Emergency loans help SMEs overcome Covid-19

October 26, 2020

Banco Promerica Costa Rica, a Norfund investee, is proactively seeking a Covid-19 emergency response for its small and medium sized (SMEs) clients.

Costa Rica has been hit hard by the impact of COVID-19, as have all other countries in Central America. The Costa Rican government responded quickly by introducing strong containment measures and succeeded to flatten the curve and reduce the number of deaths.

However, these measures slowed economic progress and has resulted in a sharp contraction of the economy[1].

Banks halt SME loans

Shaken by the number of businesses that were being forced to shut down or operate at 50% due to the pandemic lockdowns, most banks in Costa Rica halted their lending to small and medium sized businesses (SMEs). Thousands of jobs are now at risk.

The Central Bank of Costa Rica states that 7000 companies have already frozen employee contracts with 118,000 people.

Banco Promerica takes a different approach

Banco Promerica Costa Rica took a different approach. The bank, a Norfund investee since 2018, aims to secure thousands of local jobs by supporting the SME-clients that operate in the hardest affected sectors (agriculture, tourism, consumer- and retail- goods and entertainment). The intention is to help them maintain their employment contracts.

Will extend loans to 300 SMEs and save over 6000 jobs

With this initiative, Banco Promerica Costa Rica was the first regional bank to approach Norfund with a well-developed proactive plan of in total USDM60 to directly support SMEs during the crisis.

As an investment manager it was particularly motivating to be able to immediately work on mobilizing capital to entities at the very start of the crisis.

Heidi achong, investment manager, norfund regional office costa rica

Heidi explains that Norfund appreciated the request, but conditioned that the bank would need to line up an additional 5/6 of their total liquidity project from other lenders – and they did!

FMO, Proparco, Blue Orchard, the IFC and others provided individual facilities. However, none of the other lenders provided tier 2 capital, so the subordinated loan from Norfund was particularly attractive because it also bolstered the capital adequacy of the bank.

With this USDM 60 facility in place, Banco Promerica Costa Rica aims to extend loans to almost 300 SMEs in highly affected sectors to cover their operational expenses for 4- 6 months . It is expected that this facility will save more than 6000 jobs.

Norfund’s contribution

Norfund has extended two facilities to Banco Promerica Costa Rica since the start of the Covid-19 crisis. The first was a USDM 3 subordinated loan to bolster the bank’s capital adequacy position given the expected increase in non-performing loans due to the economic repercussions of the crisis.  The other was a USDM7 senior unsecured loan for liquidity purposes to be used 100% for on lending to SMEs in Costa Rica to cover up to 6 months operational expenses including payroll and operational expenses.

Relevant articles:

[1] https://www.worldbank.org/en/news/press-release/2020/06/25/apoyo-del-banco-mundial-a-costa-rica-para-promover-la-recuperacion-economica-y-un-desarrollo-bajo-en-carbono