INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 26, 1998

• 0904

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order pursuant to an order of reference of the House dated Thursday, November 20, 1997, consideration of Bill C-21, an act to amend the Small Business Loans Act.

We'd like to go to clause-by-clause consideration today after we've heard from the witnesses and have questions.

There's a possibility of a vote. My understanding is that it is at approximately 10.15 a.m. I'm not sure if that's going to happen. That being said, I'd ask members to keep it in mind with their questions and comments, and their ability to be brief.

We have an opening statement, and we'll begin with that. Mr. Sagar, please.

Mr. Peter Sagar (Director General, Entrepreneurship and Small Business Office, Industry Canada): Thank you, Madam Chairman and members of the committee.

I am Peter Sagar. I'm the director general for entrepreneurship and small business with Industry Canada. Joining me today is Madam Marie-Josée Thivierge, currently director of strategic and financial planning, operations sector, Industry Canada.

• 0905

We are very pleased to meet with the committee and to discuss the clause-by-clause reading of Bill C-21.

[Translation]

To supplement the recently tabled annual report on the operations of the Small Business Loans Act in 1996-97, I have also provided the committee with a document on the SBLA that was prepared by Industry Canada for a hearing of the House of Comments Standing Committee on Public Accounts.

[English]

I hope the members of this committee will find the document to provide a useful and thorough examination of the issues related to the bill before you today. We have outlined in that document our response to the findings of the Auditor General.

Madam Chairman, Bill C-21 proposes a one-year extension to the small business loans program because the current lending period will expire on March 31, 1998, and with it the authority to register any new loans.

The Auditor General issued his report on the first audit of the SBLA in a decade in December 1997. This left us with insufficient time to complete the comprehensive review needed of the SBLA and to conduct the consultations necessary to develop, introduce, and gain passage of new legislation for a March 31, 1998, deadline.

I would like to review briefly the key features of Bill C-21. As you'll appreciate, it is a very simple bill.

Proposed paragraph 6(1)(d) of the legislation extends the current program lending from April 1, 1998, to April 1, 1999. It also increases the aggregate lending ceiling by $1 billion, to $15 billion. I appreciate that in the current draft act that is available on the Internet the lending ceiling is stated as $12 billion, but in fact that was raised to $14 billion through a supplementary estimate last year, I believe.

Proposed subsection 6(2) extends the current payment guarantee lending period for one year as well, to April 1, 1999. Associated regulatory changes will extend the time period for loans to be made, from April 1, 1998, again to April 1, 1999. Actually, I think technically that should be to March 31, 1999.

Madam Chairman, during second reading of the bill in the House considerable attention was focused on the provision to increase the aggregate lending ceiling. I won't go into great detail, but I will make it clear that without this increase some time during the coming year, if the legislation is extended lending will stop under the act. We will run out of room to offer new loans. The lending ceiling increase is simply to enable that lending to continue.

[Translation]

Perhaps I could also take a moment to indicate what effect the increase in the lending ceiling will have on the overall financial picture of the program. As you may know, the lending ceiling applies to the total value of loans registered during a given period. It does not take into account repayments, and over the history of the SBLA, over 94 per cent of loans have been repaid. Nor does the ceiling reflect the defaults.

[English]

The additional $1 billion in aggregate lending authority will permit lending to continue to the end of the proposed extended lending period. However, the total government liability will increase by a fraction of this amount. This is due to the caps in place on the government exposure and in fact is a theoretical liability that has never been remotely approached in the history of the program. Actual claims experiences are always much less than the maximum government exposure.

Madam 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 recently just how sensitive this program can be to changes.

As a result of amendments passed in 1992, which came into force in 1993, firms with sales of up to $5 million were eligible for small business loans. That's up from the $2 million previously. Maximum loan size increased to $250,000 from $100,000. The SBLA financed 100% of eligible assets up from 90%, and 90% of individual claims were covered, up from 85%. As always, however, there was a cap on the total government exposure.

• 0910

[Translation]

The amendments fundamentally changed borrowing and subsequent claims patterns. Before these changes, SBLA lending averaged about $500 million annually; within two years, lending soared eight-and-a-half-fold to $4.4 billion. The government's actual and potential liability also soared, and the apparent riskiness of the loans rose.

[English]

In response to this situation and this standing committee's call for a review of the act in 1994, the government introduced changes in 1995. These amendments are aimed at putting the program on a cost-recovery basis over 10 years. Under the 1995 amendments, an annual fee of 1.25% of the outstanding balance on the loan was charged, and the maximum interest allowed to be charged was raised to prime plus 3%. In addition, as had been scheduled, the percentage of financing available fell back to 90% and insurance coverage was returned to 85% of an individual loan.

The dollar value of loans issued has since dropped into the range of $2 billion annually, but the cost of the loans made in the 1993-95 period will be felt for some years to come. This makes it all the more important that we take the time needed to do a careful analysis of the possible impacts of program changes on the use and the ultimate cost of the program. It is this sort of analysis that lies behind Bill C-21.

As I indicated at the outset, the proposed extension of the lending period will provide all stakeholders the time needed to conduct a comprehensive review.

[Translation]

Part 4 on page 27 of the document tabled here today and last week with the Public Accounts Committee gives an idea of the wide-ranging nature of the comprehensive review.

I would note that the planned review takes into account all of the findings and recommendations made by the Auditor General, and will include extensive consultations with private and public stakeholders.

[English]

I hope this brief summary of the purpose of the bill and the history and comprehensive review of the program has been helpful for members. Madame Thivierge and I would be pleased to respond to the committee's questions.

Thank you.

The Chair: Thank you very much, Mr. Sagar.

I'd like to let the committee know that the decision made at the steering committee was that we will proceed without calling witnesses at this time, because of the extension in the time line, but we are prepared to do a full review once the department has its review finished. We're looking at doing a number of hearings with witnesses when we have the review before us, probably later in the fall. That was the decision of the committee.

That being said, Mr. Pankiw.

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): First of all, Madam Chair, I'd like to move that this committee undertake to do a complete review of the SBLA this year.

The Chair: Mr. Pankiw, it's already been agreed that we are going to be doing—

Mr. Jim Pankiw: That's for sure?

The Chair: —a review of the SBLA when it comes before the committee again. A report on the SBLA is being done right now by the industry department, and we have discussed it several times at steering committee. It's not as if we don't intend to do that. We do fully intend to do that.

Mr. Jim Pankiw: Okay, good enough.

It's my understanding that the current liability extended under the SBLA is $12.7 billion; therefore, that would leave $1.3 billion remaining. According to the Auditor General, as much as 46% of the loans are given to businesses that would have got the loans anyway. So considering that there's still $1.3 billion available in liability to extend, I just don't see the need to extend that liability by a further $1 billion. You could effectively double it simply by implementing some procedures to streamline the lending and prevent businesses that would have got the loans anyway from getting them.

Mr. Peter Sagar: Thank you. That's a good observation. I saw the debate in the House on the issue, and I appreciate the complexity of this relatively simple program, but with many parameters at play. Let me respond in several parts to your question.

• 0915

The $12.7 billion of loans that have been extended is not the government's liability at this stage. Many of those loans have already been repaid. So the actual liability I believe is between $6 billion and $7 billion at this point, in the sense that that's the total value of loans currently outstanding.

We have a system in place though where the lending authority of the government is based only on total authorizations ever issued in the lending period. That amount is currently at $12.7 billion. Typically, we are running at around $2 billion per year of lending currently. So you can see that in the next year if we don't increase beyond the $14 billion we'll hit $14.7 billion of lending total by the end of the year. Without the increase we would have to shut the program down some time during the course of the year.

The argument has been made that by eliminating non-incremental loans in some way we could actually live within the ceiling. There's one fundamental problem with that. There is the question of how you would measure incremental loans. The Auditor General cited one of our studies done by Professor Riding of Carleton University that suggested—it's a fairly lengthy study, so I'll try to condense it—that 54% of the loans were, in his view, purely incremental. That is, when he reviewed the cases there was absolutely no question that those loans would not have been made. But in reviewing all of the loan files he found an additional 32% where it was doubtful that the loans would have been made.

In his view, and to flip it on its head, only 14% of the close to 700 loan files he reviewed should have been made in the absence of the SBLA. The rest, 32%, fell in a grey zone. So somewhere between 54% and 86% is the level of incrementality of the program based on that review.

The second issue is that within the context of the program individual loan decisions are made by lenders. We don't control them. We don't have the ability to review each file as it comes in and say whether or not we think it's incremental. The army of bureaucrats that would take—and I question whether we could get bureaucrats competent to make those sorts of decisions—would be legion. Frankly, I don't think we could do it. But it would actually require an overhaul of the legislation even to contemplate that sort of action.

In a nutshell, the increase in the lending ceiling is absolutely required. We've asked for about 15% above the current lending rate to allow for a contingency if the program ramps up. If the economy remains strong and more small businesses start to expand, we will need that room to grow with the program. But we simply cannot live with the current lending ceiling.

The Chair: Thank you, Mr. Pankiw. Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): I was just going to ask the witness to clarify. I know Mr. Pankiw and his party have been trying to limit the amount and so forth. I want to make sure it is clear and on the record that the lending institutes, of which we have some 15,000, have only so much time after March 31 of this year to register the claims for their lending. I want you to be specific on that time limit.

You also mentioned $2 billion per year as all these lending registrations have been coming through. I also want you to emphasize the messages you have been sending out to the lenders—who are doing the due diligence and the business plan review and so forth before they lend—since 1994 or 1995 and some of the changes. What time period did the Auditor General's report entail, and what changes have you made since then?

• 0920

Mr. Peter Sagar: Let me pick up the last part of your question first. Then I'd like Madam Thivierge to respond to the first parts.

The Auditor General's report was based on the experience of the program through its history, in fact, but the vast majority of loans covered in his report were made during the 1993-95 period, simply because the volume of lending was so high in that period. So as you read the Auditor General's report, you'll see a lot of comments on whether or not the loans were incremental and whether or not the program would be on a cost recovery basis, which of course it wasn't during the 1993-95 period.

But it's important to understand that his review covered a period where certain procedures and guidelines were not in fact in place. When the program ballooned up, and particularly when it ballooned up to $4.4 billion of lending in 1995, we put in a whole series of changes to the administration of the program to get on top of it, because it's a vastly different game to be administering a program that has been stable for over 30 years versus administering one which has undergone radical change in a very short time.

Madam Thivierge can explain to you what some of the steps were that she took as administrator of the program to bring it under control.

Ms. Marie-Josée Thivierge (Director, Strategic and Financial Planning, Operations Sector, Department of Industry): Thank you, Peter.

When I arrived in the fall of 1995 and realized that we had to manage an eightfold increase in lending, we also started getting claims in, and we knew the claims would more than likely mirror the lending that had taken place out there, so that by 1997-98 we would likely have to process a comparable amount of claims.

A number of steps were taken, and I think the point you were looking at was the whole issue of due diligence and due care.

In late 1995 and early 1996 we redesigned all of our forms—i.e., the registration form for registering an SBLA loan with the administration as well as the claim-for-loss form, asking that a senior official of the bank review both the registration form and the claim-for-loss form before it was submitted and that he or she certify that the loan had been made according to banking practices and with the proper care that he or she would apply to non-SBLA loans.

In addition to that, when they submit a claim for payment to the administration, they also certify that the loan was administered with due care, that the claim for loss, as submitted, is proper, and the amount of the loss is in fact a loss that was made as a result of administering the loan as per the act and the regulations.

In addition to that, we've issued lenders' guidelines, which can be found on the Internet and were circulated to 13,000 branches. We are dealing with 1,500 lenders but with, in fact, 13,000 points of service. All of these were provided with lenders' guidelines in which we clearly stress that these loans must be made with due care for the public interest. We also provide them with some instructions about the required documentation and so on.

There have also been some questions about—and the Auditor General refers to it in his report—the fact that some of the borrowers tried to receive more funding than the $250,000 limit under the program. When that was made known to us, notices to lenders—and the Auditor General also refers to this in his report—were issued to in fact clearly state that this was contrary to the intent of the act and should a claim be submitted where in fact the lender had provided more than $250,000, that claim would not be paid.

So we have taken a number of steps, and through lenders' guidelines, redesigning forms and issuing notices to lenders to make sure that lenders comply with the intent of the act and the regulations, we feel we have done a lot to improve the quality of the lending under the program. These were issued in early 1996.

The Chair: Okay, Mr. Lastewka. Madam Lalonde.

[Translation]

Mrs. Francine Lalonde (Mercier, BQ): The Auditor General has reviewed the program and what struck me the most was his comment about the problems associated with cost recovery and loan effectiveness.

• 0925

He recommends that we take a closer look at this issue. If indeed we have to be certain that 100 per cent of all loans will be repaid, we may hesitate to help out small businessmen and to assume the appropriate level of risk.

Right now, we need to promote development in the fields of communication and research and development and to commit sums of money that reflect the risk involved.

The starting point for my question is the Auditor General's comment. First of all, what regulations are we dealing with here? I've never seen them, but they must exist. You just indicated that lenders could consult guidelines on the Internet. I've never seen these regulations, even though I should have, but if we have to consult Strategis to find out everything we need to know, then... it contains a rather substantial amount of information. Since the proposed amendments pertain only to the one-year extension and to the increased ceiling on guaranteed loans, how will you be able to address the Auditor General's concerns before the program expires? He is not worried so much about the legislation as such, but rather about the way the program is administered, and this is your area of responsibility.

Mr. Peter Sagar: It is difficult to answer that question in absolute terms.

Mrs. Francine Lalonde: I realize that.

Mr. Peter Sagar: We have introduced numerous changes to the program management process to better manage the risks in terms of verifying claims for payment, dealing with program regulations and advising lenders. We have also developed a system to follow up on program results. We are now in a better position to identify risk and potential losses by sector or region. We are currently in the process of setting up a data bank. It won't be ready in the next month or two, but it will be for the program review stage. We're going to be in a much better position to manage the risks associated with this program.

In program terms, there are three or four main points governing liability, including the 85 per cent liability level assumed by the government for each loan and program administration fees. It is also important to know which sectors are covered under the program and which are not. Liability limits also determine risk. We will look at all of these factors and deal with some of them in an effort to better manage risk in the future.

Do you have anything to add to that as far as the administration of the program is concerned?

Mrs. Marie-Josée Thivierge: Yes, I do.

Mrs. Francine Lalonde: You haven't really answered my question.

Mr. Peter Sagar: [inaudible]

Mrs. Marie-Josée Thivierge: Perhaps I can clear up a few things for you. The legislation calls for the minister to draft regulations and for the program to be administered in accordance with these regulations. The latter give the minister the authority to impose certain administrative conditions on lenders.

Of course, we endeavor to ensure that administrative practices test to the limit the authority conferred upon the minister under the regulations. However, the fact remains that the primary objective of the program is to encourage banks to issue more loans. That being the case, the program is structured in such a way as to give banks some latitude when it comes to making lending decisions.

• 0930

Moreover, the incrementality to which he referred to earlier is indeed closely linked to the credit decisions made by the lending institution.

Under the current legislation and regulations, a lender cannot be compelled to take additional specific measures over and above those he is already taking. Program administrators check with the borrowers to ascertain the level of incrementality which, as Mr. Sagar indicated, is somewhere between 50 per cent and 85 per cent.

We have a responsibility to table the bill by the fall, along with the attendant regulations. The latter will focus specifically on this issue, that is whether any conditions can be imposed on lenders to improve the quality of the lending and to deal with the incrementality issue. In addition, we will be looking at the Auditor General's recommendation which called for random checks of lending institutions to see how they go about making credit decisions.

Currently, if I were to try to impose conditions on a lender, he could choose to comply with them or not. I would have no legal recourse to force a lender into complying. For example, I couldn't tell him that I would not pay the claim because he failed to ask the borrower for a business plan. At present, there is nothing in the legislation or in the regulations which allows me to take this action. We will be looking very closely at this, in keeping with the Auditor General's recommendation.

The written guidelines issued to 13,000 points of service clearly state that program administrators expect lending institutions to exercise the same due diligence in the case of SBLA loans as they do for non-SBLA loans. However, if the institutions choose not to comply with these guidelines because they are not part of the regulations, the minister has no legal authority not to pay the claim.

[English]

The Chair: Thank you, Madame Lalonde.

I'm going to remind committee members that our time may be tight this morning if there's a vote. Having five minutes for questions and answers means that questions and answers will be within that five minutes. So try to keep our questions and responses as brief as possible.

Mr. Ianno, please.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Thank you, Madam Chair.

You may have mentioned it, but I came in about ten minutes late: what number is the loan loss in the last year or the last couple of years?

Mr. Peter Sagar: It's an interesting question. Over the history of the program, it has run between 5% and 6%. We are seeing what appear to be higher loss rates coming out of the 1993-95 period, but we won't know what the actual loss rates for that period are for a number of years, because typically an average loan defaults within three to five years, but it can take up to ten years for a default to occur. So to know what it is for any particular point in time is very difficult.

Marie-Josée, where are we overall right now?

Ms. Marie-Josée Thivierge: Overall, we're below the 6% mark. In fact, in the document that was tabled for you, if you look on page 17, figure 9, this shows you that the historical trend has been a little higher than 5%.

Mr. Tony Ianno: When you say 5%, is it 5% of $2 billion or 5% of the total?

Ms. Marie-Josée Thivierge: It's 5% of the total. Actually it's 5.75% today of total lending under the program since 1961.

Your question was what our experience has been in the last year or two years. What we seem to be experiencing is earlier defaults, but it's premature at this time for us to know exactly what the defaults of the post-1995 loans, for instance, will be.

This is what the table shows. On the 1995-96 loans, given the claims we've received so far, we're at a 3% loss rate. We know this will not be the loss rate for the 1995-96 loans, but it takes three to five years after the loan is made for a claim to come in.

So at the moment, our program is structured to absorb, with our fee structure, about a 6.38% loss rate, and we're not there yet.

Mr. Tony Ianno: What are we bringing in on a break-even basis in terms of the 1.25%?

Mr. Peter Sagar: With the 2% registration fee and the 1.25% annual fee, it comes to 6.38% on a real basis. So, we can absorb—

Mr. Tony Ianno: So it's covering itself, roughly?

Mr. Peter Sagar: Yes.

Ms. Marie-Josée Thivierge: For the moment, yes.

• 0935

Mr. Peter Sagar: If losses remain in their historical range, it will cover itself quite easily. If losses were to go up significantly, we wouldn't cover it. But I would emphasize that these fees will only cover loans made post-1995. They won't cover the losses incurred in the 1993-95 period, when the program was not on a cost-recovery basis.

Mr. Tony Ianno: What does that mean? Is there a separate fund? Is there an Industry Canada A and an Industry Canada B, and then Industry Canada C pays it all?

Mr. Peter Sagar: Conceptually, you could think of it that way, but as in most cases, the money flows to the consolidated revenue fund in terms of fees and it comes back out in terms of expenses. There's no actual.... It's not like employment insurance, where you can visualize a separate fund in the accounts.

Mr. Tony Ianno: Prior to 1995?

Mr. Peter Sagar: Even now.

Mr. Tony Ianno: Oh, so in other words, it will just cover.

Mr. Peter Sagar: Yes. We keep track of the flow of this money, but these are virtual accounts rather than real ones.

Mr. Tony Ianno: Okay. In your chart—I haven't looked at it, I'm sorry—do you show how much of the program each financial institution has outstanding?

Mr. Peter Sagar: Yes, in the report you can see that. It's a separate document, and you can see the key financial institutions and the types of financial institutions lending under the program.

Mr. Tony Ianno: The annual report?

Mr. Peter Sagar: Yes.

The Chair: Last question.

Mr. Tony Ianno: Yes, last question, thank you very much.

Has there been a study, with the new administration and with the changes that were made to the SBLA, to see, as this program has been increased manyfold, the number of jobs that have been either created or sustained because of the program?

Mr. Peter Sagar: A number of studies have been done by Industry Canada, and the Auditor General referred to them. In fact, before the public accounts committee, the Auditor General argued that what he was trying to point out in his report was that these estimates are soft. Let me just review briefly what some of the estimates are.

When loans are made, we ask the borrowers to estimate for us the number of jobs they will create as a result of the loan. The average in the program has been 2.3 or 2.4 jobs per loan, estimated by the borrowers. That's the number we report in the annual report. It's what the borrowers tell us they will do.

Professor Riding, in his study, went back to those 682 borrowers and said “Now that you have the loan, how many jobs did you actually create?”, and they said 3.9 jobs per loan. None of that takes into account spin-off jobs—that is, jobs in construction or producing the machinery or supplying those businesses.

We also conducted an econometric study. Econometric studies of small business activities are very difficult, because there's no econometric model that actually has small business built into it. Nonetheless, we did an estimate, and that was reported by the Auditor General. He said it created about seven jobs per $1 million of lending, a much lower figure.

Mr. Tony Ianno: Four times $250,000 is already $1 million, so....

Mr. Peter Sagar: Yes, there's a big gap. The Informetrica model that was done actually estimated there would be virtually no job creation directly in the firms receiving loans. So in about 16,000 loans made, they would have estimated that only about 1,000 jobs net would have been created, according to their model.

We have real problems with that, but it goes to illustrate—and this is what the Auditor General pointed out—the tremendous difficulty of really estimating what the net job creation is of any program, let alone a very large-scale small business loan program.

Mr. Tony Ianno: Can you not ask the banks and the institutions, when they're doing their annual update, to ask the actual borrowers how many jobs they have created and then tabulate it?

Mr. Peter Sagar: Yes, we can.

I'm an economist, so I'll blame them. The economists come back and tell us we haven't accounted for jobs that may have been lost as a result of the loans. For example, if you finance one company here, perhaps business went down slightly in a company over there and they laid somebody off. It's trying to get that accurate balance that is virtually impossible in a program of this kind.

• 0940

So what we report in the annual report is what lenders tell us. We haven't tried to estimate or inflate that number for jobs created in the construction and supply industry. We keep it fairly flat at that level. But there is a range of estimates, and somewhere, again, lies the truth in that.

Mr. Tony Ianno: Thank you.

The Chair: Mr. Herron, did you have a question this morning?

Mr. Dubé.

[Translation]

Mr. Antoine Dubé (Lévis, BQ): I realize that you have already provided a breakdown of the loans issued for this year, but as far as losses by region are concerned, do you have a table which highlights losses incurred by each different region?

Mrs. Marie-Josée Thivierge: We are currently revising our annual report. For reasons of confidentiality, it will be difficult to report on the losses of each lending institution. However, you will be able to see the losses incurred by province, since this is the reporting method that we use. Perhaps we could look at reporting on losses by region next year.

Mr. Antoine Dubé: I have another question for you concerning business loans. A growing number of institutions are issuing loans. When a loan program is popular, it's probably because it is more generous or more flexible than other existing loan programs. Has a comparative study been done of all lending programs geared to SMEs?

Mr. Peter Sagar: Yes, of course. We have done comparisons at the international level and have found that loss rates under our program are much lower than loss rates under other international programs. Virtually every country in the world has a program similar to the SBLA program, and our losses are much smaller, just as our administration fees are much lower.

However, one has to understand that these programs are all different and that they pursue very different objectives, which makes it very difficult to draw comparisons. We feel that our program is much more efficient and less costly to the taxpayer.

Compared to other programs in Canada, the SBLA program is open to just about anyone. Loan amounts are not too high. The two other programs have very different aims, for example, high- technology or regional or sectoral development. Each program has different objectives or terms. If a borrower prefers one type of loan over another, he is of course free to choose the type of loan he prefers. The SBLA program is open to everyone because it involves a basic type of loan.

Mr. Antoine Dubé: Has a nation-wide study been done?

Mr. Peter Sagar: Of all programs?

Mr. Antoine Dubé: Yes.

Mr. Peter Sagar: No, because as things now stand, programs, in particular provincial programs, are changing fairly frequently. There is no current study that we could use as a reference point. However, each time a new program is announced, we check to see if it is in fact the same thing as the SBLA program or if we are dealing with incrementality.

Mr. Antoine Dubé: Are you talking about programs that come under Industry Canada? You yourself said that the federal government provides funding, through Industry Canada, to CFDCs. Has a study been done comparing these programs?

Mr. Peter Sagar: We haven't done this type of study. I can tell you that we look at the announcements and at all of the decisions that are made to see whether the programs are similar or different to the SBLA program. We try to see if the new programs are different, whether they offer anything new for the private sector and whether there is any kind of duplication or overlap.

Mr. Antoine Dubé: Thank you.

[English]

The Chair: Mr. Shepherd, do you have a question?

Mr. Alex Shepherd (Durham, Lib.): Yes.

Mr. Lastewka was talking about the incidence of bad debt losses and the reporting of those by the financial institutions.

• 0945

It seems to me what the Auditor General was saying is that statistically, because that one year after the default period is still guaranteed by the government, the receipt of them by yourselves or getting close to the claim period, about 80% of them were in the last portion of that period. In other words, the financial institutions took advantage of the government guarantee, and they sent the bill to you.

I heard what you're saying about the good and wonderful things, but are you monitoring the timing of that when it comes into your office? Has it moved from this 80% level back to something that's reasonable?

Mr. Peter Sagar: I'll hand this to Marie-Josée Thivierge in just a minute.

It's a trade-off as well. We have changed the program. We could force the claims in earlier, but the risk is that then you don't get maximum recovery. We're trying to find a balance between pushing forward the claims and letting the banks maximize both the recovery period and their ability to perhaps sustain that company in life. Some companies get into trouble and then recover. If we push the claim processing time too quickly we could force bankruptcies where they aren't needed.

Marie-Josée.

Ms. Marie-Josée Thivierge: I'd like to clarify a few things. First, that one-year timeframe is the period of time we give lenders to register a loan with us. After a loan goes in default, lenders in fact have up to 36 months to submit a claim, for period 12 loans, i.e., since 1993. It was done to encourage lenders to administer loans when loans default and take all of the steps related to liquidating the security and maximizing recovery. Then the claim is submitted to the administration.

For the first 12 months that a lender takes to realize on the security, we offset at full interest rate. Starting from the 13th month and going on to the 36th month, we offset half the interest rate. What's important here is that until such time as a claim has been paid, the lender pays the administration the 1.25% fee. So in fact it is not an incentive for the lender to drag his feet in realizing on the security, because in fact he continues paying some administrative fees to the administration.

On average so far, what we've seen is that loans will default for 1993-95 loan period.... We're starting to see some activity there, so it's safer to talk about that period at this time. But in fact the 1993-95 period loans default after about 15 months. Lenders will take more or less 12 to 15 months to submit a claim to the administration.

They do so only once they have liquidated all the assets and realized on all security, including personal guarantees. That very often is where the time is more considerable, because if you end up with spouse's assets or you're in the middle of a divorce or some of the personal guarantees are tied in with other parties, that may delay the process. But in fact we've been seeing that timeframe actually reduce. They submit claims faster into the administration than they used to, historically.

I just wanted to give you a few facts and—

Mr. Alex Shepherd: So are you saying that the Auditor General isn't giving us any facts? Is that what you're saying?

Ms. Marie-Josée Thivierge: No.

Mr. Alex Shepherd: The Auditor General is saying “Isn't it a strange event that 80% of these claims are coming in just under the timeframe in which the interest rate would have been reduced in half?” That seems like a strange coincidence.

Ms. Marie-Josée Thivierge: To be honest, I'd have to go back to the report of the Auditor General to see that 80% timeframe. But in fact, a large part—

Mr. Alex Shepherd: You haven't read the report?

Ms. Marie-Josée Thivierge: Yes, I have, sir. I just don't remember that one figure. In terms of our experience—and I have pulled out the statistics from the system—the claims are coming in somewhere between...for 1995-98 loans before the 12-month timeframe, you're correct. For 1993-95, they're coming in after that 12-month timeframe. So I'd have to see what the sample of the claims was that the AG has looked at to arrive at that conclusion of 80%.

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That being said, in our discussions with the Auditor General when they were doing the review of the administration, we had extensive discussions about interest under the program and what could be done to minimize interest to the crown or to the taxpayers. There are two aspects of it. We could look at the possibility of making interim claim payments to the banks, because delays in submitting claims are often encountered because of the personal guarantees, so we could make partial payments to reduce the interest payments and do a final payment when personal guarantees have been handled.

The second part is to try to minimize the time the administration takes to process a claim. On that front, in working with the Auditor General we've reduced our processing time from 98 days to 30 days. But as part of the review, one of the items we put in there is to look at the 36-month timeframe and see whether we should revert back to pre-period 12 where we had full interest for six months and half interest forever.

Mr. Alex Shepherd: That's a good idea.

Ms. Marie-Josée Thivierge: It's now more than 36 months and if anything comes after that we don't pay. In fact, a claim must be submitted within 36 months as it stands today. For pre-1993 loans, a lender could take forever and could be compensated at half rate forever.

So we are looking at the two mechanisms because currently the administration is processing claims from both pre-1993 and post-1993. We will do a cost analysis of the impact of these two and try to arrive at some recommendations when the act is tabled in the fall.

Mr. Alex Shepherd: Thank you.

The Chair: I just want to remind committee members who were not here at the beginning that we will be doing a full review of the SBLA later on, probably early in the fall. Today we are dealing with the bill before us that has one section and two subclauses in it.

The bells will possibly start ringing at 10:15 for a vote. We're looking at a 30-minute bell if there is a vote. That means we cannot come back to this room after, because this room is reserved until 11 o'clock, so we must finish before the vote. Again, I will remind you that at 10 o'clock I will proceed to clause-by-clause.

Madame Lalonde, please.

[Translation]

Mrs. Francine Lalonde: Twice, you've mentioned personal guarantees. I was under the impression that the legislation did not call for any personal guarantees, given that the loan was already secured under the SBLA. I was wondering about this.

Some businessmen in my riding have complained that they are being asked for a pound of flesh in addition to the government guarantee. This concerns me, since you have used the expression twice and it contradicts what I'd been told. Can you explain this to me?

Mr. Peter Sagar: Under the SBLA, personal guarantees are limited to 25 per cent of the amount of the loan. In the case of small business loans, personnel guarantees are viewed as essential. Without a personal guarantee, the lender assumes a tremendous amount of risk. That explains the 25 per cent limit. It's much lower than in the case of regular loans to SMEs.

Mrs. Marie-Josée Thivierge: Allow me to make a distinction here. I was talking about a personal guarantee. When the loan is issued, the lender does not demand a list of all personal assets to use as collateral of some sort. In the event the loan is not repaid, the lender may, pursuant to the legislation, liquidate the assets financed by the SBLA and obtain a guarantee equal to 25 per cent of the loan value. When the borrower signs for the loan, the lender does not require him to put up his house, car or personal assets as collateral. However, if the loan is in default, the lender reserves the right to recover up to 25 per cent of the loan value on personal assets not identified. That is the wording contained in the legislation and in the regulations. We're talking about a guarantee, not a security.

Mrs. Francine Lalonde: Different banks must follow different procedures. Clearly, this is a form of blackmail.

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Mrs. Marie-Josée Thivierge: Based on our experience, the majority of financial institutions do in fact request a personal guarantee, but no more than 25 per cent, and the borrower undertakes to ensure that his enterprise will be successful.

Mrs. Francine Lalonde: We can therefore draw the conclusion that small businesses are treated quite differently. A large share corporation is not required to provide the same kind of guarantees.

I'm sure the subject will come up again, Madame Chair, when the next bill is tabled.

[English]

The Chair: Thank you, Madame Lalonde.

We want to thank Mr. Sagar and Madame Thivierge for being with us this morning. We will be seeing you again and we appreciate that.

I will now move to clause-by-clause consideration of Bill C-21 and I will call clause 1.

(Clause 1 agreed to)

The Chair: Shall the title pass?

Some hon. members: Agreed.

The Chair: Shall I report the bill to the House?

Some hon. members: Agreed.

The Chair: Thank you. I want to thank everyone for the conversation and questions this morning. As I said, we will be coming back to review. Again I thank Mr. Sagar and Madame Thivierge for being with us.

I should remind everyone that we might be meeting on the Monday when we come back, because there is a vote scheduled that afternoon. So we're talking about a 3:30 p.m. meeting on Monday.

The committee is dismissed.