The Obama administration announced in September that it would set aside $30 billion for a program to revive small-business lending. But only 7% of banks have participated in it.
About 526 community banks have requested $7.6 billion in funds from the program, which is available to the nation's nearly 7,700 lenders that have less than $10 billion in assets. That is far short of the amount allocated by the Treasury Department. The program, the centerpiece of Small Business Jobs Act, included enticements such as low interest rates to encourage banks to get money into the hands of small-business owners.
But relatively few community banks, which had until March 31 to apply for the program, signed up. Earlier this week, the Treasury Department extended Thursday's deadline to May 16.
The extra time may still not be enough incentive for banks to sign up. Many say they have plenty of capital but little demand from small businesses. Banks have also long complained that increased scrutiny from regulators has made it difficult to underwrite risky small-business loans. A government program, especially one with strings attached, may not be the solution.
Small banks that draw from the fund will make repayments at different interest rates, ranging from 1% to 5%. Banks that increase their small-business lending by at least 10% would pay the lowest rate, while banks that increase lending by less than 2.5% would pay the highest rate. That will require detailed and continuing paperwork, which some bankers say they don't have the resources to handle.
The Treasury says that the program has received support. The goal is to spur as much small-businesses lending and create as many jobs in communities across America as possible. The deadline was always meant to be extended, and the agency wants to ensure that every interested bank has the information they need to apply. The Treasury also says the application process was developed to be straight-forward, and the application is less than a page in length.
But some community bankers say they already have sufficient capital to meet loan demand from qualified borrowers, which tend to be the larger and well-collateralized small businesses.
Compared to recent years, fewer small-business owners are receiving loans—and many complain that they are still being rejected despite healthy financial statements. The total value of small-business loans declined by $43 billion last year. Community lenders, which hold 52% of all small-business loans, were accountable for nearly half of that drop.
The Treasury estimates that about $17.4 billion will ultimately be borrowed from the fund. The Independent Community Bankers of America, a lobbying group that supports the fund, has projected that the funds could amount to $170 billion in loans because for every loan that banks make, they need to hold only a small fraction of capital.
Some community banks applied for funds to be prepared in case the economy improves more quickly than anticipated.
Detractors of the fund say some banks are applying for money to refinance outstanding government debt rather than to boost their small-business lending. Some members of Congress, including Sen. Olympia Snowe (R., Maine), have been critical of the program.
Ms. Snowe, who is the ranking member of the Senate Committee on Small Business and Entrepreneurship, has said other actions, such as expanding existing Small Business Administration programs, would better help small-business owners.
On Tuesday, Ms. Snowe filed an amendment to improve the fund's oversight, administration and accountability.
She continues to oppose this fund, which she believes had not been fully vetted before it was signed into law. She also feels it risks taxpayer funds and provides a perverse incentive for banks to make poor lending decisions in order to reduce the interest rate on the money they receive.
The Treasury says the program is designed to motivate banks to maintain high-quality underwriting standards and that it won't share in loan losses banks would incur by making bad loans. It will also consult with each bank's regulators to ensure the bank can repay the funds.
The program was meant to help banks that were already financial stable. It would only consider banks that had the ability to repay funds in the event that a business loan was not repaid.
