Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 15 - Evidence - March 26
OTTAWA, Thursday, March 26, 1998
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-21, to amend the Small Business Loans Act, met this day at 11:05 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we are here today to deal with two issues. The first is Bill C-21, the Small Business Loans Act bill. The act has a sunset clause as of next Tuesday night, March 31. This is to extend the act. It does not deal with any substantive changes to the act. However, consistent with our practice, we felt it important that representatives of department attend and take us through the highlights.
We will then move on to the CPP Investment Board report which we are committed to give to Mr. Martin by Tuesday.
Our witness on Bill C-21, an Act to amend the Small Business Loans Act, is Mr. Peter Sagar, Director General of Entrepreneurship and Small Business. I will ask Mr. Sagar to begin by introducing his colleague and then make his comments.
[Translation]
Mr. Peter Sagar, Director General, Entrepreneurship and Small Business, Industry Canada: May I introduce Ms Marie-Josée Thivierge, presently director of Strategic and Financial Planning, Operations Sector, Industry Canada. We are very happy to be here to answer any question the committee might have about Bill C-21.
[English]
To supplement the recently tabled annual report for 1996-97 on the Small Business Loans Act, I have provided the committee with a document on the SBLA prepared for the Standing Committee on Public Accounts in the other place. This document provides a thorough examination of the issues related to the bill before you today. It also outlines our responses to the findings of the Auditor General.
The Small Business Loans program increases the availability of loans for the establishment, expansion, modernization and improvement of small business enterprises. Eligible borrowers include for-profit businesses with annual revenues of $5 million or less. Since its establishment in 1961, the program has made more than 493,000 loans totalling more than $20.2 billion. The annual report indicates that in fiscal 1996-97 alone, some 30,000 small- and medium-sized businesses used the SBLA to access about $2 billion in financing.
The SBLA must be periodically fine-tuned and adjusted to meet the changing needs of the marketplace and to ensure that the loan guarantees do not place an undue burden on the Canadian taxpayer. Since Chapter 29 of the Auditor General's report, which was the first Auditor General review of the SBLA in a number of years, was tabled only last December, there was insufficient time to complete the comprehensive review and consultations necessary to develop and gain passage of new legislation and the related regulations for a March 31, 1998 deadline. On that date, the authority to register any new SBLA loans will expire if Bill C-21 is not enacted.
[Translation]
I would like to give you a brief overview of the main aspects of Bill C-21. Subsection 1 of the bill extends the current lending period from April 1st, 1998 to March 31, 1999. It also proposes to increase the aggregate lending ceiling by $1 billion, which will then reach $15 billion.
[English]
Paragraph 2 extends the current payment guarantee lending period for one year as well to March 31, 1999. The associated regulatory changes also extend the time period for loans to be made from April 1, 1998 to March 31, 1999.
Mr. Chairman, considerable attention has focused on the provision to increase the aggregate lending ceiling. I should explain that, without that increase, lending under the program will cease sometime in the autumn of 1998, rendering moot the extension of the lending period. Termination of lending would occur at an entirely unpredictable time depending when and at what volume loan registrations are received. The administration would have to inform lenders that there is no remaining lending authority. No loans could be registered, and no claims would be honoured in respect of them. This would, in effect, leave a number of loans already approved and made by banks stuck in the processing channels. Many of them would be called. This would create great disruption for the borrowers and the lenders.
The effect of the increased lending ceiling would be significant. It applies to the total value of loans registered during a given period but does not take into account repayments over the history of the SBLA. Over 94 per cent of loans have been repaid. This is a fairly significant track record for a program of this type.
[Translation]
Increasing the loans cap by $1 billion, that is from 14 to 15 billion, will allow loans to be granted till the end of that new period.
However, the total amount of the government maximum liabilities may increase by a small percentage of that amount because of the cap put on the government's liabilities.
This is a theoretical liability which has never been incurred since the beginning of the program. The claims received have always been much lower than the maximum amount.
[English]
Mr. Chairman, I would speak briefly about incrementality. As with insurance of any kind, there are likely to be some loans that actually do not need insurance. Since the government took steps to move the program toward cost recovery in 1995, any business which uses the program, even if it does not need the SBLA's loan insurance, is paying a premium and, in effect, sharing the risk of lending to small businesses which do need the program.
[Translation]
It is still too early to know whether user fees will strengthen the incrementality of the program. This may be quite possible. Industry Canada, who is responsible for administering the SBLA, closely monitors the situation.
Meanwhile, during our exhaustive review of the program, we will certainly examine that question in detail.
[English]
Mr. Chairman, we are proceeding with a thorough review of the SBLA both because we must cover the recommendations of the Auditor General and because we have learned just how sensitive this program can be to changes. I will not spend time reviewing the details of the changes made in the 1993-95 period. Suffice it to say that a program that, up until then, had annually delivered about $500 million in loans ballooned to providing in 1994-95 over $4.4 billion. The government's actual and potential liability soared, and the apparent riskiness of the loans rose.
In response to this, the government introduced changes to the program to move it to over to a cost-recovery basis, including an annual fee of 1.25 per cent of the outstanding balance on a loan and a limit on the maximum interest to be charged to prime plus 3 per cent.
[Translation]
The total amount of loans has fallen to around $2 billion a year. However, the costs of the loans granted between 1993 and 1995 will still be felt for a few years. That is why it is so important to make a detailed analysis of the possible consequences of any change implemented on the use and the real costs of the program. Bill C-21 is based on such an analysis.
[English]
I appreciate the efforts of senators to consider Bill C-21. I hope this brief summary and the tabled documents will be of use to you.
The Chairman: I have some questions about the review process. Essentially, this bill puts things in a holding pattern for 12 months while the real interesting substance of the SBLA is examined. It extends the ceiling and keeps everything in place while the review process goes on. Can you tell us about the review process? In particular, at what point in the process does this committee get our hands on the review? I presume it is before the policy is finalized. The interesting policy debate is not on whether you extend the ceiling for a year but on whether the program should exist at all and, if so, in what form. In other words, the policy questions and not the money questions are most interesting to this committee.
Mr. Sagar: It is always difficult to suggest when and how a Senate committee might want to involve itself.
The Chairman: In fairness, the intrusive nature of this committee is such that if you tell us what the process is, we will have no difficulty figuring out how to intrude in it.
Senator Kelleher: They want it done by March 30.
The Chairman: That is right, but, in fairness, that is the problem of the people who manage the House of Commons. That is not the department's fault. Would you tell us about the review process?
Mr. Sagar: We have launched a series of research projects on key elements of operation of the legislation and are gathering the data and assessing borrowers' and lenders' reactions. We have also conducted a preliminary interview or consultation with the key members of the community -- the key borrowers, key borrowers' associations, the CFIB Chamber of Commerce -- to get their preliminary reactions and guidance on the key pieces of the legislation which must be examined. We plan to use this to focus down a second round of consultations and research over the next two months.
I believe the objective would be to bring forward legislation in the fall with the goal of trying to attain passage prior to January of 1999. This would allow time for the legislation regulations to be implemented with the various lenders and others. However, I should point out that this is only our plan and that the government may want to review the timing and other elements of it.
The Chairman: Presumably, in your current, second round of consultations, you have circulated a document to the people with whom you are consulting.
Mr. Sagar: Yes, we circulated a document, in fact late last year. That was for the first round.
The Chairman: You did a first round based on a document. You are then doing a second round which presumably is based on the results of the first round, but there is no document that refines that?
Mr. Sagar: Not as of yet, no.
The Chairman: Out of the second round, you then intend to synthesize what you heard, I presume?
Mr. Sagar: That is right.
The Chairman: Does your synthesis become a public document? No, it would not be. It is a summary of consultations. It is not asking what the government's position is.
Mr. Sagar: It could well be, senator. I have not yet considered whether it should be public.
The Chairman: I am happy, then, to make a request, with the support of my colleagues. We would love to see a summary at the end of the second round. I will tell you why. Once you get it in legislative form, the government has less flexibility. As I think you know, we had a sort of stare-down between officials in your department and this committee over the Bankruptcy Act. Ultimately, sense prevailed and the department accepted a dozen amendments from this committee.
I am happy to continue to operate with that process, but it is not nearly as constructive as our providing some sensible input prior to your locking the bill into legislative form. You always seem to be somewhat more flexible in advance of that stage. The way to do that would be to provide us with whatever synthesis is prepared as a result of the second round of consultations. It would be helpful for us to look at that.
As to the extension of this bill for a year, let me go on record as saying I was prepared to be flexible this time -- by "flexible" I mean being told you must have the bill by next Tuesday -- only because it does not deal with substance. Presumably your next bill will deal with substance.
My concern is with the way the House of Commons manages its business. Please take the message back that if you leave us in the same position next year on a bill that has substance, there is not a snowball's chance that you will get it through in a hurry. We understand the substance of the bill. This committee takes every business bill seriously. If you do not give us time to review it seriously, you will have a period of time next April when you will have no SBLA. This is not a threat; it is simply a statement of fact. I am not exaggerating. That is the way the world is.
Senator Kelleher: I feel very strongly about what has happened to us here, as does Senator Stewart. This happens constantly.
This bill was brought over to the house in November. This is almost the end of March. It is very nice to have our remarks on the record; however, sometimes a letter can be effective.
The Chairman: I planned to ask about that at the end of this presentation. In fairness, the letter should be a letter from me to the house leader with a copy to the Minister of Industry, rather than the other way around.
I know that the Minister of Industry has been pushing. It was only within the last ten days that the house leader got seized of the issue. The letter needs to go to the house leader, because that is where the problem lies. The bill was in the House of Commons in November, and it just sat there.
Senator Kelleher: That is right.
The Chairman: I will gladly do that, and I will send a copy to all members of the committee.
Senator Callbeck: I have some questions on the plan. I see that an annual administration fee was introduced. Is there is still a registration fee?
Mr. Sagar: Yes.
Senator Callbeck: Registration is a one-time thing, and administration is every year.
The interest rate is not to exceed prime plus 3 per cent. I take it, then, that everyone who gets a loan under this legislation does not pay the same interest rate.
Mr. Sagar: That is correct. The introduction of the annual fee of 1.25 per cent in 1995 was a major change in the program. It is an annual fee on the outstanding balance on the loans. It can be incorporated within that 3-per-cent cap on prime rate lending. However, borrowers are typically assessed lending based on their applications, the amount of money, the term and so forth. There is flexibility in that. Typically we see interest rates running about prime plus 2 per cent.
Ms Marie-Josée Thivierge, Director, Strategic and Financial Planning, Industry Canada: Since the 1995 introduction of the 1.25-per-cent fee which has raised the interest rate to prime plus three, we have found that, on average, lenders were charging about 2.6 per cent over the prime rate.
In addition, when the fee was introduced, there was a competitive market. Some lenders were charging prime plus one or prime plus two. That behaviour no longer exists. In the last year or so, when we reviewed the interest rates being charged on most of the loans, we found that most of the loans now are at prime plus three.
Senator Tkachuk: Did you just say that the average interest rate was 2.6 or 3 per cent?
Ms Thivierge: Over prime.
Senator Tkachuk: Over prime. Is the administration fee on top of that?
Ms Thivierge: No. The fee structure has been set up so that, at the time of registration of the loan, there is a 2-per-cent fee just for registering. That 2 per cent is for the value of the loan.
Senator Tkachuk: Where does that money go?
Ms Thivierge: That money goes to the CRF.
In addition to that, in 1995, we introduced an administration fee that the lender paid back to the government. They are entitled to charge that as part of their interest rate to the small businesses.
Before 1995, the interest rate was capped at prime plus 1.75. We allowed that interest rate to be raised by 1.25 per cent. The administration fee that the lenders are paying back to the government can be charged to the borrowers by no other means but through the interest rate.
Senator Tkachuk: Does it end up being 3 per cent?
Ms Thivierge: Yes.
Senator Tkachuk: My understanding is that, in the process, personal guarantees are signed by the borrowers. Do you know the average guarantee insisted upon by the banks?
Ms Thivierge: The way the program is structured, lenders may take personal guarantees on the loan that do not exceed 25 per cent of the value. Not all lenders take it. If they take it, they must realize on it. That guarantee is not tied to specific assets, per se. When the small business owner obtains a loan from a lender, that lender may, at time of default, realize on personal assets up to 25 per cent of the loan. It is often a matter of availability of personal assets. It is capped at 25 per cent of the value.
Senator Tkachuk: Before I became a senator, another fellow and myself were involved in a similar situation. I signed a 25-per-cent guarantee; he signed a 25-per-cent guarantee. The government guaranteed 90 per cent at that time. It is less now.
In reality, the banks have a guarantee from the federal government of 80 per cent, and they get personal guarantees from the borrowers of 25 per cent. They have liens on all the assets, which is legitimate. That is a fairly secure loan for prime plus three. That is about as secure a loan as you will get anywhere. It is expensive.
Ms Thivierge: I will offer several points on that.
We were before this committee in 1995 and explained how the scenario you outlined could not occur. We introduced the word "aggregate". The personal guarantee in aggregate must not exceed 25 per cent. It is no longer possible for two individuals signing on the same loan to each provide 25 per cent. The cap of 25 per cent applies to the aggregate of the two.
As well, that provision applies to the amount outstanding of the loan at the time of default, but the government guarantee of 80 or 90 per cent applies to the net loss after all realization and not on the amount of the loan. There is a portion of that loss which is absorbed by the lender.
Senator Tkachuk: What is the rate of default on the program?
Ms Thivierge: In terms of actual claims payment or cost to the government, currently we are about 5.75 per cent.
Senator Tkachuk: Is that after assets are sold?
Ms Thivierge: That is after assets are sold. That is the amount of government guarantee, essentially.
The Chairman: Is the 5.1 per cent the number in your last annual report?
Ms Thivierge: That is right.
The Chairman: At the height of the recession, my instinct is that the number must have been much higher. In other words, your default rate must have some element of a function of how well or how badly the economy is doing.
Ms Thivierge: The program is structured such that the loan is made in a given year but we will not see a claim for three to five years after the loan is made. We have always reported in this annual report average loss rates for all loans outstanding. Therefore, the 5.75 per cent applies to all loans outstanding since 1980.
To address the issue of cost recovery and better forecasting which has been raised by the Auditor General, we have developed a forecasting model that will factor in economic indicators to allow us to get a better sense of how the program is behaving, given what is happening in the economy.
The Chairman: That is really my question.
Ms Thivierge: We have established that. We developed a forecasting model which we are trying to implement this fiscal year. There are some difficulties, largely for post-1995 loans, those that were put on a cost-recovery basis. On those 1995 loans, we have had essentially no default experience because they loans are still out there and we are barely starting to see some claims. As those claims come in, we will factor in things such as program elements, size of loan, types of business enterprise, and we will mix all that with the historical loan loss patterns and blend in some economic indicators as well.
The Chairman: Just to summarize, before we formally pass the bill, you will send us the summary of whatever the synthesis is of your second round of consultations so we will have a opportunity to have a discussion on those with you prior to your locking ideas in for legislation.
Mr. Sagar: Mr. Chairman, if I may, I would like to return to the department for a discussion with the minister to develop a total plan so we can involve this committee in it, including whatever documentation you require and so on.
The Chairman: If you can get back to us on that, that would be great. Thank you for attending.
Honourable senators, is it agreed that I will report the bill back to the Senate unamended, and that I will write a letter to the government house leader, who manages government business, with respect to this bill but also with respect to the process in general, with specific reference to the fact that there is no way we would deal with the substantive policy part of this bill next year in anywhere near this kind of time-frame?
Hon. Senators: Agreed.
The Chairman: Honourable senators, our second item today is our report on the hearings we have held across the country regarding the Canada Pension Plan Investment Board. We will do this in camera.
The committee continued in camera.