes?

Mr. Rothwell: Both. They're doing this to farm business now, but if they're allowed to do it in agribusiness, that just compounds the issue.

Mr. Leckie: We would like to see a gap analysis. If there is something in which we are falling short, can we be told what it is to try to fill it?

Mr. Toriel: Actually, I also support this, Mr. Chairman. I think that whatever existing financial institution there are, such as banks, credit unions or caisses populaires, those markets are being threatened by those activities. It goes way beyond the chartered banks. It's really any financial institution that is alone and fighting in a community that is being threatened.

The Chairman: We will certainly ask those questions of the FCC when they are in a position to provide us with testimony.

Mr. Canuel has been very patient. Please, go ahead.

[Translation]

Mr. Canuel: I look at your profit levels, and at the same time I see the government being forced to make cuts in many different areas-employment insurance, forestry and agriculture. I have a suggestion to make and I would be interested in hearing your reaction to it. If the government had the courage to make you pay 20 per cent more in taxes, would that put you at risk? Is it possible that some banks could go bankrupt?

Mr. Toriel: It is a well-known fact that the banks are already paying the highest corporate taxes of anyone in Canada at this time.

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Also, I think it's important to see the positive side. If we make billions of dollars in profits, there will be that many more billion dollars going into government coffers in the form of taxes, not to mention the taxes we pay in the communities where we operate-taxes paid by our employees, property taxes, and so forth.

If you look at the profit levels of our banks, compared with banks in other parts of the world, you will see that they are definitely not out of line. I see no particular problem there.

You are wondering whether banks could go bankrupt if they had to pay 20 per cent more in taxes. Well, put the same question to any other corporation or industrial group. Raise their taxes by 20 per cent and you'll see what happens. You will simply be forcing people to decide whether they really want to serve their community as they do now, and continue to perform their current role. Why would you want banks to be the only ones to pay higher taxes, just because they're successful? Much of those profits come not from Canada, but from abroad.

Mr. Canuel: But why shouldn't banks make sacrifices? Everyone is paying higher taxes and having to suffer the consequences of cuts. A lot of workers haven't had a salary increase in ten years, so it's not easy for them. When they see the banks making huge profits, their reaction is to say we should ask the banks to make sacrifices too and help us pay down Canada's debt.

Mr. Toriel: But we are making sacrifices. We are paying more taxes than anyone else.

Mr. Canuel: That's fine; you still have high profit levels, though.

Mr. Toriel: But that's very positive because that money goes back into the economy. Just think of all our employees, and all the people working either directly or indirectly for banks here in Canada.

Mr. Canuel: I agree. If we hired half of the public servants who have been laid off, they, too, would stimulate the economy, as would former employees of all the plants that have shut down, if they were able to work. You are not the only ones. I understand that you want to keep the economy going, but everybody in Canada who employs someone else keeps the economy going, and some of those people have a rope around their neck.

[English]

The Chairman: Thank you.

I would like to take this opportunity as the chairman to thank you for your testimony today. All three of your organizations, the Credit Union, the Business Development Bank of Canada, and the Canadian chartered banks, are an important part of rural Canada. In fact, they're a critical part of rural Canada because, as Mr. Thalheimer mentioned in his question, rural Canada will not succeed without capital. The small business people in rural Canada and the natural resource industries, which we oversee in this committee, will not have an opportunity to expand and to increase employment.

I was pleased that you provided testimony today. I encourage all of your organizations to continue the work you're doing in rural Canada and of course to enhance it and to get the maximum impact out there.

Again, my thanks and appreciation for your testimony.

Mr. Thalheimer: Can I make one comment?

The Chairman: After a beautiful closing speech like that, Peter? Go ahead.

Mr. Thalheimer: I want to go on record as saying, in response to Mr. Canuel's remarks, that I'm certainly not of the view that we should tax existing successful businesses out of the country. I think everybody should pay their fair share of taxes. If the banks are paying their fair share of taxes, there's no reason I would subscribe to taxing them any more. It seems they're taxed at the maximum corporate rate. I don't care how many billions they make; as long as they pay their fair share of taxes like any other individual corporation, I'm happy. I hope they make trillions, because I know I'm going to get my 50% as a government.

To me the bank bashing isn't fair, just because you're talking in billions. I think we should also recognize the billions they are paying in taxes. Let's be fair about this whole thing. I want to go on record as saying that I want to encourage any business that's successful in this country. I certainly don't want to tax them out of existence.

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Mr. Leckie: Hear, hear! I like that ending even more.

Some hon. members: Oh, oh!

The Chairman: We'll certainly send the last page of that testimony over to the finance committee.

We stand adjourned to the call of the chair. Thank you.

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