INST Committee Meeting

STANDING COMMITTEE ON INDUSTRY, SCIENCE AND TECHNOLOGY

COMITÉ PERMANENT DE L'INDUSTRIE, DES SCIENCES ET DE LA TECHNOLOGIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, December 5, 2001

• 1537

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order, pursuant to Standing Order 108(2), for consideration of small and medium-sized enterprise bank lending.

This afternoon the committee will hold its third of three meetings with the banks. We welcome representatives today from the Bank of Montreal and the Scotiabank. We'll hear from the Bank of Montreal, followed by questions, and then at approximately 4:30 p.m. we'll hear from the Scotiabank.

Representatives from the Bank of Montreal are Mr. Tim O'Neill, the executive vice-president and chief economist; Mr. Frank Techar, executive vice-president of small business banking; and Mr. Derral Moriyama, senior vice-president, sales, services and market segments, small business banking.

As I indicated at the previous meetings, members of this committee attach significant importance to this topic. The impetus for these meetings stems from the 1994 report of the Standing Committee on Industry entitled Taking Care of Small Business. As the report stated:

Small and medium-sized businesses, in Canada and elsewhere, constitute the vast majority of firms; they are vital to employment, important contributors to community cohesion, and the source of the large firms of the future.

That statement still holds today.

I invite the witnesses now to make their opening statements, and will turn it over to the Bank of Montreal.

Mr. Frank Techar (Executive Vice-President, Small Business Banking, Bank of Montreal): Thank you, Madam Chair, members of the committee. Good afternoon.

My name is Frank Techar, and I am executive vice-president in charge of Bank of Montreal's small business banking division. I'm pleased to have been invited to meet with you. I'm accompanied by my two colleagues, Tim O'Neill and Derral Moriyama. Derral was previously our vice-president of community banking in Edmonton, where he had a hands-on role in dealing with our small business customers.

Both Tim and Derral have appeared before this committee before, and following my opening statements we will, of course, answer questions.

We were particularly pleased that the committee decided to hear from each bank individually rather than on an industry basis. We believe the Bank of Montreal has a unique story to tell that distinguishes us from the other major banks, and differentiates us in the marketplace. Our goal is to be the first choice for small business in Canada.

This is not a new goal for us. The small and medium-sized business sector has long been a key market for us, and has been a top priority in the past 10 years. In that time we have worked hard at meeting the financial needs of small business, and have met with some considerable success. This is reflected in the growth in market share.

• 1540

In 1990 we had about 9% of the small business market, and today we enjoy a market share of 18.9%, more than double where we were in 1990.

Our approach to better serving our small business customers has four dimensions—people, channels, pricing, and products. Let me give examples of the type of thing we are doing in each of those four areas. In each case we're getting away from that old one-size-fits-all approach.

On the people front, we have nearly 2,000 professionals in our branches across the country and in our telephone banking centre who know and understand small business. We've recently added 100 specialists to better serve the small business segment.

On the channel front, we've introduced the Direct Bank for business, which gives customers the option of 24-hour-a-day banking access by phone or Internet. This has meant building our technological base and hiring and training relationship managers, who can authorize small business loans of up to $250,000. This is not a substitute for branch banking. Rather, it is an interchangeable channel customers may use at their convenience. Today, over 100,000 of our customers have signed up for it.

On the pricing front, again, the old one-size-fits-all approach doesn't work. We now offer business customers a range of 12 banking plans. By choosing the appropriate plan for their needs, the customers have predictability in banking fees, and they can eliminate fees by maintaining low specified balances. In fact, 25% of our banking plan customers have their monthly fees waived.

We have a wide range of innovative product offerings. Today, however, I'd like to focus on a group of recent programs we have introduced to assist our customers in handling the specific challenges they're facing today.

We're deeply conscious of the fact that we cannot be fair-weather friends. If we are to achieve our goal of being the first choice for small business, we have to be there for our customers in good times and in bad. We have to go the distance with them through each phase of the business cycle, and remain constant through every swing of the economic pendulum. We are determined to stand by our customers and help them not only weather the storm but emerge from it stronger, providing them with the practical help and advice they need to improve their financial lives in this economic environment.

In support of that commitment, we recently launched a number of programs for our customers. Since early October we have been offering small business loans at prime for up to two years, for amounts ranging from $50,000 to $250,000. You've probably seen our ads for our prime-rate sale, or read about it in the newspapers. In conjunction with this sale we are also covering the need to borrow lesser amounts by offering a small business line of credit, up to $50,000, at prime.

These products offer customers and potential customers an opportunity to take advantage of today's record low interest rates and restructure their debt in preparation for the economic and business pendulum swinging back into more positive territory.

In a speech to the Vancouver Board of Trade a couple of weeks ago, our chairman, Tony Comper, referred to his great faith in the fundamental soundness of the Canadian economy and the ability of Canadian consumers and businesses to manage creatively through the current downturn and bounce back with vigour as conditions improve. That view underpins our prime-rate sale and line of credit offering. Bank of Canada rate cuts have brought commercial lending rates to their lowest levels since the 1930s, and our prime-rate sale is designed to quickly move the benefits arising from those cuts into the hands of our business customers. By doing so, we believe we're reinforcing the Bank of Canada's objective of economic stimulation, and hastening the recovery.

In addition, at the start of last month we took this initiative a step further and introduced an interest credit program for our small business customers, with prime-based operating loans and lines of credit. For the three months from November to January, these customers will automatically have a credit equal to a quarter of 1% of their interest costs deposited to their accounts. This program applies to both existing loans and, on a pro-rated basis, new loans taken out during that period, including those taking advantage of our prime-rate sale. Over 80,000 of our customers will benefit from our interest credit.

Our customers have been loyal to us, and we want to demonstrate that their loyalty means something to us. Aside from the measure of financial relief it provides, we adopted this program as a way of emphasizing to our customers that we are there for them and we intend to stick with them. The message seems to be getting through.

We were pleased to see Catherine Swift of the Canadian Federation of Independent Business quoted in the Globe and Mail as welcoming our initiatives as positive steps. That is exactly what we are trying to do, and we are glad to have this endorsement by the CFIB, which, as you know is not prone to giving banks an easy ride, and nor should they be.

• 1545

These are elements of how we're working with small business today. We are also taking steps internally to ensure constructive support for our small business customers during these times. A clear message has been sent to our people in the field that we will not be changing our approach to small business or our lending practices simply due to economic conditions. To put it bluntly, we are not tightening our credit-granting policies.

In the wake of September 11, we recognize that some of our small business customers may experience difficulties with their cashflow, financial transactions, or sales arrangements. These difficulties could, in turn, lead to increased credit needs, inability to make loan payments, and altered business plans.

In resolving these situations and providing assistance to our customers, we have reminded our community-based bankers that understanding, tolerance, flexibility, and innovative solutions will be required now more than ever. Options to be considered will include establishing new lines of credit to meet their needs, extending amortization periods, or restructuring credit terms and conditions. We stress that all matters should be dealt with on a case-by-case basis, and each customer's situation will be unique and require local solutions that make sense.

Madam Chair, that is the Bank of Montreal's story. I thank you for the opportunity to inform the committee about our particular approach to small business banking in Canada. As I said at the outset, we consider this particular area of banking to be a matter of strategic importance to us. We put a lot of effort into it, and we will not walk away from our customers during these tough times. We're sticking with our existing customers, and we are aggressively seeking new customers.

Thank you.

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

We will now begin with questions.

Mr. Penson, please.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.

I'd like to thank the Bank of Montreal for coming today to outline your credit policy for small and medium-sized businesses.

I'm interested in where you see the economy going. Have we hit bottom yet? What do you see in terms of consumer confidence? It seems to me that's pretty important.

As well, are you starting to see any uptake in credit by small businesses as a result of the low interest rates out there? Are people starting to expand their businesses, or are they still hesitant because of where the economy has been going?

Mr. Frank Techar: Maybe I can address the second question and then turn the economic questions over to my colleague, Mr. O'Neill.

We've actually seen a significant increase in activity over the last few months as a result of the things we are doing with respect to our prime-rate sale and our interest credit. I think the tip of the iceberg that got some of our customers off the shelf and into the market again was when they saw rates go so low, and our promotion around our prime-rate sale.

In general, just as anecdotal evidence from talking with our relationship managers across the country, we're seeing a bit more talk about confidence and things improving with our small business customers. So just anecdotally, we're starting to see a bit more positive attitude.

Tim.

Mr. Tim J. O'Neill (Executive Vice-President and Chief Economist, Bank of Montreal): On the general economic outlook, our expectation is that this is the bottom. This quarter will be the weakest quarter in the softening we've seen. We had, as you know, a decline registered for the third quarter in economic activity in Canada, and there'll probably be another decline in this quarter, mainly tied to what's happening in the U.S.

Our expectation is the U.S. economy will bounce back starting early in 2002—not strongly—and growth will accelerate through the year. We'll benefit from that. We'll benefit as well from the easing the Bank of Canada has done through this past year.

Just to give you a number, output will probably decline somewhere around 1.5% on an annualized basis in this quarter. By the fourth quarter of next year, growth will be well over 4%. So we're going to see what will turn out to be, by any historical standards of certainly the last two recessions, but even going back before that, a very short, shallow recession and a very quick recovery.

• 1550

On the consumer side, consumer spending has softened through this year, but there's no obvious collapse in consumer confidence. For that matter, in the U.S., where you might have expected it in the period following September 11, confidence has fallen, but spending has held up better than might have been anticipated in that environment.

If we look at the credit demand across all financial institutions, we'll see that consumer finances held up reasonably well. As typically happens when the economy slows down, you see it in business credit demand slowing down. But as Frank has indicated, I think we're reaching the bottom on that. We're hearing our business clients—and I'm talking about small business now—shifting from wait and see to cautiously optimistic that the recovery is close at hand, and they're ready to start looking at expansion again.

Mr. Charlie Penson: Mr. O'Neill, the last major growth period seemed to be in the high-tech sector. Telecommunications really led the way. Do you see a difference? What sectors do you see leading the recovery?

Mr. Tim O'Neill: I think in the initial stages it will probably be the more traditional cyclical industries. We have a global weakness—it's not just in Canada or North America—and that has affected our commodity-producing industries and those related to them. As the U.S. and then the rest of the world economy begins to recover from this, I think those industries will certainly pick up.

We've done reasonably well in such areas as retail trade. The auto sector, although it certainly went through a trough, is coming back, having pared excess inventories.

I think high tech will not be the leader in economic growth through the next couple of years. It will come back and over the long haul it probably will outperform the rest of the economy. But there was such an excess demand for products of that sector and investment in information technology that it's going to take a little while longer for that to be worked out. So I would see maybe 2003 before that sector comes back.

The Chair: This will be your final question, Mr. Penson.

Mr. Charlie Penson: I'd like to ask you about the recent trade talks, those that included bringing China into the World Trade Organization and those that were held in Qatar, where agriculture made some significant progress in terms of export subsidies. You have a farm sector in your business, I'm sure. Do you see an improvement for the Canadian agriculture scene as a result of the two developments in the WTO?

Mr. Tim O'Neill: In the short term, of course, what's going to be primary in affecting the agriculture sector are more conventional things such as weather. I'm not going to try to forecast that.

Mr. Charlie Penson: I hope not.

Mr. Tim O'Neill: I have enough trouble forecasting growth.

Over the longer term, out of the continued progress toward broader trade liberalization to more fully incorporate emerging market economies, I think we're going to see a gradual elimination of the restrictions on or supports for domestic production. I think that's an inevitable consequence of this process of opening up trade and removing import duties or other trade restraints among the industrialized economies. Frankly, that's the only way we're going to be able to be fully inclusive of emerging market economies in the world trade picture. Although that will be a challenge, obviously, for certain sectors of agriculture in Canada, in the long term I think everybody will benefit from that much broader opening up of trade.

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

We'll now go to Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

Welcome to the review.

• 1555

I have a couple of questions about your report. I'm sure my colleague Mr. Ianno will get into it more deeply. Is the 9% to 18.9% dollars or new businesses? I'm not sure how that reads.

Mr. Frank Techar: It's based on dollars outstanding, loan balances.

Mr. Walt Lastewka: You referred to 2,000 professional business bankers. Are these small business bankers?

Mr. Frank Techar: It's 2,000 professionals across the country dedicated to serving small businesses.

Mr. Walt Lastewka: The specialists are a resource for the 2,000, I take it. I'm not sure what is the role of the additional 100 specialists.

Mr. Frank Techar: The 100 individuals we added this year are account managers, relationship managers.

Mr. Walt Lastewka: One of the things that has come to my attention, which I've asked each of the banks about, is that there appears to be a loophole here. On an ongoing basis, small businesses have difficulty with accounts receivable. Many times medium-sized and large businesses tend not to pay their bills from small businesses and to drag it out. I notice that since September 11, hotels in Niagara Falls, for example, have not been paying the small businesses. This of course then gets a small business into trouble very quickly.

Do your professionals work with small businesses to make sure they understand how important accounts receivable are and to ensure that they have the proper systems in place for accounts receivable?

Mr. Frank Techar: From our perspective, the way to address that, I think, is that we're relying on our account managers to have those conversations with each small business customer about whether or not they're having a problem. Quite frankly, it's up to the small businesses as well to really take a hard look at their businesses during this time to see if they're performing at the level they expected to. So I think there's a joint responsibility between the bankers and the businesses to take a hard look at the business and say, “We may have an issue with receivables”.

Once you get to that point, you look at what can be done about it. We can talk about helping them with a negotiating strategy with their suppliers, for example, and making them realize that they're actually extending credit. The way to get at that issue is to have a conversation with the suppliers, just as we hope they would have conversations with us. The business is built on conversations, and I think that's the best way to go at it.

The industries are different and the financial profiles of the companies are different, so we tend to view it on a case-by-case basis, and we would have our account managers address that.

I might ask my colleague Mr. Moriyama to address that. He has had some recent experience in the field, and he perhaps can tell us about what actually is going on in the branches.

Mr. Derral G. Moriyama (Senior Vice-President, Sales, Services and Market Segments, Small Business Banking, Bank of Montreal): Certainly, I'd be pleased to.

In my last position in Edmonton, I was approached by several of our clients about how to become a bank, and what they were asking at that particular time was really what to do with their receivables. They were being asked by their customers to provide more credit terms than they had seen in the past. So we were asked, as perhaps the best managers of risk that they were aware of, how to go about managing the receivable situation.

Our relationship managers met with a group of five or six clients and talked to them about what to look for, what we look for in our systems going forward, and how to extend credit. A lot of the clients in fact said, “It's difficult enough making money at our business let alone being a bank, so how can you help us with this?” We went through the steps on what to look for. We went through the steps on the available credit information, the aging process, and the red flags that come up. It was extremely well received by the clients.

Mr. Walt Lastewka: It's really come home to me that an account executive saying to a small business “You should get your accounts receivable in line” is not good enough.

Mr. Derral Moriyama: No, that's absolutely right.

• 1600

Mr. Walt Lastewka: Many small businesses are good at their trade or whatever they're doing, whatever they're supplying, but they're very poor at accounts receivable. It's an area they try to shy away from, and hope that it happens. I'm looking for more assistance from the banks in that type of collaboration, because there are simple systems that you can put in place but there's training required. There should be more work done by the people who loan money to businesses, because it's not any different from access to capital. If you have $100,000 of receivables, there's your capital.

Mr. Derral Moriyama: Our colleagues in Atlantic Canada, for example, are holding breakfast seminars. They are inviting some of their clients and prospects to come to the seminars, having the client speak not only about the receivables but about other issues as well. They have them talk about some of the positive things they have done, about some of the things that haven't been that positive, and what the rest of the people in the audience could learn from that. It has worked out very well.

Mr. Walt Lastewka: I would appreciate any materials you would have on accounts receivable. I think it's something that has been looming for a long time. It has always been out there, but it's more significant since we've had a bit of a downturn. So I ask for any help on that.

Mr. Derral Moriyama: Okay.

Mr. Walt Lastewka: That leads me to my next question.

The Chair: And your last question, please, Mr. Lastewka.

Mr. Walt Lastewka: In this round, right?

Many times, not fixing the accounts receivable leads into bankruptcies. We have in the neighbourhood of 145,000 bankruptcies a year. At the same time we lose 145,000 businesses every year we gain 125,000. That nets us 20,000 new businesses every year.

What are the reasons that businesses go bankrupt, or what's your rationale for it, and what is your bank doing to prevent bankruptcies to the people you loan money to?

Mr. Frank Techar: I would like to tackle that first question. We believe the primary reason companies run into difficulty is that, first and foremost, they're slow to recognize that they have a problem, or they don't face up to the facts. That is probably the biggest hurdle.

The biggest piece of advice we can give to small business is to make sure that they are looking at their business plan and managing their business according to the plans they've set out, and not wavering from those plans. I think early recognition is key.

Once the problems arrive they fall into two buckets, basically, external and internal. The external reasons are typically market-related or customer-related. They lose a major supplier, they lose a major customer or a major contract, or for some reason become uncompetitive in a particular market. From an internal perspective, financial management always tends to play a factor in these situations, whether it's managing the balance sheets, the cashflow, or the receivables, as we've been talking about. Or, again, we can go back to the fundamentals of the business plan. We hope all small businesses have one and continue to test against it, as large businesses do on an ongoing basis.

I think those are the primary reasons, and it comes out time and time again. What we're doing specifically on that front is encouraging those conversations. I think we have a wealth of experience in our branches.

Perhaps I might add that there is evidence of that. Every year we do a very detailed survey, which deals with our employee professionalism, of all of the financial institutions across the country. At this point in time, our rating at the Bank of Montreal exceeds the average of the banks and exceeds the average of all financial institutions dealing with small businesses in this marketplace.

I personally am confident that our people are having those conversations at the appropriate time. Are we hitting them 100% of the time? I would be pleased if we did, but obviously that's probably not the case. I think encouraging those conversations is the most important thing we can be doing.

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

• 1605

[Translation]

Mr. Bergeron, please.

Mr. Stéphane Bergeron (Verchères—Les-Patriotes, BQ): Thank you, Madam Chair. Thank you, gentlemen, for being here today. Thank you for your comments.

I would like to follow up on the question asked earlier by Mr. Penson. He asked you what were, according to your day-to-day experience, the impacts of the tragic events of last September 11, but more precisely on the help extended to small and medium businesses.

Have you felt that, at first, the events of September 11 had slowed down or put on the back burner former plans to create businesses or to expand or modernize certain businesses, that plans had been put aside for a while so to speak, postponed or even cancelled? Have you seen that type of effect after September 11?

[English]

Mr. Frank Techar: I think the economy was slowing down prior to September 11, so we were actually seeing some of our businesses being a little more conservative leading up to that date. As a result of September 11, there's no doubt that our businesses have stood back from their plans and really taken a hard, critical look at whether to invest or not. As we talked about it a little earlier, there's been some anecdotal evidence that suggests this hangover from September 11 may be starting to work its way out of the forefront of our customers' minds. And they're starting to talk about renewed activity and investment.

So I think it had a definite material effect, as it did for our business, for a short period of time, hopefully.

To address that, we're trying to stimulate demand by being aggressive on rates and are hopefully getting some of our customers off the sidelines, making those decisions easier for them about investing in new capital, plants, or inventory to get the economy moving.

[Translation]

Mr. Stéphane Bergeron: There, you allow me to start right away on the subject of rates. Mr. Lastewka has mentioning earlier that close to 50% of new businesses go bankrupt within five years or disappear at some point in time.

It's a fairly high rate and it is understandable, given that high rate, that you are somewhat cautious with the rates that you charge because you are trying to protect the money you invest when you make a loan to a business. I know you said that businesses were taking too long to realize they have a problem and to look for qualified advice to address those problems. Could debts be one of the problems that ail businesses that eventually go bankrupt, and, therefore, one reason could be that they have to pay, in some cases, relatively high rates on their loans or lines of credit?

[English]

Mr. Frank Techar: The interest rate issue is one of the factors that potentially would contribute to companies having difficulties, especially small companies, and I think we've talked about some of the other reasons. I don't think it's the primary reason. I don't think the borrowing cost is the primary reason. I think it has to do with the fundamentals of the business plan. It has to do with how the company is managed and how aggressive the individuals or the small businesses are being with respect to their growth prospects and their timing.

Small business is a risky business, and I believe the number of bankruptcies we see in the marketplace is evidence of that. It's a hard business to support, from our perspective. It's hard for small businesses to reach that next plateau to get over the start-up phase and into the “feeling good and earning money” phase.

It's complex, and I don't think there's one answer, but I wouldn't say the borrowing rate is the primary contributing factor to businesses having problems.

• 1610

[Translation]

Mr. Stéphane Bergeron: I understand your point of view when you say that business is a dangerous thing for small or medium businesses. I understand also when you say that it's more difficult for you, as a loan institution, to support small and medium businesses. But you are surely aware—it is the case in Canada in general, but particularly in Quebec—that the main part of our economy, the part that creates jobs and wealth are the small and medium businesses. This is why it is so important for us, parliamentarians. This is why we are concerned by the support given by financial institutions to that class of businesses.

I heard you say, and I read it in your conference notes, that the Bank of Montreal was clearly perceived as having the will to adapt to the consequences of the events of September 11. I don't think I am far from the truth when I say that the Bank of Montreal is the only bank to have reduced, even though somewhat marginally, the interest rate on credit cards. Nevertheless, it is surprising to see that there are still in Canada rates close to 30% on business credit cards, when all the other rates have followed the downward trend started by the Bank of Canada. All the other rates, whether for mortgage rates, for personal or business loan rates, for lines of credit, have gone down. But for business credit cards, the rates are still around 30%, when in the United States, they are at around 14.4 percent. The rates have been reduced. The downward trend has affected the rate of business credit cards in the United States, but surprisingly, in Canada, it doesn't seem to be the case. How do you explain that?

[English]

Mr. Frank Techar: On our small business credit cards, actually, we have seen a rate reduction of 1%. And our business cards now have a rate of anywhere between 10% and 13%. Admittedly, that is much higher than businesses can borrow using a line of credit or other type of credit product. We're trying to encourage our customers, through a program we are promoting now in the marketplace called Help Provided, to consolidate their debt, to refinance their high-cost debt at this point in time.

What we're doing is offering them lower-cost options in the form of our prime rate offering, which I would suggest is available to most small businesses at two, three, or four percentage points lower than they would typically borrow at.

Our response to the high rates on credit cards—and we acknowledge that rates are still high, but they're starting to come down—is look at other alternatives. A credit card option is a great payment vehicle, it's a great information vehicle, but if you're really trying to finance your business, there are other much more cost-effective means to do it.

The Chair: Thank you, Monsieur Bergeron.

Mr. Volpe, please.

Mr. Joseph Volpe (Eglinton—Lawrence, Lib.): Gentlemen, my compliments on a presentation that was well put together.

I was particularly struck by some of the language you used. I'm wondering whether it's pervasive to all of the business at the bank or whether it's just for small business. I was struck by the phrase that you're conscious of the fact that you cannot be “fair-weather friends”, addressing an accusation of the past, I suspect, and that you value customer loyalty—I think the quote is, “their loyalty means something to us”—which means you will not be changing your approach or lending practices simply due to economic conditions.

Is that the approach you'd take to corporate as well as to small business and personal loans?

Mr. Frank Techar: I'd like to address that in two ways.

First of all, I will start with a little proof of point. The reason we're so confident in saying those things has to do with the fact that during our last two slowdowns in economic terms in Canada, during the recession in the 1990s through the middle of the 1990s when we had a bit of a slowdown as well, the Bank of Montreal did extremely well.

• 1615

We did well for the three reasons you just stated. We did not change our credit policies. We have been very consistent through the decade. We've stood by the individuals and businesses who have done business with us, and we believe we have not been fair-weather friends. The proof of point to that is the market share growth. Our share growth during those economic down periods outpaced the competition. So we are doing nothing but being consistent, in my opinion, as we've acted throughout the decade.

With respect to what we're doing elsewhere in the company, I can tell you that our Help Provided program extends to our personal customers as well. We have lowered interest rates on our lines of credit. We are starting to lower interest rates on our credit cards. We are encouraging refinancing and debt consolidation. So we are very cognizant of the fact that this is important, not only for small businesses but for all our customers, and we're being very aggressive in trying to get that message out.

Mr. Joseph Volpe: Last week, I along with several other members of Parliament received a copy of a letter that BMO-Nesbitt Burns sent to one of its clients. And this is probably a question better addressed to Tim O'Neill, as chief economist, but you can answer it if you like.

It addresses a response to a message that was read in the papers. It says:

One of the key preconditions to such an equity issue would be the normalization of Air Canada's relationship with the Government of Canada. In our view, the recent announcement of proposed change to the Competition Act...will be perceived by the market as a continuation and escalation of a negative relationship with Ottawa. The passing of these amendments would act

—not potentially, but would act—

to impede a potential issuance of equity by the Company.

I think what members of Parliament like me read here is that what would happen is that the bank would dump the client.

Mr. Frank Techar: I'm obviously not in a position to respond to that, since it's the first I've heard of it, obviously, and it's not my business. The only thing I can say is that we'd have to take a look at those circumstances.

I don't know how to respond to it other than say it's obviously happened, and....

Mr. Joseph Volpe: But you're aware that this committee passed those amendments.

Mr. Frank Techar: I am.

Mr. Joseph Volpe: You're probably also aware that the committee didn't have a clue what those amendments were until yesterday morning. So this letter that went out on the 27th either means that your bank was responding to material that the committee members didn't have, or it was speculating on the potential business of the committee. Or perhaps it was being asked to come forward with a letter like this in order to influence the position of the committee on amendments that would eventually, and did, emerge.

Mr. Frank Techar: All I can do to address that is say we'd love to take it away, do some further investigation, and get back to the committee, Madam Chair. I'm not in a position to respond.

Mr. Joseph Volpe: I'm sure you can get a copy of this letter without me giving you my copy, but I really would appreciate it if you did answer it.

Mr. Frank Techar: Okay.

Mr. Joseph Volpe: I'm just wondering what kind of relationship would contravene the kinds of great statements you made in your presentation by virtue of simply saying that the Government of Canada and you don't get along, and if you don't get along with the Government of Canada, we ain't doing business with you.

Mr. Frank Techar: We would love to have a chance to respond.

Mr. Joseph Volpe: Madam Chair, you'll follow up on that?

The Chair: We'll definitely follow up, and I'm sure Mr. Techar will respond very promptly.

Mr. Strahl, please.

Mr. Chuck Strahl (Fraser Valley, PC/DR): Thank you, and thank you to the people bringing testimony today. It's been very good. Obviously small business is close to everybody's heart, so you're in a good zone of the banking industry, I think, where people want you to succeed and want your small-business partners to succeed as well.

I would like to compliment you on the programs you announced for small business, especially the rate relief issue, which I think was administered properly. It was one of those ones where they didn't have to actually apply, fill out paper and that kind of stuff. Small businesses love that. If you're going to do a program—and I realize it costs you a few million dollars, so it's not chicken feed either—it's important for small businesses that it be as simple as possible, because most of them don't have time to fill out some more forms.

So congratulations on that. I think that was good.

• 1620

I do have a couple of questions on a couple of other issues. I have a letter from a constituent of mine who sent me a note the other day on concerns about the potential rate hikes on ABM machines. I think CIBC actually initially floated the idea of putting a surcharge on the ABMs that are outside of their banking establishments.

My constituent goes on at some length, saying they already feel gouged by ABM charges. I realize she doesn't have to...but she is specifically a small-business person. She tell me that she and her husband own a business in Chilliwack—my hometown—and says:

Operation of this business is extremely expensive as we are still in the growth stage and desperately trying to succeed.

At present, bank charges and interest we pay out...total approximately $200 a month.

That would increase by another another $25 or $35 a month under this particular program.

I realize it's not your bank, but in the articles in the newspaper—quite a few people have picked up on this—CIBC admitted that they were going to float this, $1 to $1.50 for each transaction. So far none of the other banks, of the big five, has yet adopted a surcharge for transactions by non-clients, but the Royal Bank has said it hasn't made a decision yet. Of the other three big banks, only the Bank of Nova Scotia said definitely that it won't follow CIBC's lead.

So here's your opportunity to tell us whether or not your bank is going to follow CIBC's lead. You know, small business folk, like the lady in my riding—and I won't give her name, perhaps, since I don't know if she wants to be named—are saying, “Come on, guys, you're making record profits through good times and bad”.

The Bank of Nova Scotia says it definitely won't follow CIBC's lead.

So what do you think?

Mr. Frank Techar: I'd like to start by thanking you for your kind words about our interest program. It's nice to hear, and gratifying for me and my team.

With respect to the surcharge, obviously it's a competitive marketplace, and forever is a long time. So I'd like to respond to that by saying we continue to evaluate whether we would follow or whether we stand pat. And at this point in time, there are no plans to increase those ATM fees.

Mr. Chuck Strahl: No plans at this time; what should I...? As you can tell, I'm willing to pat you on the back, but when I write this lady back, what should I say? What kind of a timeframe is that? Is it “No plans today, but look out tomorrow”? Is there any kind of timeframe you can give me that I can give this lady in return?

Mr. Frank Techar: Well, you have to appreciate that I'm not responsible for that business, so any commitment I might make will probably not be honoured.

To my knowledge, we do not have any plans to raise them.

Mr. Chuck Strahl: And I accept that. I'm not trying to harass you, but it is those kinds of fees that really are bugaboos for small business. A lot of them are just Ma and Pa operations, like this, working working out their homes, trying to make ends meet.

You're right, they should probably consolidate their thing, and they probably shouldn't use a bank machine—there are a bunch of things we could all wish for in an ideal world—but they find they have to. So with regard to those fees—and I know you didn't do it, so I don't really want to drag you into this—I would encourage you to be as reluctant as possible to raise them, because it is something these kinds of folks find they have to do.

This is similar to the other stories that are circulating about the credit card rates. Again, if somebody has the time and inclination, and can consolidate, and can head down to the bank and hit the low bottom of the rates, all that is perfect, but it's usually a pretty well-established business that's not using their credit card because they don't have to. It's not wise to use them for ongoing financing.

Why is it the credit card reductions lag so far behind? For your rates, you're talking about 10%, 13%, but the rates have been coming down. There's no doubt about the trend. It's not like you're expecting a sudden spike in rates. This trend is long established. It has been going on all year long now. There have been successive rate reductions, month in and month out. Then somebody reduces it by 1% or something, and small businesses say, “That's nice, but they've come down 6% for everybody else”.

Why so long on the reduction of credit card rates?

• 1625

Mr. Frank Techar: I think there are two primary reasons. The first one has to do with costs going up for the business, not just the funding cost but also other costs that deal with all of the other features, including loyalty programs, and the fraud costs that are continually on the increase.

The second reason, quite frankly, is that in this economic environment I think we're taking a step back and really looking at what the effect on personal bankruptcies is going to be, at what the effect on credit in general will be, as a result of the slowdown in the environment.

So I think we're starting to see rates come down. I think if the economy performs as my colleague here anticipates, it's likely that this trend will continue over some period of time. It's a competitive marketplace. If there was a solution to that, or a magic answer, I think you'd see it in the marketplace, just as we're trying to do those types of things for our small businesses with our prime-rate sales.

So I think it has to do with the cost of running the business and the uncertainty with respect to the marketplace at this period of time.

Mr. Chuck Strahl: I would remind you, though, that when these small businesses write these letters.... For instance, this lady says if these sorts of things were dealt with, she “might be able to look upon their excessive profits with less of a jaundiced eye”.

In other words, although what you say may be true, if profits continue to be record every year, or every quarter, or every month, and you say, “You have to understand, there's a lot of fraud out there”, the small business person in my riding then says, “That may be true, but, boy, why does it seem that I'm the one who has to pay for it?”

So that's just a reminder, for what it's worth.

Mr. Frank Techar: Thank you.

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

Mr. Ianno.

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

Thank you very much for coming. First of all, I'd like to commend the Bank of Montreal for continually trying to be proactive in finding new product lines and ways of working with small business. I want to do that first and foremost.

Next, the numbers. You're fine in comparison with the average of the banking; you're at 24.58%. You used to be at 32.39%. I'm hoping that with these new measures and the continual attempt on your part to hopefully increase your numbers.... In 1995, at December 31, you lent out to small business $7.966 billion. At June 30, 2001, you lent out $8.779 billion. That's an increase of almost $800 million, but large business was at $16.625 billion in 1995, and at June 30, 2001, $26.9 billion. So that's an increase of $10 billion. I know you like to be seen as a small business bank. Do you see a disparity in the increases?

Mr. Frank Techar: I think I'd like to address that in two ways, but before I do so I'll recognize the fact that the ratio has come down. If we had our druthers, we'd like to see it up a little higher than it is right now.

There are a couple of reasons for that. The first reason is, as you know, over the last couple of years we've sold some branches to credit unions and to the National Bank across the country. As a result of that we've lost approximately $300 million in small business loans, and those customers are now being served by somebody else. If you add those small business balances into your equations, the number looks a little better than it is right now, but not at the 30% level.

The primary reason for that reduction, and I'm addressing just the small business piece of this for now, has to do with demand. In 1996 demand for small business operating loans was higher than it is now, and the reason is that other product options are available to small businesses.

• 1630

I can give you two proof points for that.

First, lease receivables over that same period of time have more than doubled, from $8.5 billion to $18.5 billion, a significant increase over the same period of time. Obviously we're not in that business for various reasons.

The second reason has to do with the venture capital market as well. Whereas in 1995 we had no outstanding commitments to small businesses with respect to providing equity financing or mezzanine financing, at this point we have $180 million and there are other providers that have built venture capital businesses as well.

So the mix of financing alternatives has changed and the demand for your straightforward business loans over that five-year period of time for small businesses, in our opinion, has changed dramatically. I think that's driving that change in relationship more than anything else. It's not a focus on the large companies versus taking our eye off the ball on the small ones.

Mr. Tony Ianno: So with your new products, you don't really see much of a change occurring in the numbers, right?

Mr. Frank Techar: We are aggressively trying to grow our small business volumes as fast as possible.

Mr. Tony Ianno: So you put some thought into your new product line?

Mr. Frank Techar: Absolutely.

Mr. Tony Ianno: Do you think it will make a difference?

Mr. Frank Techar: We think it will make a difference. In fact, we're actually seeing a difference. After just a month or so, we are seeing three times as many inquiries with respect to our small business—

Mr. Tony Ianno: So it could be that the way you do business didn't create the demand as compared to the demand not being there. Is that correct?

Mr. Frank Techar: We are trying to address the fact that there's been a shift in demand in the market. We are trying to do everything we can to address the fact that the fundamentals may have changed in the business.

Mr. Tony Ianno: Let me understand. As soon as you introduced these new product lines, there was a shift in demand. Is that a shift in what people need or a shift in mindset only?

Mr. Frank Techar: I think there's been a willingness to consider bank financing versus alternative sources of financing as a result of our program.

Mr. Tony Ianno: So in other words, your new clients will be existing clients that may do lease financing versus increasing demand, which they otherwise would have had before but didn't have a vehicle?

Mr. Frank Techar: That's potentially the case. For some of those customers this may be an alternative to lease financing. For others it may be an alternative to business loans at a different rate. So this is not going to make up the market phenomena.

The Chair: Last question, please, Mr. Ianno.

Mr. Tony Ianno: Yes.

I'm trying to understand the mindset in terms of your last point. Difference in rate as compared to leasing products.... So because you have a slightly better rate, they will have a higher demand? Or is it that the demand was always there, but because your rate has changed, they are coming to you and asking for it? I'm just trying to understand. What if, in my existing business, I always had a demand and I wanted to get the loan from you? You changed the rate, and now I come to you, or have I come to you both times and now I'm getting the loan?

Mr. Frank Techar: We're hoping this is an opportunity for our current customers to expand their business. As I said earlier, we hope this is an opportunity so that in this current market condition, where they would have been on the sideline as a result of what's going on in the economy, we can get them off the sideline.

Mr. Tony Ianno: So this is a catalyst.

Mr. Frank Techar: This is a catalyst to get them off the sideline.

The Chair: Mr. Ianno, I think he's answered it several times in several different ways.

Mr. Tony Ianno: I have no problem with that. May I ask just one more question?

The Chair: No, we have to move on; I apologize.

I just want to clarify one thing. This is the third meeting the committee has held with different banks, and to date every bank has claimed to increase the market share of business with SMEs. Unless the chartered banks have gained relative to other lending institutions—and maybe that's the case—I think the claims suggest that each chartered bank is using a different definition of an SME. Could you give us your definition of an SME?

Mr. Frank Techar: Sure. Small and medium-sized businesses, in our definition, are businesses with revenues of $100 million or less that typically borrow $10 million or less.

• 1635

For purposes of the market share comparison, we're basing our statements on the CBA data, which typically shows business loans from zero to $5 million. The data above $5 million is typically contaminated with corporate business that happens to be at very small numbers. There are corporations borrowing $5 million or $6 million, and that tends to put volatility into the numbers.

So when we're looking at market share, we're looking at the CBA stats from zero to $5 million.

The Chair: Thank you.

I just want to go back to Mr. Volpe's comments. Mr. Techar, you might want to take this back to head office.

We invited the banks to appear on behalf of Bill C-23. Your association chose not to appear, which is fine, but did submit a written letter. We're really quite surprised by the letter we received, on behalf of one of your clients, on the suggestions, because you were invited to appear. At any time, my office is open and the clerk's office is open to make presentations if you have concerns about legislation.

So I would hope you take the message back that we're a little bit offended; that's probably the best word to use.

Mr. Frank Techar: We will take it back, loud and clear. Message heard.

The Chair: But we do appreciate you being here on small business lending and we look forward to seeing you again in the future. I'm quite excited about the trend you started with the lowering of the rates. I'm still waiting for the press announcements from everybody else.

Thank you very much.

We're going to suspend while we change witnesses.

• 1636

• 1639

The Chair: We're going to resume our hearing.

Mr. Ianno.

Mr. Tony Ianno: Madam Chair, I have a procedural question.

In terms of small business, in the last seven to eight years the definition has been very simple, and it's been part of the CBA, that it's a $1 million capacity to borrow, which generally means $10 million in sales. That is what all the banks agreed to, so I think we should stick with that number, not change and allow every bank to say anybody who borrows $100,000 or $5 million to $10 million.

The Chair: Mr. Ianno, we'll have these conversations and discussions once we've met with all the banks to determine where we're at and what the process is in the future. But your point is well taken.

• 1640

Mr. Tony Ianno: Thank you.

The Chair: I'm very pleased now to welcome, from the Scotiabank, Ms. Susan Kennedy-Loewen, vice-president of small business; Mr. Bob Funk, the vice-president of agriculture; Mr. Ron Kester, director of financial planning, Canadian Commercial Banking; and Ms. Mary Webb, senior economist.

I am going to turn it over to you for your opening statements.

Ms. Susan Kennedy-Loewen (Vice-president, Small Business, Scotiabank): Thank you.

Good afternoon, Madam Chair, members of the committee. My name is Susan Kennedy-Loewen. I'm vice-president of small business banking at Scotiabank.

Joining me today is Bob Funk, who is our vice-president of agricultural services; Mary Webb, senior economist; and Ron Kester, director of financial planning.

It's our pleasure to be here today to talk about the strategies and initiatives of Scotiabank towards the small business market, entrepreneurs, professionals and farmers, and to answer your questions.

To start, we would like to define how small business has been defined at Scotiabank; that is, with our small business owners generating $1 million or less in annual sales and generally requiring $250,000 or less in credit needs. They're defined that way because that represents approximately 87% of the market.

We have about 250,000 small business banking customers—650,000 if you include business owners whose personal needs are met at Scotiabank. Year over year, we've increased our number of customers by approximately 13%.

Loans outstanding to this market totalled $3 billion, deposits $6 billion; $4.5 billion has been authorized to the small business market. That's an increase in total of about 9.5% year over year.

Throughout September and October this year, I was privileged to attend six conferences across the country for our small business bankers, reconfirming the bank's commitment to the small business owners, and to learn which tools and what support our bankers need to be able to deliver effectively to this market.

We've restructured our delivery network, re-focusing our offers and concentrating even more on how we increase the value of what we bring to this key client group. In particular, our strategic focus for small business is to provide: a relationship-focused, customer-centric delivery through our branches throughout Canada; one point of contact for all their banking needs, both business and personal; simple and easy-to-understand products and services; and greater access to financing.

Let me briefly describe some of the initiatives we have undertaken. To start, Scotia service for business is about our bank's overreaching philosophy of how to deliver to the small business customer. To ensure that small business owners have one key point of contact at Scotiabank, our branch managers are focused on championing small business in over 1,000 branches. In addition to that, over 500 small business account managers across the country have been fully dedicated to the small business customer.

In total, that's 1,500 personal, direct-access points at grassroots in our communities for small business owners—a group of professionals with an average of 17 years of Scotiabank experience each. This restructuring is geared to allow us to reduce account manager turnover and lever the experience of bankers in their relationships with business owners.

Our small business bankers are supported by a dedicated small business resource centre, staffed with experts in small business. They have one focus, to help our bankers in the field deliver outstanding customer service to the business customer.

As requested by our customers, we've taken a packaged approach to offering our best products and services to the small business market. Through the ScotiaOne account plan for business, we are the first to package a business account with overdraft protection, a personal account with overdraft protection, and a prime-rate-based business credit card, all for the price of the business account. The package confirms Scotiabank's commitment to recognize our small business customers holistically, and to meet both their business and their personal needs.

To lower the cost of borrowing, we offer the ability for the owners to do all their business financing through our Scotia Line Visa card for business—a credit card that provides access to prime-based lines of credit. Our customers can also do their retail and business borrowings through our Scotia Total Equity Plan, which allows them to leverage the equity in their home for interest rates as low as prime for both their business and their personal requirements.

These products are not promotions or short-term offers. They are products that were designed to provide our customers with the comfort and the value of low-cost borrowing over the long term.

Small business wants easier access to financing. We've introduced ScotiaOne Loan Source for business.

• 1645

In an agreement with National Leasing, a Canadian leasing company based in Winnipeg, Business Custom Capital, a Canadian subsidiary to Wells Fargo, and Creditwave Corporation, a vibrant and growing small business in Canada, we're the first to provide comprehensive, one-stop shopping for small business financing.

The Loan Source is available throughout our 1,000-plus branches in Canada. Through the program, should Scotiabank not be in the position to approve a business loan after we have exhausted all efforts, we will, with the customer's consent, send the application to an alternate lender best able to meet the customer's need. Most loan approvals can be made within two business days of receiving the application. And Scotiabank maintains the relationship with the customer by continuing to handle the day-to-day business and personal banking needs.

I'm also pleased to announce to you today that, starting in January, Scotiabank will start a pilot with the business development corporation as our fourth alternate financing source in the lending store. We believe the business development corporation provides a strong complementary offer to the existing lenders. It will enhance the service for our customers. We look forward to working very closely with them on this.

We continue to seek other financing companies that will help to provide value-add to the small business client. The Loan Source is about bringing together the best in one place, experts in small business financing to help small business owners get quick access to the money they need from the best industry providers. All of these efforts are aligned with what we have been hearing from our customers. They want solutions to their financing needs and the market's best expertise to support them.

In fact, we're the leading bank in establishing alliances with national associations who represent the interests of hundreds of thousands of business owners. We have exclusive arrangements with three of the top associations—the Canadian Federation of Independent Business, the Retail Council of Canada, and the Canadian Professional Sales Association. In addition to that, we enjoy strong relationships with nine professional alliances—doctors, dentists, and lawyers.

In the spring of 2001, we further demonstrated our commitment to provide end-to-end service by finalizing an agreement with United Grain Growers. We can better meet the needs of over 15,000 UGG customers in western Canada. Bob Funk will be happy to talk about this.

In summary, we're committed to serving the small business market. We have a great team of small business account managers and retail branch managers. We know these are challenging times for small business. We believe the best way to provide support to our customers is through relationship management, empowering our small business bankers who deal with their day-to-day needs and deal with their customers on a one-on-one basis. They provide the flexibility and the continuity our customers need.

I've included in the packages we've distributed a letter from John Young, who leads up our domestic branch network, that was sent out reinforcing the importance of supporting our small business customers through the difficult times.

Small business owners are looking for a bank that is optimistic about small business and dedicated to relationships. We believe we're that bank. We're relationship-focused. We offer simple, easy-to-use products and services. We offer effective access to financing. We've established key alliances with leading small business groups. Together we think it is a strong formula to continue to meet the needs of small business and help us to grow to understand the market better.

Thank you. We look forward to your questions.

The Chair: Thank you very much.

I'm going to turn it over to Mr. Penson for questions.

Mr. Charlie Penson: Thank you.

I'd like to welcome Scotiabank here as well.

Concerning this downturn we're facing in the economy, you were here when Mr. O'Neill was saying he thought it may be short-lived. I guess I'd ask for your input on that as well, Ms. Webb.

The question I have is, given that it's a different situation from that of the last downturn in the economy—where there was high inflation and high interest rates—if it is a short-term dip, it seems to me all the more important that you stick by your customers, especially in the small and medium-sized enterprise side, to see them through the downturn, because it may not be a long period of time. I'd like your comments on that.

I'll just get my questions out of the way, and then you can work on them. The other question I have is, given the definition of your small and medium-sized businesses, what portion of the amount of credit you have available to small and medium-sized business would be taken up by agriculture?

The last question would be, what portion of your small and medium-size loans would be supplemented or used with the small business loans guarantee act that the federal government is involved with? We'll start from there.

• 1650

Ms. Susan Kennedy-Loewen: Mary, did you want to start?

The Chair: Ms. Webb.

Ms. Mary Webb (Senior Economist, Scotiabank): We at Scotiabank do believe the Canadian economy is going to remain relatively weak, not only in the fourth quarter but possibly also in the first quarter. We're concerned that the Canadian economy is lagging the U.S. economy going into this downturn, that there is a risk in the first quarter that we'll still have significant corporate consolidation to work through here in Canada, and that there will have to be further inventory accumulation.

With that in mind, we see really minimal growth in the first half of 2002 but starting to pick up by the summer. Again, we're looking to the U.S. economy with its tremendous fiscal stimulus as well as a monetary easing to be the engine of growth that would benefit Canada as well.

Like Mr. O'Neill, I think this downturn is going to be quite moderate, not only because of low inflation and low interest rates but because Canadian industry is far better positioned now than it was in the early 1990s, as are our governments in Canada, both provincial and federal. Are we willing to stay with our customers? Absolutely. But that's not only because we look for this downturn to be relatively short; it's because we've seen so many of our smaller and mid-sized customers put a lot of investment into becoming very competitive in their respective markets, and we believe they can remain so.

The global marketplace that Canada is in is going to remain very competitive, but we have a number of industries here that are very able to meet that challenge.

Mr. Charlie Penson: Thank you.

The Chair: Ms. Kennedy-Loewen.

Ms. Susan Kennedy-Loewen: To answer your question with respect to how the small business or small and medium enterprise business reflects to the overall portfolio, I'll break this down in two ways, appreciating the fact that small business is defined in several different ways. When we talk about small business being $1 million and under in revenue, it represents about 90% of our customers.

If we talk about it from small and medium enterprise, that would be the customers in the $5 million to $10 million and under in annual revenues, and represents about 94% of the customer base we have.

If we think about it in those terms, we know that small and medium enterprise business represents approximately 16% of the total outstanding.

Mr. Charlie Penson: But my question was, what portion out of that sector is agriculture? As well, how much of the small business loan guarantees the federal government has make up your loans?

Ms. Susan Kennedy-Loewen: Our book of business on agriculture—and I was just confirming it with our agriculture specialist—is approximately 20% of the small and medium enterprise book.

Mr. Charlie Penson: Okay.

Ms. Susan Kennedy-Loewen: And the government guarantee is approximately 10% of the small and medium enterprise business.

Mr. Charlie Penson: So if a small business were to come to you and ask for a loan, how do you decide whether you're going to use the loan guarantee through the Small Business Loans Act as opposed to making that loan yourselves?

Ms. Susan Kennedy-Loewen: When Scotiabank reviews the application for credit for a small business, we have it accommodated through a central adjudication process. By that, I mean a team of people in a central location who are specifically small business experts. In that process, they review the application to determine if there is any way that Scotiabank can approve it on their own book and on their own basis; then it would be undertaken in that fashion.

In the event that perhaps there's a component that doesn't fit the guidelines of the bank—perhaps they have not sufficient or any down payment into a term loan purchase or a capital purchase—we would seek opportunities through the government guaranteed program to help us be able to provide the financing for that customer.

Items that come to mind are when the cashflow of the business needs a longer term than we would be able to provide under our standard program. It gives us the opportunity to establish a cashflow that would be effective for the business and provide greatest opportunity for their success. We would ensure that was reviewed as a component of all of the opportunities in front of us.

Mr. Charlie Penson: Would it also include higher-risk loans that you might put in that category?

• 1655

Ms. Susan Kennedy-Loewen: To respond to that question, if we were to include loans that were start-up industries, where perhaps there was not a performance history of the business that we could get an understanding of, if it was someone who did not have a personal credit history that we could understand or recognize as reflecting their ability to repay, we would consider those to be higher risk and, yes, we would absolutely consider it for those as well.

Mr. Charlie Penson: Would you monitor those loans as to which has the best success pattern?

Ms. Susan Kennedy-Loewen: I believe we are able to extract, by industry, through our standard industrial codes, the loans that are provided with a government guarantee and then the underlying delinquency or activity. It's not something we have undertaken. We have not found a need at this point, because there has not been a negative trend to give us reason to dig deeply into that. But absolutely, it is information we have and we could make available, if you would like to see it.

Mr. Charlie Penson: I would like to see that, if possible.

Ms. Susan Kennedy-Loewen: I'd be happy to do that.

Mr. Charlie Penson: Okay. They are my questions.

The Chair: Thank you very much.

Mr. Lastewka, please.

Mr. Walt Lastewka: Thank you, Madam Chair.

I'm going to go back to my line of questioning, which will be no surprise to anybody. First, let me congratulate you on your new position and what you've been doing in the small business sector. I thought the advertising for your new program seemed to be quite effective.

The area I have been questioning and continue to question is around the underlying problems of accounts receivable, as you may have heard when I questioned the Bank of Montreal.

I'm not sure of the guidance that your account executives are giving to your small businesses. I know I'm having some discussions in the Niagara area with a number of small businesses and the financial people, but there seems to be a lack of good guidance to small businesses—and I'm talking of small businesses as those with 50 and under employees—not only on their systems of accounts receivable, and their flags for overdue accounts, but also the approaches required to be used in order to minimize their long-outstanding accounts.

I know that in some cases account representatives have been very quick to say, “Your account receivables are way overdue and you should bring them in line”, but the next question they're asked is, “How do you think I should do that?” There's very little guidance. So my question to you is, what kind of assistance do your account executives give, or what kind of programs do you have, in order to assist those small business people who hate collecting on their accounts?

Ms. Susan Kennedy-Loewen: I think that is an excellent question. We often say cashflow is king when it comes to small business, because collection of accounts receivable and understanding timing of payables are very key in the financial success of a business. It's important for us, from a relationship perspective, to start that discussion well before there's a problem. It's about understanding the small business, it's about understanding who their customers are and how their customers plan to pay them, and how they plan to collect it. That's part of discussions we undertake on a day-by-day basis with our customers.

There are also processes in place where the bank can assist the customer in understanding the creditworthiness of their customer, by providing credit ratings or suggesting ways for them to get credit information about their potential customers. In that way they know they have a customer who can succeed and help their business to succeed.

We start the conversations early, and I think that's very important. We also encourage our bankers to seek ways to help them understand. It's always wonderful to point out a problem to someone...and not have the solution for it. It's about going deeper, and understanding options, solutions, and recommendations that we can give.

Those solutions may include using the personal experience of our branch managers, or our account managers in small business, and how they undertake their personal collection activities, because they can use similar types of processes with the small business owner. It's also about using our resource centre for business to help them understand who in their local communities may be able to help that business owner with collection of their receivables.

• 1700

So there are many different options and alternatives available. We recognize the importance of it. At the same time, we also recognize the importance of helping them manage their trade payables when they pay.

It's not a conversation we hope to have, and we don't enjoy having it when the problem arises, but if we have a really good relationship with our customers, they'll engage in conversations about how to manage all aspects of the business effectively so that they spend more time on the business and less time on those financial attributes.

Mr. Walt Lastewka: Do you have any programs in place today to instruct your account executives and assist small business?

Ms. Susan Kennedy-Loewen: We have some internal training processes that include accounts receivable collections. We also have training in our business resource centre to help branch managers or account managers for small business who may have a skill gap in being able to deliver that information. So training would happen almost instantaneously on that call or that conversation.

Mr. Walt Lastewka: You know I'm going to check up on that.

Ms. Susan Kennedy-Loewen: Certainly, you're welcome to check up on it.

There's one more that we've engaged in, a program called “vubiz”, which is available for the small business owner. It's an online program with approximately five modules, each two hours in length. Each of those modules works through different aspects of managing a business. It has a very specific, integrated component that deals with account receivables.

Mr. Walt Lastewka: I want to switch over now.

Many times when the account receivables go up too high, companies go into bankruptcy. You know the numbers about how many people in small business go out of business and how many new ones start each year. We net around 20,000.

From your experiences at Scotiabank, what would you say are the main causes for small businesses going out of business? What do you think we should be looking at to try to assist?

Ms. Susan Kennedy-Loewen: It's a two-pronged question. I'll respond from the bank approach.

Mary, if you wouldn't mind, you could join in with an economic discussion as well.

Bankruptcy can occur for many reasons, both inside and outside of that small business owner's control. We often see small business owners who spend, on average, I believe, over 50 hours a week working at the business. So it certainly isn't lack of dedication or drive to be successful.

At times, small business owners have gaps in their skills. They're very good at certain things, but there are areas where a support team surrounding them could provide the benefit of filling in those gaps.

I'm thinking of some customers I had who put an informal team around them, including their accountant, their banker, and a mentor in the community who was a successful business owner to help them fill those areas of skill gaps.

Oftentimes, small business owners try to accomplish everything by themselves. Help is very important—guidance, direction, and mentorship. So at times that can be the answer.

At other times, it can be completely outside their control. It could be that their major customer is no longer in business. It isn't a lack of due diligence in being a good business, it's just something out of their control.

The Chair: Ms. Webb.

Ms. Mary Webb: Madam Chair, there are a number of factors particularly at play at the current time. We have an extremely rapid pace of change in terms of product and market demand. We have very competitive markets. We have a number of global opportunities, but they're very complex markets to serve.

One of the key advantages that small business has now relative to a decade ago is the technology. High tech has been a tremendous benefit to small business, because it closes the gap between their ability to react with suppliers and customers relative to a large corporation. Not only do we look at low interest rates, but we also look at a declining tax burden, with six out of the ten provinces lowering their corporate rates since 1999.

But the fundamental answer goes back to Susan's point, that with the pace of change, with the importance of export markets, and growing those export markets as well as domestic markets, the broader the framework of support for small business, the more beneficial it is.

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

Mr. Strahl, please.

Mr. Chuck Strahl: Thank you.

Thank you for coming before the committee today. I have just a couple of questions.

• 1705

I think you were in the crowd when you heard me mention the name—and not in vain—of the Bank of Nova Scotia, that they said they were not going to follow CIBC's lead in charging for ABMs off-site. Is that the position of the bank?

Ms. Susan Kennedy-Loewen: That's correct.

Mr. Chuck Strahl: Oh, that's so nice to hear. Thank you for that.

Ms. Susan Kennedy-Loewen: How about “That's absolutely correct”?

Mr. Chuck Strahl: That's good, because the Bank of Nova Scotia had record profits today. Of course, I'm not against profit. Profit is okay, but it's nice, when you have a profit like that, that you aren't hiking a fee, or at least that one. So you're to be congratulated on that.

On the small business credit card rates, what kind of rates would a small business person get? I see it's in your literature there. Does it vary, depending on the business?

Ms. Susan Kennedy-Loewen: The interest rates on the ScotiaLine Visa card for business are prime-based rates, and they can vary anywhere from prime to prime plus 4.5%.

We did a study on our way in this morning to determine exactly what rates we are at right now for those customers who have the ScotiaLine Visa card for business. Just to review the numbers—and I think I have them in my head—25% of the total portfolio of ScotiaLine Visa for business is carried at an interest rate between prime or prime plus 2%. What that means is that at today's prime of 4%, 27% of the customers are paying between 4% and 6% interest rate today. We know that 25% of the balances outstanding on those credit cards today are at prime rate of interest, and that represents about 8% of the total portfolio.

Mr. Chuck Strahl: Okay.

Now, when I look at the rates and the different programs, it's difficult to know for sure which program to take. It's like personal banking. You go in and one thing is better; another one looks a little more difficult. Do you routinely, with your small business experts, advise your clients as their business grows that they should switch banking packages? Is that part of what you do?

Ms. Susan Kennedy-Loewen: Absolutely. In fact, we've just recently forwarded a list of our customers of business accounts, because these customers may have an opportunity to actually save money by changing and switching into a different program. We've sent a list out to all the branches, and they will actively undertake to contact those customers and bring them into the bank or discuss with them on the phone the opportunity for them to have something that's better suited to their needs.

The primary reason for that is that small business is continually changing. There are small businesses that want to grow bigger, and if we don't recognize and understand the opportunity as the customer changes, and adapt with that customer, then we're not providing the outstanding service we're looking for. So it's a commitment to the new program.

Mr. Chuck Strahl: Again, I think it is important, especially for small businesses, that the banks take that initiative, because they can't crunch the numbers. They don't have the time for it. They don't have the computers for it, perhaps. And it is puzzling, when you go through the array of services. So when you can do that, it's in your interest, obviously, but also in the interest of the SMEs.

Do you keep statistics on the number of small business people who are women who deal with your bank? Do you keep that as a category, just like agriculture?

Ms. Susan Kennedy-Loewen: From the numbers we are able to maintain, we know that 52% of small businesses are owned or co-owned by women. Our statistical data in the bank does not clarify for us when we have a small business whether that business is owned or co-owned by a woman versus a man. We just don't break it down into those levels at this particular point.

What we do know from internal surveys we have is the level of satisfaction our customers are getting from their primary banker, and women over the past year are starting to feel we are providing better and more effective service. I'm not saying it's the best. I'm saying it's getting better, and it's an area we recognize we want to work and focus on, because it's an incredibly important part of the market.

Mr. Chuck Strahl: I agree with that, and I'm interested because of the success women have in starting small businesses, which is due in part to the fact that, in general, I think we macho, moose-killing kinds of guys probably borrow more money than we should and don't do enough research to get into the business to begin with.

• 1710

But that's an interesting statistic. It's hard to keep it, because businesses are often named separately, but I'm sure that's the case.

There are a couple of other quick things. One is fees for use on Interac debit cards. There was a newspaper article recently in the Globe and Mail, and one in the Hamilton Spectator and so on, saying there's a growing trend for businesses to charge fees for use of Interac cards. The fee that might be charged when you buy something, is that driven by the store or the retailer, or by the banks?

Ms. Susan Kennedy-Loewen: If I understand the question, you're asking where the fee for debit cards is derived from, or what is the initial source of the fee.

Mr. Chuck Strahl: Right.

Ms. Susan Kennedy-Loewen: That comes from the bank for the processing costs. There are several options available for small business, because it's becoming a bigger part of especially the retail markets needs. There are options available through CFIB and through the Retail Council to ensure that we can provide optimum rates to those individuals, discounted rates, because of total volumes that come in through those associations. That's one of the reasons we find that the connection with the association has been so effective for the small business owner. By total volume, we're able to discount and reduce pricing.

So it's about trying to maintain low cost from the starting point, from the get-go, and then driving that cost lower by looking at the total volume. That's what helps keep our costs down as well. Obviously it's an efficiency factor.

Mr. Chuck Strahl: Do you negotiate with small businesses who use that service? Is it a different contract with every business, or how do you...?

Ms. Susan Kennedy-Loewen: No, it's not, because that would take more time than the small business owner would want to spend on a debit card fee. It's a flat cost to them that the CFIB association or the Retail Council association has negotiated so that they're able to pass that on to all members of their association.

Mr. Chuck Strahl: The last quick question is—

The Chair: Very briefly.

Mr. Chuck Strahl: —do you think advertising your ATM charges on the machines is a good idea, so that when people say they're going to take $100 out, it reminds them that this is going to cost them $1.50? Is that a good idea? Some machines do that.

Ms. Susan Kennedy-Loewen: I think we have a commitment to full disclosure, if a fee is going to be charged to the customer. When I think about Scotiabank cards, Scotiabank accounts, absolutely, any kind of full disclosure we can give our customers on what their fees are going to be is a good thing.

Mr. Chuck Strahl: Thanks very much.

The Chair: Thank you.

Mr. Ianno.

Mr. Tony Ianno: Thank you, Chair, and thank you to the witnesses for coming.

In terms of numbers, I'm hoping that Scotiabank will improve and will work hard towards achieving better numbers. Unfortunately, among the five or six banks, Scotiabank numbers are 15.92% as compared with the other banks, which lead from 26.63%, at the Royal Bank, all the way down. The only bank that's below you is the Hongkong Bank, which is almost getting out of the small business market, from what I can tell, although they're somewhat there.

In terms of small business lending, at December 31, 1995, it was $5.23 billion; at June 30, it went up to $5.77 billion, an increase of $500 million roughly. But large business lending went from $20 billion to $30 billion. I guess you now have a centralized system in terms of credit checking and all your systems of lending to small business.

Do you see any improvement in your numbers? Are you doing anything that will actually improve how much you lend to small business, aside from what you've stated?

Ms. Susan Kennedy-Loewen: The first thing I think we want to add with regard to the comments on what is changing, and what are the leading indicators telling us we're doing the right thing, is that 87% of the customers Scotiabank surveyed in June said they want a relationship bank, and we believe the relationship bank strategy is number one and key to the customer.

When we look at what we have undertaken in the past three quarters, we believe this strategy also shows the leading indicators are going to start to move those numbers up and forward.

• 1715

What have we undertaken to do that? After the September 11 tragedy, we went out as recently as October and did a pre-approval offer for our small business customers on the ScotiaLine Visa card, because it's a low rate of interest and easy access, and our customers provided a very favourable response to that.

Mr. Tony Ianno: So the numbers will increase because of all that you've just stated?

Ms. Susan Kennedy-Loewen: Well, because the customers are saying they need access to financing and they have taken up the credit offer, we're hopeful that means they're going to use that card.

We also are seeing that the process we undertook with the United Grain Growers has introduced an additional $149 million worth of small business outstandings into our portfolio. They'll show up in the October 31 numbers, and that will be a specific, credible, and confirmed commitment that we are moving to grow those numbers forward. Those are, I believe, 15,000 new customers to Scotiabank as well, and in addition to that, we've seen our numbers grow in customers in the zero to $50,000 range, the small business customer who needs access to quick financing through overdraft protection, and we're also starting to see the utilization of that overdraft increase.

Mr. Tony Ianno: So all these measures then will improve you from being the worst small business lender of your colleagues at the CBA to eventually overtake the TD, is it, at 18.7%?

Ms. Susan Kennedy-Loewen: I'm very much looking forward to the October results that will start to prove out that our overall market share is moving forward.

Mr. Tony Ianno: So basically that $177 million from the United Grain Growers, and hopefully some additional ones, which may—

Ms. Susan Kennedy-Loewen: There is additional, besides that, that we know from unpublished numbers with CBA.

Mr. Tony Ianno: So if it's a $250 million increase, that might increase by what percentage, 0.01%, 0.10%, or 1%?

Ms. Susan Kennedy-Loewen: I'm going to quote a market share on the $1 million and under in annual revenues, but we expect to see that move forward, because the total number of customers that are growing is 15%, year over year. We expect that number to move about 60 basis points.

Mr. Tony Ianno: So that's 60 basis points on your numbers.

Ms. Susan Kennedy-Loewen: Yes.

Mr. Tony Ianno: You know the definition that we at this committee established on SMEs with the banks, the $1 million borrowing capacity and $10 million in sales.

Ms. Susan Kennedy-Loewen: Yes.

Mr. Tony Ianno: So when you discuss that you define small business, you're saying the segment you want to concentrate on in that portfolio is the smaller segment, right?

Ms. Susan Kennedy-Loewen: What I'm alluding to in that component is that the strategic direction of our $1 million and under—that is, how we can focus on delivering fast, easy, and simple processes and products for those customers—fits well into the market needs of the $1 million and under in annual sales.

As we move beyond that, what we find with our customers is that they need more complex understanding of financial statements, more complex understanding of cashflow from our bankers in the field. So we've tried to divide it in a way that our banker in the field is the right banker in front of the right customer.

Mr. Tony Ianno: Is your banker in the field the one who determines the creditability?

Ms. Susan Kennedy-Loewen: In Scotiabank, all our branches are empowered with the decisions on our small business lending, up to $250,000—and in fact, in some cases, up to $300,000.

Mr. Tony Ianno: So they don't have to send it to your central agency?

Ms. Susan Kennedy-Loewen: They send it to the central agency to save time. The goal of the central agency is to be able to provide responses to our customers quickly and efficiently. What it has provided us with, from the trends we've seen over the past three years, is more approvals to our customers than in the past.

Mr. Tony Ianno: I see, but not an increase in the amount that gets approved in your overall portfolio, because you're relatively the same. Correct?

Ms. Susan Kennedy-Loewen: What we're seeing is that it is approving authorizations, and what the customer utilizes does change, if we break that down by quarter. Overall, because—

Mr. Tony Ianno: It's not the outstandings that count; it's the authorizations.

Ms. Susan Kennedy-Loewen: It's both, actually, but we know what our authorizations are. We can't entirely predict how much of that authorization the customer is going to use.

So as we look at that, we also recognize that as we move forward we need to make sure the credit is available for them to utilize. That's why authorizations are a good leading indicator to us, and then we watch the authorizations and how they correlate to our outstandings, because market share, as I'm hearing more often, is measured by each bank differently, by outstandings, by authorizations, by number of customers, by total dollars.

The Chair: Last question, please, Mr. Ianno.

Mr. Tony Ianno: There's one that has been constant, unfortunately. We'd like to see the Bank of Nova Scotia do much better, because your chairman would like to see you do much better, but unfortunately the numbers don't change. So I'm hoping, and I'm wishing you lots of luck on achieving that, because we don't see it, unfortunately.

• 1720

Ms. Susan Kennedy-Loewen: I am appreciative of your support. I think our strategy is right, and I do believe you will see our numbers move. The goal is to move our market share forward, obviously.

Mr. Tony Ianno: This is a related question. How long have you been in this position now?

Ms. Susan Kennedy-Loewen: I'm a twenty-year banker. I've been in this position for a year and a half.

Mr. Tony Ianno: So it took you a while to implement new programs that will increase the numbers, correct? And now you're going to see the benefits of them, aren't you?

Ms. Susan Kennedy-Loewen: It's reinforcing our strategy, implementing new initiatives to help support that strategy, and now our goal is to look for the fruits of the labour.

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

[Translation]

Mr. Bergeron, please.

Mr. Stéphane Bergeron: Thank you, Madam Chair.

Thank you, ladies and gentlemen, to have accepted our invitation. Thank you for your presentation and for the answers that you give to our questions.

I have to say, after the question that was asked by Mr. Strahl, that it is rather refreshing to see women get involved in a environment which traditionally was, rightly or wrongly, reserved for men. It is interesting to see that more women get involved in the banking business.

When I hear the different presentations, and yours in particular, I'm quite pleased to see that all financial institutions have tried, at least for the small and medium businesses, to set up a special niche. What you seem particularly proud of, is the creation of a one-stop window for all the financing needs of small and medium businesses.

I was reading as well your document. On page 3, you said that you offer “a prime rate-based business credit card”. On page 4, you say:

...through a Scotia line Visa for business, a credit card that provides access to a prime-based line of credit.

My question is quite simple. What is this prime rate? I would imagine that it isn't the prime rate of the Bank of Canada. It must be the prime rate of the Scotia Bank. What is it?

[English]

Ms. Susan Kennedy-Loewen: ScotiaLine Visa card for businesses is a prime-based credit card. And when we say prime-based we're talking about Scotiabank prime, and Scotiabank prime today is at 4%. By example, the customers that would be incurring a rate of prime plus 2% today would be charged a rate of 6% on that ScotiaLine Visa card for business.

We've established the rates at prime-based because small business needs access to the funds easily and simply. And whether it's a line of credit attached to their account or it's a credit card, either process needs to provide low-cost access to funds for the customer.

So if we consider the whole ScotiaLine Visa card for business, as I mentioned earlier, the customer can be charged anywhere from prime to prime plus 4.5%. In today's rate environment, where our Scotiabank prime is 4%, that means our customers that have a ScotiaLine Visa card for business are paying anywhere from 4% to 8.5%. And if we see a continued decline in the bank rate and a decline in Scotiabank's prime rate, our customer would have an immediate decline in their ScotiaLine Visa card for business interest rate.

Mr. Chuck Strahl: Don't look at me.

[Translation]

Mr. Stéphane Bergeron: Yes, of course.

[English]

Ms. Susan Kennedy-Loewen: In addition, Madam Chairman, the card also does not carry an annual fee. Some credit cards do have an annual fee attached to them; the ScotiaLine Visa does not have an annual fee attached.

[Translation]

Mr. Stéphane Bergeron: I agree. Now, since you are our last group of witnesses this afternoon—in fact, you are the last group of witnesses that the committee will hear before the budget presentation next Monday—I would like to ask you the following question which is quite simple. If you had to formulate some wishes to the members of the committee on the way that the government could help small and medium businesses, what type of recommendations would you make?

• 1725

[English]

Ms. Susan Kennedy-Loewen: First and foremost, Madam Chair, I would encourage the government guarantee program to continue. I think it's a tremendous opportunity for us to be able to look at options to provide financing across all industries, all businesses, at all levels, whether they are start-up, mature, or growing.

I would encourage the documentation of the government guaranteed loans to be simplified. We've worked very hard and we must continue to work very hard to continually reduce paperwork for small business. They don't like it. I haven't really met a banker who loves it all that much, either. The simplification of documentation provides easier access.

The other thing that I believe is very important and we are now working toward at Scotiabank is to be able to provide quicker and easier information on all the government programs available for small business, so that small business understands we're working towards their benefit and their success, because that's good for the Canadian economy.

The Chair: Mr. Lastewka.

Mr. Walt Lastewka: In addition to what you just said concerning paperwork, my study of all the banks and financial institutions, concerning the report on business plans...vary from 11 pages up to 65. I've forgotten what exactly Scotiabank's were, but it was much more than 11.

Are you doing the same thing, to try to reduce the business plan application to perhaps fewer than 11 pages?

Ms. Susan Kennedy-Loewen: The project that is well under way right now is to completely revise our existing business plan writer. We also know that we don't just need to revise the business plan writer; we also need to update it to reflect both the business and the personal needs of the business owner. Oftentimes we have in the past dealt with business uniquely and separately from the personal financial needs of the business owner.

What we know is that they also have personal retirement goals. They would like to see their children have an education. They may want to save for their education or future opportunities. We haven't looked at that holistically. We need to update our financial planner to deal with both of those. That project is currently under way.

Mr. Walt Lastewka: My encouragement to the Canadian Bankers Association is that all the banks get together and make a simple form that could be used for all banks, rather than having the twists for every bank. A business plan is a business plan. Why couldn't we make it nice and simple such that a business person could make one format and it would be applicable to any bank that he or she went to?

Can I have your comments on that?

Ms. Susan Kennedy-Loewen: I think that's a very good suggestion. I would like to take that away with me.

Mr. Walt Lastewka: Thank you.

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

Mr. Penson.

Mr. Charlie Penson: Ms. Kennedy-Loewen, do you see the federal business bank as a competitor?

Ms. Susan Kennedy-Loewen: I'm sorry, are you referring to the business development...?

Mr. Charlie Penson: Yes. In other words, are you in competition with them for this business that we're talking about today?

Ms. Susan Kennedy-Loewen: No, I think the business development corporation is a complementary service to Scotiabank. I think it's a complementary service to all banks. That's why we believe it adds great value in our ScotiaOne Loan Source for business.

There is a tremendous opportunity for us to grow beyond the existing suite of products and services that Scotiabank delivers to small business. BDC has a very strong consultative role, perhaps even much more aggressive and closer tied to business than the bank.

Often in my personal history with Scotiabank, most of it in the branch, I have been involved with conversations with BDC, myself, and the customer sitting in my office talking about how BDC can respond to the customer's needs, about how we add the value. It's a project that works very much in complement.

Mr. Charlie Penson: Would you work with the business bank in loans to a customer? Would you supplement them or would they supplement you?

Ms. Susan Kennedy-Loewen: We have oftentimes held an operating line to a customer where they would hold a term loan. Or we may have the business depositing accounts, the merchant Visa, the debit card, and they would hold the term loan. So, yes, that does happen.

Mr. Charlie Penson: But wouldn't it be in much the same manner as the Small Business Loans Act that we talked of a little while ago, that essentially they are taking the higher risk?

Ms. Susan Kennedy-Loewen: I think there are other opportunities where BDC has provided additional value beyond just the government-guaranteed loan process. Equity, patient capital—there are other components of what they offer that are certainly value-add to growing businesses and to start-up businesses as well.

• 1730

Mr. Charlie Penson: If something happened and the Government of Canada decided to discontinue that service, would your bank be able to offer similar services, or to service that need, in other words?

Ms. Susan Kennedy-Loewen: There are components of what they offer that we have in a similar fashion, if we're talking about the type of product or service. The customer they lend to...? In all honesty, I think it would be a detriment to the small business community if this happened.

Mr. Charlie Penson: Businesses using them would not be able to find services with the chartered banks out there in the banking community today. That's what you're saying.

Ms. Susan Kennedy-Loewen: Absolutely, very possibly. As I say, there have been many occasions where I have actually referred customers to BDC because they were able to accommodate a request for financing when we were not able to. I think it's just a great partnership.

Mr. Charlie Penson: Yes, I understand this, but it seems to me the government may be taking the bigger part of the risk here. That's what I'm getting at.

Ms. Susan Kennedy-Loewen: I'm not sure I can respond effectively to this question, just because of my knowledge of the risk portfolio BDC takes on. I can certainly speak to Scotiabank's risk and how we can manage our portfolio. There will be a group of customers coming to Scotiabank looking for financing who we will not be able to assist. I think this is true for all financial institutions. We need to ensure that we maintain a full sweep across the industry, and BDC does provide this service.

Mr. Charlie Penson: Okay.

The Chair: Thank you, Mr. Penson.

[Translation]

Mr. Bergeron, do you have another question?

Mr. Stéphane Bergeron: A very short one, Madam Chair.

Ms. Kennedy-Loewen, I am a bit confused, as you noticed, by the answer you gave me about interest rates. I only want to ask you to explain your answer. When you talk about a credit rate on business credit cards that matches the prime rate plus two or plus four, you talk about the rate which is granted to the best customers of the Scotia Bank, is that right? Am I wrong?

[English]

Ms. Susan Kennedy-Loewen: Madam Chair, that is the correct answer. We are talking about Scotiabank's prime rate, which is the rate of interest we would provide to our best customers. Currently it's 4%.

When we say prime plus 2%, it means this small business customer on a ScotiaLine Visa card for business would be charged 6% per annum.

[Translation]

Mr. Stéphane Bergeron: Take the case of a customer who is not a well known customer, nor a long term customer of the Scotia Bank. What would be the rate you could grant him on his credit card today?

[English]

Ms. Susan Kennedy-Loewen: The maximum rate a customer would incur on a ScotiaLine Visa card for business would be prime plus 4.5%. This means today such customers would be charged a rate of 8.5%.

[Translation]

Mr. Stéphane Bergeron: Thank you very much.

[English]

Ms. Susan Kennedy-Loewen: You're welcome.

The Chair: Thank you very much.

I have one question for you, Mr. Funk, and I'm not sure if you can answer it at this stage.

With regard to the agricultural industry, are you more apt to find yourself lending to one sector over the others, or is it quite varied?

Mr. Bob Funk (Vice-President, Agriculture, Scotiabank): Our portfolio is relatively well distributed. It would depend on where we are in the country. If we're in the Fraser Valley, for example, we'd have a little bit more in the greenhouse business. If we're in the prairies, then we would have more beef cattle.

The Chair: Are you finding more challenges in one sector versus another in agriculture, or is it pretty much the same across the board?

Mr. Bob Funk: There are a couple of things causing us some extra work at this time, one of which is the countervail initiative that has been taken against the hothouse industry. Our response in respect to those customers has been to acknowledge that this is going on. We know the issue is not yet resolved. They have until February, early date, or April, latter date, to complete the determination of what the tariff will be, if any.

In the meantime we are assuring our customers that we can see them through, because there are some issues with customers around what they would wish to do in their businesses that depend on what the level of tariff turns out to be.

The Chair: In other words, you're trying to accommodate customers through difficult times in all the agricultural sectors you represent. Is this correct? Is that a fair statement?

• 1735

Mr. Bob Funk: Yes, from the standpoint of special initiatives causing us problems right now. We're talking about the U.S. Department of Commerce initiative.

The Chair: I'm very well familiar with this. I have many, many greenhouses in my area.

Mr. Bob Funk: The cattle industry, for example, operates within a cycle. Over the course of time we have established a policy package around this industry that acknowledges, first off, the existence of this cycle before we do any lending, and that we will stay in the industry through the cycle. So we have tried to deal both with unique and specific issues that come up now, and to position ourselves in advance as well as we can to acknowledge that, when we're going to do business in a cyclical industry, we don't come in and go out.

The Chair: Just very quickly, the grains and oilseeds sector has entered a very strange cycle—I'm not sure you could even call it a normal cycle—since 1996 and the introduction of the U.S. Farm Bill.

I'm not really sure if the banks are recognizing that this has been a long, strange cycle. How are we dealing with it? Because it's been having quite a dramatic effect in the last couple of years.

Mr. Bob Funk: There are some economic issues around this that Mary may want to further comment on. In our portfolio at this time we are seeing our customers being very proactive in positioning their own financial circumstances.

We work with farm customers on the basis of a relationship that parallels and emulates what we do for small businesses elsewhere. It's incumbent on the banking officer to make sure that he or she and the customer stay in touch.

The Chair: Perhaps Ms. Webb could add to this.

Ms. Mary Webb: Certainly.

We recognize the challenges our prairie grain and oilseed farmers are facing because of the international situation. We recognize that in fact our Canadian farms are relatively profitable compared to similar operations in other countries.

We look forward to the WTO negotiations, but that's a longer-term constraint, and as Bob was saying, our job at the Bank of Nova Scotia is to deal with each specific case on a day-by-day basis and to work through them in the shorter term.

The Chair: Thank you.

Mr. Bob Funk: May I finish the thought that came back to my mind?

The Chair: Certainly you may, Mr. Funk.

Mr. Bob Funk: We work with individual customers. When we look inside our portfolio, we are finding its condition is not that much different this year from what it was last year in terms of the number of problem accounts and problem loans we have out there and the severity of them.

We are basically seeing customers who have managed themselves into positions where we don't have a whole lot of additional worry about them. They have on their own curtailed their capital expenditures or decided not to not go ahead with some capital expansion, with the purchase of additional land; they are waiting for the circumstances to turn around for them.

When we look at them, our job is to ask them to bring basically two things to the table. One is strength of management and the other is a sort of financial depth in their circumstances so we can put flexibility into the picture and give them options.

The Chair: Thank you.

To the witnesses, we appreciate this very much. This committee is obviously very concerned about all small business lending, and we do want to thank you very much for being here.

It's been very informative, the different sessions we've had with each of the banks, and we look forward to meeting with you again in the future.

The meeting is adjourned.