1. Slide 1 / 27.09.2016 SMEs’ access to finance A commercial banking perspective

2. Slide 2 / 27.09.2016 SMEs: Economic importance and structural issues

3. Slide 3 / 27.09.2016 SMEs are of systemic importance for Romanian economy * According to EC definition Source: Commercial Register, Raiffeisen RESEARCH estimations Contribution of companies by size* to economic growth Contribution of SMEs to economic growth is significant, accounting for more than half of the value added created in the economy Also, SMEs hold an important share in overall investments Structure of companies investments in fixed assets by size

4. Slide 4 / 27.09.2016 Micro companies the most affected by the economic downturn * Net profit/Turnover; * *Equity/ Total assets;***Operating profit/Interest expenses;*** *Current assets/ Short term debt Source: Commercial Register, Raiffeisen RESEARCH estimations Net profit margin* Interest servicing capacity*** Solvability** Liquidity****

5. Slide 5 / 27.09.2016 SMEs structural issues (1): Weak cash-flow management Financing gap= Average collection period (Receivables/Turnover*360)+Inventory turnover (Inventories/ Turnover * 360) – Payables period (Short term debt/ Operating costs*360) Source: Commercial Register, Raiffeisen RESEARCH estimations Average collection period (days) Payables period (days) Inventory turnover (days) Financing gap* (days) Large gap between operating cash-inflows and cash-outflows in case of SME, especially micro companies  Pointing to weak management capacity  Leading to impaired debt servicing capacity

6. Slide 6 / 27.09.2016 SMEs structural issues (2): Limited transparency creates barriers to external financing Source: National Bank of Romania, Raiffeisen RESEARCH SMEs have in general a weaker than expected financial position, which is explained by the “tax optimization” incentive – increasing tax deductible expenditures in order to reduce profit tax HOWEVER this deteriorates the financial outlook of the firms and leads to an increase in financing costs and more restrictive lending standards Also, limited financial management capacity of SMEs has a negative impact on their external financing conditions Source: Flash EB No 271 – Access to finance, ECB, EC Financing costs Tax optimization Net effect of “tax optimization” on total costs can be positive

7. Slide 7 / 27.09.2016 SMEs structural issues (3): Reduced commitment of SMEs’ owners Source: Commercial Register, Raiffeisen RESEARCH estimations Own funds of SMEs account for a lower share of total financing sources as compared to the corporate sector Especially in case of start-ups/ micro companies, owners are not usually able/ willing to invest sufficient capital in order to reduce credit risk  Increased collateral requirements (LTV) Own funds by company sizeShare capital by company size

8. Slide 8 / 27.09.2016 SMEs structural issues (4): Low business continuity Distance is estimated as the difference between the two NACE digit codes of a given company, reported in 2008 and 2009 respectively Source: Raiffeisen RESEARCH estimates Change in the main economic activity from one year to another is more frequent among SMEs, especially micro companies, and is sometimes unrelated to the previous economic activity  this introduces more uncertainty in assessing SMEs’ future earnings capacity and decreases their predictability 10% of micro companies changed main economic activity (NACE two digit code) in 2009 compared to 2008; in case of small companies 6.5% changed their activity while at the same time only 4.9% of medium companies refocused on other economic activities. Change in economic activity across SMEs  High distance is equivalent to a change in economic activity in 2009 that is least likely to be related to the previous one from 2008  Low distance is equivalent to a change in economic activity in 2009 that is more likely to be related to the previous one from 2008

9. Slide 9 / 27.09.2016 Outlook: SMEs access to financial resources

10. Slide 10 / 27.09.2016 Lending standards tightening cycle seems to be over Source: National Bank of Romania, Raiffeisen RESEARCH Lending standards for non-financial companies Since the onset of the financial crisis, lending conditions have been rapidly tightened by banks, more aggressively in case of SMEs, as the latters’ credit risk has increased Starting with the first half of 2010, the tightening cycle seems to have stabilised (at very restrictive levels), but given the weak economic outlook the chances of banks relaxing the lending standards in the short term are low

11. Slide 11 / 27.09.2016 However, credit risk of SMEs continues to increase Credit risk, as perceived by the banking sector Banks perceive SME’s as bearing significantly more credit risk  banks’ SMEs portfolio deteriorated to a larger extent compared to the corporate portfolio  SMEs’ future economic and financial position is more vulnerable as compared to the corporate sector. Insolvency rate of small and medium (SE) as well as for micro companies remains on an uptrend Quarterly insolvency rate* in real economy * Turnover of new insolvent companies/ Turnover of active companies, seasonally adjusted data Source: National Bank of Romania, Commercial Register, Raiffeisen RESEARCH

12. Slide 12 / 27.09.2016 Demand for new loans shows signs of improvement Source: National Bank of Romania, Raiffeisen RESEARCH Demand for new loans in RomaniaDynamics of private credit to non-financial companies Short term tendency of loans to companies (% mom)

13. Slide 13 / 27.09.2016 Conclusions – What limit SMEs access to finance? SMEs, by their nature, bear more risk compared to the corporate sector, which is ultimately reflected in tighter lending standards Weak cash-flow management “Tax optimization” of financial statements leads in the end to increased borrowing costs Owners’ equity participation is often too low, resulting in a high indebtedness level; in such cases banks would be effectively providing equity financing, should they decide to lend out funds to SMEs Business continuity is affected in some cases by the change in economic activity; business predictability is impaired.