INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 24, 2000

• 0907

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order. Pursuant to Standing Order 108(2), this is a consideration of business lending to small and medium-sized enterprises.

I'm very pleased to welcome our witnesses here this morning. From the Credit Union Central of Canada we have Mr. Brian Topp, vice-president, and Mr. Rob Martin, research associate. From the Business Development Bank of Canada we have Mr. Luc Provencher, the deputy chief executive officer.

I would propose we have opening statements and then move to questions together. Some questions may be directed at both; some may be directed at one. If you want to add something to a question that's not directed at you, just signal, and I'll allow that. If everyone's in agreement with that, we'll go in the order as presented, unless you have a different agreement amongst yourselves.

Mr. Topp, whenever you're ready, please begin.

Mr. Brian Topp (Vice-President, Credit Union Central of Canada): Thank you for inviting the Credit Union Central to come and talk to the committee. It's fun to be here. As the chair said, my name is Brian Topp, and I'm the VP of government affairs. This is my associate, Mr. Martin. It's always good to have Mr. Martin along with you.

I'm going to speak to three points today: I'm going to talk a little bit about the credit union system and tell you about it, I'm going to give you a rundown of our role in business lending, and I'm going to talk about a few of the obstacles we face and how we're hoping Parliament might be able to help us out a bit in addressing them.

Let me begin by updating you on credit unions. Here are a couple of interesting facts about the system. There are 10 million Canadians banking with a credit union or a caisse populaire. That's one in three Canadians. It is an interesting fact that that's the highest per capita membership in financial cooperatives in the world.

More than six out of ten Quebeckers belong to a caisse populaire, and more than half of the people of Saskatchewan belong to a credit union. Last year our system managed over $110 billion in assets, about $70 billion in the Desjardins system and the balance in the credit union system. There are 820 credit unions and 1,350 caisses populaires in business, operating in more than 3,700 locations with almost 3,200 ABMs.

The credit union system is a significant innovator in the financial services industry. We were the first to install automatic banking machines; we pioneered debit cards; we introduced telephone banking in B.C. Our largest member credit union, VanCity, is on the Internet with a full-service virtual bank, the Citizens Bank of Canada.

Credit unions are a notably big part of the future in rural Canada, as any MPs from rural ridings will know. In a growing number of communities across the country, including 140 villages and towns in Saskatchewan, 51 in Manitoba, and 30 and growing in B.C., as Mr. Riis will know, credit unions are the only financial institution left in town. Last week the Bank of Montreal sold our system 34 rural branches to credit unions in Alberta and Saskatchewan. That's just one more step in a long process.

• 0910

The credit union system has been changing a lot. I have here a copy of the 1964 report of the Royal Commission on Banking and Finance, which is very good nighttime reading, as you can all imagine. It has some interesting statistics on the credit union system back then. In 1961 there were 3,496 credit unions operating outside Quebec. There are about 820 now, as a tremendous process of consolidation continues in the system, much of it in the last ten years. They provided services to about twice as many members back then and managed over sixty times as many assets.

You asked us to give you an update on small business lending, so I'll talk about that. To give us a place to start, I'd direct the committee's attention to table 1 in our little brief here, which is drawn from the MacKay task force report and which is an interesting summary of the state of play of credit union lending to small business in Canada.

You'll note that credit unions are pretty big players in small business lending in just about every region in Canada. In Atlantic Canada credit unions are the fifth-largest lender. In Quebec of course the Mouvement des caisses Desjardins is far and away the biggest lender to small business. In Manitoba and Saskatchewan we are the lead lender to small business; in Alberta we're third; in British Columbia we're the lead lender. In Ontario the small business lending is dominated by the chartered banks, but our system does have about $1.5 billion in loans out to small business, which is not a bad start.

What makes credit unions good business lenders? Probably you hear from time to time from the CFIB. Perhaps you'll be familiar with their 1998 survey of credit conditions. In that report the CFIB makes a considerable study noting that a very significant obstacle for small business is high turnover among credit account managers. They note that firms unlucky enough to have been rotated through four or more managers during a three-year period are twice as likely to be rejected for business loans than customers of banks with a lower turnover.

CFIB did a survey of lenders, and we set out their results in table 2 in our little brief here. You will note that CFIB reports that credit unions have the lowest turnover of credit managers of any financial institution in the system. As a result, you'll note we have the lowest loan rejection rate.

So stability in our system and stability among our loaning managers is clearly a key competitive advantage for the credit union system, and it's one of the key reasons small business people seem to like doing business with credit unions.

I'd like to highlight just one other finding from another CFIB study, their 1997 survey of bank charges. They did a survey asking their members to rate what they thought about the value for money received for bank charges. Consistently across the country, in every province, the small business people participating in the survey gave credit unions, or the caisse populaire system in Quebec, top rank for value for money for bank charges.

So the picture is that credit unions are pretty significant players in small business lending in markets across Canada, we provide business customers with more stable service and are generally more open to lending requests, and our customers think we provide the best value for money on bank charges.

We do face a significant problem in small business loans, and I can summarize it this way. Too often, when we win, we lose. We work on business accounts, we treat them well, we do well, and then they outgrow us. As a result, to put it another way, the credit union system in many parts of the country needs to expand its suite of services, because small and medium-sized businesses are increasingly demanding more from their financial institutions, and they aren't always finding the services they need from their credit unions. So we are in this ironic position that we work well with small business and they want to work with us, but then at a certain point some of them have to move on.

We're moving to address the problem. The way we're doing that is by a couple of pilot projects being undertaken by our largest centrals. Two of our biggest centrals in particular are piloting a new approach to providing business services. Every central across Canada provides credit unions with some sort of support in doing small business loans, but our central in B.C. is currently working to take those support services to a new level.

B.C. Central is putting in place a full-service provincial small business service centre that's targeting business customers with credit needs under $1 million, which is the vast, vast majority of the business accounts we deal with. The goal is to provide our local credit unions—where the small-business lending services are still basically concentrated in each credit union—with a one-stop back office, provincial central, that's going to permit them to provide a full suite of SME services. I've summarized in my brief some of the services we're talking about improving.

• 0915

Very quickly, the kinds of services that are more successful and that small businesses are looking for from a credit union are: interest rate and foreign exchange risk management; corporate credit cards and purchasing cards; credit card merchant services; direct payment; payroll; cash management; letters of credit; international financial services; foreign exchange; trade finance; leasing; insurance; group RRSPs; and employee benefits packages.

The credit union is trying to provide these services. We're looking for help from central, from the national system, in syndicating and securitizing loans so they can do more, in getting second opinions on cases to help them come to credit judgments, and in credit-scoring software to simplify and reduce the costs of coming to credit decisions about smaller accounts.

Basically the idea is that the credit union system is going to be able to provide a full suite of services that small business customers are increasingly starting to demand—no matter how big and where they are, including in small rural communities where we are the only player. It's an initiative that's pretty exciting for our system. We're watching it closely across the country, and if it works well, it's very likely to serve as a national pilot.

Very briefly, Madam Chair, I also want to highlight that we are putting some thought into accounts that have credit needs of more than $1 million, which, in terms of the number of customers, is a small minority, about 4% of the amount of customers that are in the market, but they are where the action is in a lot of ways in terms of dollars. The credit union system is, in many parts of the country, badly positioned to serve these accounts, but we are piloting an effort to try to do a better job with them.

Our central in Saskatchewan has launched a subsidiary called CUCORP Financial Services. It's a division designed to provide a suite of services very much along the lines of what I just described in the B.C. model. It's targeted at accounts of more than $1 million. From a standing start about two years ago, they've already built a loan portfolio of $280 million, working with 80 major accounts. Right now we're taking a close look at expanding this CUCORP model into the British Columbia market.

Madam Chair, I said I'd conclude by speaking about some of the obstacles in our way and about how Parliament can help our system do a better job. I'm going to do so very briefly.

We're piloting some new approaches serving small business at provincial and local levels, but our competitors operate nationally and, increasingly, internationally. Our strength lies in our close ties to individual communities, including quite a number where we're the only game in town, but we're clearly going to need to move quickly to learn from the lessons of our regional pilot projects. We're going to need to apply those lessons across the country as quickly as we can.

Madam Chair, the MacKay task force, the national Liberal caucus task force on the future of the financial services industry, the Commons Standing Committee on Finance, the Senate Standing Committee on Banking, Trade and Commerce, and the government itself, in the June white paper, Reforming Canada's Financial Services Sector, all came to the same conclusions about Canada's credit union system. The white paper put it pretty well on page 37. It said: “The structural fragmentation of the credit union system outside of Quebec has been identified as a potential barrier to growth.” There's no doubt that this true.

The Mouvement des caisses Desjardins in Quebec has come to an identical conclusion about the caisse populaire system in Quebec and is moving quickly to consolidate and simplify the structure.

Over time, a step at a time, we're going to need to modernize the credit union system. We need to simplify it and consolidate our structure, our operations. In particular, over time, services to small business would be a good candidate for a national approach within a credit union system. The federal government and you, as members of Parliament, can help by providing a more flexible legislative regime to permit us to modernize the system.

Madam Chair, at a newsmakers' breakfast three weeks ago, the government House leader indicated that this spring the government intends to table financial services legislation implementing key elements in the June white paper on financial services. We're looking forward to that legislation. We're hopeful that it's going to include some of the ideas outlined in the white paper and in the various committee and task force reports. If we can move forward in this area, we'll be in a better position to work with small business customers—and the people who work in those small businesses—in the communities we serve across Canada.

Thanks a lot for your attention.

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

We're now going to turn to the Business Development Bank of Canada, with Mr. Provencher.

Mr. Luc Provencher (Deputy Chief Executive Officer, Business Development Bank of Canada): Good morning to everyone.

I'll be going through this presentation you have with you, so I'll just make some brief comments and then open it up for your questions.

Thank you very much for the invitation.

[Translation]

Good morning, ladies and gentlemen.

[English]

We're pleased to have this opportunity to talk about innovative ways in which BDBC supports small business in Canada. Following the presentation, we will be very pleased to respond to your questions.

This committee has played a very important role in support of small business.

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[Translation]

Your 1994 hearings led to the BDBC Act in 1995. Your support since our new act came into force has been very precious and we highly appreciate it.

[English]

Please turn to page 2, SMEs in Canada.

[Translation]

There are close to one million SMEs in Canada, and they are tomorrow's large businesses. Almost 100,000 of them are exporters and close to 50,000 are knowledge-based industries or

[English]

KBIs, as we say in English.

Governments, academics, and press have paid a lot of attention to small-business issues during the last decade because small businesses are important. As for BDC, this is our only business. We are in business for small and medium-sized business.

Page 3 shows that SMEs now take a number of different forms that are either responding to or anticipating the changes our economy is going through.

[Translation]

A growing number of knowledge-based enterprises require financial services tailored to this new evolution.

[English]

The areas that growing SMEs are striving to include exports, new technologies, innovation, globalization, and knowledge-based businesses.

As you know, BDC's mandate was reviewed in 1995. We are in the business of SME financing for viable entrepreneurial projects. We offer a line of innovative business financing solutions tailored to meet the evolving needs of today's entrepreneurs. We achieve our policy and mandate objective at no cost to the taxpayer. We have 19,000 clients and commitments of over $5 billion to them. We have activities in the vicinity of over $1.3 billion with them each year.

[Translation]

In a few months, that is five years after the adoption of our incorporation act, we will embark on the statutory revision process of the BDBC Act.

[English]

There are still market imperfections in SME financing, and BDC's role is to help fill this gap. Let me just give you a few of the gaps. The risk gap can be the result of the business's stage of growth, its location, its economic cycle, or other factors. The size gap: because the cost of assessing loan applications are similar regardless of the size of business. The knowledge gap: knowledge-based firms tend to have few physical assets that can be taken as collateral. The flexibility gap: the unwillingness to lend on flexible terms tailored to the needs of individual businesses.

BDC fills the gaps identified on page 5 by supplying financing to commercially viable enterprises, as shown on page 6. Our approach is a total solution: one-stop shopping to offer financing, venture capital, and consulting and management support. We have a network of over 80 branches, with 1,000 employees, and we have a virtual branch that connects all businesses across the country.

[Translation]

Our innovative solutions are aimed at helping SMEs to grow and realize their full potential thanks to a large line of specialized funding mechanisms. It is a unique approach in the Canadian market and possibly in the whole world. This slide describes our tailor- made business solutions to meet the constantly changing needs of Canadian small and medium businesses.

[English]

In order to increase its reach, BDC has been the first Canadian financial institution to offer all of its services online.

[Translation]

The BDBC is at the leading edge of electronic commerce, working in cooperation with several institutions from the public and private sectors in promoting access to electronic commerce.

[English]

Through e-commerce, BDC is readily and easily accessible from anywhere in this country. BDC also makes a difference with its consulting group. The BDC consulting group gathers together experts who assist SMEs in dealing with the challenges of the business world.

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[Translation]

Among its package of business solutions, the BDBC is proud to number the consulting group which allows small and medium businesses to access professional management services at reasonable costs.

[English]

We thank you for giving us this opportunity to present a brief overview of today's BDC. We would be delighted to answer your questions.

[Translation]

Thank you for your attention ladies and gentlemen. We will gladly answer your questions.

[English]

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

We're now going to start with questions. Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you.

Thank you very much, Brian and Luc, for your presentations. You touch a very important topic for us around this table.

Luc, my first question is for you. You mentioned in your opening remarks that the bank was in the consulting and management support business. I remember the CASE program from a few years ago. I don't know when it ended. I thought it was probably one of the most useful offerings at the bank. I personally know of many businesses that got valuable advice in terms of their business planning and a number of people who avoided going into certain businesses because of the counselling they received from CASE, which probably saved them their life savings and everything else.

That program has been done away with. That no longer exists. I'm curious to know why. Quite frankly, speaking very honestly, it was probably the only program that people really liked in our area. After the 1995 changes to the mandate, people thought the Business Development Bank was probably as conservative as the regular banks, and didn't always see much advantage in going there. There was some advantage, to be fair, but the one program that people really appreciated was the affordability of the CASE program and the fact that you have all of these people at the local level, often early-retired business people with long, successful careers, who are just aching to be helpful. My guess is that they'd probably even do it for nothing, just to have something really useful to do. But it doesn't exist. My question is, why did you do that, as a bank?

Mr. Luc Provencher: I think the name has been changed, but the concept—

Mr. Nelson Riis: With all due respect, Luc, when people now go and ask for some advice, that program.... I mean, if you want to pay a lot of money for it, of course it's there, but it's a whole different level of advice being offered under the....

Mr. Luc Provencher: Consulting service.

Mr. Nelson Riis: Yes. You pay for it, you pay reasonably well for it, and it's at a different level than the old CASE program, where people would go right into your shop, sit down with you, and work all night, if they had to, to get your grocery store lined up and so on. That very practical, hands-on approach isn't available.

Mr. Luc Provencher: I think it is available, although maybe not in the same spectrum. It has been enhanced over time to answer the requests from SMEs for broader-view consulting.

For instance, we had lots of requests to help them with quality in their businesses, to help them with ISO certifications, to help people export, to help them face the new technology. These are the requests we have had in the last few years. We've been grooming some people to do that. All of the consultants working for us are not bank employees. They are consultants, as you mentioned, with different skills.

With regard to some of the people who were in the CASE program, their skills are less in demand considering the type of requests we have there, but depending on their profiles and the experience of the people, we have over 400 consultants across the country who are working like this for people. So the profile has changed a bit because of the requests from small business.

Mr. Nelson Riis: No. I wonder if the problem, if there's a problem here at all, is reflected in the two presenters today. I'm talking about a small branch in a relatively rural area, where, quite frankly, I'd be surprised if anybody is in the export business, or very few. Perhaps an issue here is urban-rural, or the city as compared with the smaller community.

At any rate, I'll simply flag that. I've met with our local officers in Kamloops, and they're very concerned about this. I don't know if it ever filters up to folks like you, so my job today is to act as part of that filtering process.

• 0930

My next question is for Mr. Topp, about the very encouraging and very enlightening initiatives that have been taken in Saskatchewan and British Columbia in terms of that one-stop shopping issue. Now, thinking in terms of British Columbia, this obviously will be in Vancouver, where B.C. Central is located. How will people outside that area access that? Will they actually have to go there physically or will there be ways and means of accessing those services from some of the more rural areas of the province?

Mr. Brian Topp: The model that B.C. Central is working on leaves most of the client relations in the branch, so the idea is the inverse of what you're asking about.

The idea is that business services could be delivered in the smallest branch, in the smallest community. The obstacle a small credit union in a small community faces right now is that it doesn't have the back office to support the suite of services I described.

Mr. Nelson Riis: This will be the back office, then.

Mr. Brian Topp: Yes.

Mr. Nelson Riis: You've answered my question.

Mr. Brian Topp: It's an inside game, designed to avoid the problem you highlighted.

Mr. Nelson Riis: Thank you very much.

Thank you, Madam Chair.

The Chair: Mr. Lastewka, please.

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

Thank you for your presentations. I have a few specific questions and then maybe a general one, if I have time.

To the credit union, my first question concerns partnering with banks. For some reason, I'm not seeing as much partnering with banks or other financial institutions. Could you give us just a highlight on whether or not you have a mandate to partner with other financial institutions, especially when it comes to small business?

Mr. Brian Topp: We'll stay on small business services, since that's our topic today. There is a lot of partnering in our work with small businesses. As a case in point, let's talk about the large accounts, to begin with, in CUCORP, which has assembled its suite of services through a series of partnerships with many companies, including some international banks.

When you're going to put together a suite of services for large accounts—in their case, $15 million or $25 million loan accounts—and you want to do it all in-house, you're going to need to spend a significant amount of capital and a significant amount of time to design the services. So CUCORP has assembled in the neighbourhood of 15 to 20 strategic partnerships with financial institutions and banks to put together its suite of services. This is much along the lines of the list I gave you.

Mr. Walt Lastewka: But now you're talking about the larger businesses, right?

Mr. Brian Topp: It just began as an example. With regard to small business services, perhaps you could be a little more specific about what kind of strategic alliances you had in mind.

Mr. Walt Lastewka: Many small businesses have various areas of risk. Sometimes when it's more risky, banks or financial institutions like to go together and say okay, let's take on the high risk fifty-fifty, or a portion thereof, in order to make the small-business project carry on.

Mr. Brian Topp: You're talking about loan syndication and securitization. The bulk of our small-business lending consists of smaller amounts. Heretofore the credit union system has, for the most part, been able to capitalize small business lending inside the system.

But you raise an interesting point. One of our obstacles, as I said, is that our clients tend to outgrow us. We intend to bring that to an end. As we work along the lines I have described to deal with this, we're going to be doing loan securitization and more loan syndication. There may well be opportunities for partnering in the future.

Mr. Walt Lastewka: When you mentioned CUCORP, all of sudden my back went straight up. I'm a little concerned—and maybe you can help me be not so nervous—that when financial institutions move to go into larger businesses and larger moneys and so forth, there will be executives and people within your organization who will say, hey, we can make more money over there, so why are we doing this over here with small business?

That's been something we've been able to turn around with banking, we hope, but are you not getting yourselves into a position now of moving away from the small business that Mr. Riis was trying to promote? Small business is the lifeblood of our economy in terms of new jobs and innovation. By you going over to this CUCORP and spending more money there, does that mean there will be less for small business?

• 0935

Mr. Brian Topp: Well, let's understand what CUCORP is and who's doing it. We're talking here about Saskatchewan Central. Saskatchewan Central is the dominant financial institution in Saskatchewan. It has pretty clearly demonstrated its commitment to small business, small towns, and rural communities, which is a big issue in Saskatchewan. Two weeks ago it went and bought seventeen branches from the Bank of Montreal. Our stock in trade, our expertise, is that as banks retreat from retail banking and head toward merchant banking, we're following right behind them filling that market niche.

One of the key motivating factors for setting up CUCORP is that the credit unions in Saskatchewan kept having to decline RFPs from large accounts. There is a market in Saskatchewan—the crown sector, health boards, firms such as the Pool, larger accounts in Saskatchewan—that is continually asking for business support services along the line I described. Because the credit union system in Saskatchewan wasn't really geared to deal with them, even though it is the dominant financial institution in Saskatchewan, it was increasingly having to decline interesting accounts.

So CUCORP is a vehicle to tool up a suite of services that permits the credit union system to bid for those accounts. It's an add-on to our services, not a substitute for them. There's no question that the business base and the whole business model of the credit union system is communities and small business. And that will continue to be the case. It has to be.

Mr. Walt Lastewka: On page 10 you mention that the federal government can help by providing more flexible legislation and so forth. I would ask you to table with the committee what exactly you want to have in the legislation and what you don't want to have in the legislation. Maybe that's something the credit association could table with us so that we could better understand exactly what you were getting at, rather than being general in your statement. I'd appreciate that.

Mr. Brian Topp: I'd be happy to do that.

The Chair: Thank you, Mr. Lastewka.

Mr. Malhi, please.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): Thank you, Madam Chair.

Small and medium-sized businesses are the key to the Canadian economy. What can the banks do to help them get treated better than the credit unions? Also, why is the credit union loan refusal rate low as compared to the banks?

Mr. Luc Provencher: Could you explain? You're talking from a business development point of view?

Mr. Gurbax Singh Malhi: Yes.

Mr. Luc Provencher: As a development bank, we are a crown corporation owned by the government. Our aim is to create, develop, and make sure small businesses are expanding. To do that, we have a wraparound approach to the entrepreneur. First, to help them start in business, we start as low as when people are in university to give them loans so that they have jobs and they create businesses during the summertime. Then we go to very small businesses, where we have loans in the range of $4,000, $5,000, or $10,000, to get them going in businesses.

We tend to mix the two together, doing some mentoring to make sure people don't make mistakes in business, and also providing them with reasonable capital so that they can realize their dream. As people move along, we have a suite of services to help them grow and be motivated to expand.

Also, in the last mandate we received with our new law that was reviewed here in this committee, we put a special focus on businesses that will create the Canada of tomorrow: KBI businesses and also exporters that will create another world for us in this country. That's basically the bank's policy. We are expanding our approach continually to help these businesses.

We're doing other things. We have 42 partnerships, one with them, to help small business get proper financing. We work together on specific financing that is required. This is an agreement we signed in 1997, and we have worked on it since.

• 0940

We also have agreements with all the banks, all the different agencies, to make sure we don't work in silos, but we work together for the benefit of small businesses.

Mr. Brian Topp: I started my career when I got out of university and discovered that there weren't a lot of jobs for history students. So with a bunch of colleagues, I got together and founded a small business, a graphic design company in Montreal, and I was involved in this for seven years.

We dealt with a chartered bank at that time, and I don't speak ill of them. They helped us out in many ways. But a feature of my experience in running that small business for those seven years was that we had a new credit loan officer about every ten months. Because we were a very small account, I think the bank was basically using us as a training exercise for their new hires as they went along.

The upshot was that about once a year we had to re-educate our loan officer on the nature of our business. Sometimes it went very well and we ended up with a very bright young person who would come in and we'd tell them all about typesetting and show them our financial results, and the next thing you knew our credit would go up a little bit. Sometimes we'd get somebody who wanted to show their boss they were really tough and they really knew how to squeeze an account, and they'd come in and squeeze us like a lemon for a year. That would be a tough year.

It seems to be the nature of commercial banking, of business banking, especially among the chartered banks, that loan officers turn over quickly. As a result, it's a bit of hit-and-miss when you're trying to create a new relationship with a chartered bank, especially in a large community of downtown business banking, as to what kind of person you're going to be dealing with and how much they know. And secondly, once you're up and running, you have to deal with the reality that you're going to have to be continually re-educating the person you're dealing with in the bank, because you're going to see somebody new all the time.

So the upshot is, as the CFIB said in the material I set out to you, the faster the turnover in your loan officers, the tougher it's going to be for you in your relationship with the bank. An awful lot of small business people report that, and they are frustrated about it. I can tell you from personal experience that it consumes a lot of time to manage this problem.

Because of the nature of the credit union system, we are a more patient lending institution. We're more patient with our accounts and more patient with our staff. Partly it's because, especially outside Ontario, our big piece of the economy is in rural Canada. We have many small credit unions with stable staff who stay there for a long period of time. One of the strengths of our system is that we develop a cadre of loan officers who stay in their positions for a reasonable amount of time and get to know their accounts and work with them.

There are management downsides to this. One of the things the banks try to manage is not having their staff be too comfortable with their accounts, because they want to be increasingly tough with them on their credit terms. They don't want to have business relationships impede what at the end of the day are evaluations increasingly driven by computer. But that's just not the way we do business. That's not the way we're going to grow the credit union system.

That's a relatively key competitive advantage. As I say, it's on our minds as we watch the chartered banks increasingly develop into merchant banking. It's a little bit like the phone system, isn't it? An awful lot of telephone companies are increasingly focusing on the long-distance market for business, but somebody has to provide local service to just plain folks. That's our business.

Mr. Gurbax Singh Malhi: More Canadian business owners prefer to borrow from their banks instead of an external source. Why is that? Still, instead of the credit unions, they prefer the banks.

Mr. Brian Topp: I'll offer my view and then I'll let Luc offer his view.

Mr. Gurbax Singh Malhi: I'm not referring to the Business Development Bank. I'm referring to other chartered banks.

Mr. Brian Topp: It's a big topic, but I'll just offer you a few thoughts.

First of all there's a frictional issue. When you start a business, you know what a daunting prospect it is to start a business. What is the most convenient and easily accessed source of lending? It's going to be a chartered bank, which has an enormous infrastructure across Canada and is geared to that kind of business.

Just look at the volumes. There's no question that chartered banks are enormous and enormously well installed across Canada, except perhaps in Quebec. They're the easiest solution. And to their credit, they offer excellent services to the right kind of business customer.

• 0945

The credit union system grew—perhaps you know the story—very slowly and incrementally on a base of modest people who were basically pooling their savings and whose first interest was to get a mortgage on their house. The focus of the credit union system for an awful lot of its history was on household finance issues. In many ways the credit unions found themselves in business lending later in their evolution.

Our system is now coming to the view that we need to do a better job of business lending, and I've described to you some of the pilots we're following to try to do a better job. One of the issues for credit unions is as I described it: fundamentally many of our services are geared to citizens and not to small business. We need to tool them up so we do a better job in lending to small business.

We are pretty good at providing a line of credit, a lease, and a relatively small business loan to a business. When you start getting into currency risks, loan syndication issues for larger accounts, insurance issues, and all the other services I talked about, we have a job to do to provide those services. That's one of the reasons we don't have a bigger part of the market.

The Chair: Mr. Provencher.

Mr. Luc Provencher: Our banking system is based on market imperfections. Market imperfections are for businesses that cannot get what they need at the time they need it. I just mentioned it in the slides. In the eyes of the lender, they consider the business to be too risky for the return they get. In terms of size, we know that a small business of a few thousand dollars does not generate lots of income, but it costs a lot of time for the people, the processes and so forth. So it is not attractive for people.

I was mentioning the knowledge economy. There's virtually no guarantee for that sort of economy. It's half of our business. Also, the ability to repay on terms that are suitable for their businesses is most likely the key element that creates problems for small business.

The creation of our bank in 1944 was based on that ground, and if you look at it today, it is still on that ground. What has happened is that the gaps are changing over time. It's very difficult to assess them, for example, between urban and rural, and also from a profile of the businesses and the stages of development of the different businesses. In a world like ours, you have private organizations that are interested in focusing on specific markets that will give them more rewards.

That's basically the reason our bank exists, and we make a living out of it.

The Chair: Thank you, Mr. Malhi.

Mr. Penson, please.

Mr. Charlie Penson (Peace River, Ref.): My questions are for the Business Development Bank.

Mr. Provencher, is your bank a lender of last resort?

Mr. Luc Provencher: No, we are a complementary lender. The law was discussed at this committee in 1994 and was changed in 1995. It was changed to have a more dynamic approach to banking. At the same time, with the new mandate it was giving us, the government asked us to promote partnerships with private and public businesses, first to get banking and credit unions and other partners to go into more risky businesses with us. And we've done over 42 partnerships that are currently working. We tried to fill that gap.

Mr. Charlie Penson: I understand. I'm sorry I missed your presentation. I was a little late this morning. I have a number of questions and I'd like to get them in in a limited time.

Can you give us an idea of the average size of loan your bank would put out? Is there a minimum in terms of loans?

Mr. Luc Provencher: There's no minimum. In fact, the smallest loans we're doing are student business loans, which we've been doing for years. It's a maximum of $3,000 per small business, for creating businesses during the summer. This is the smallest business we do.

Mr. Charlie Penson: What is your average size of loan to small business?

• 0950

Mr. Luc Provencher: It's in the $270,000 range. I can give you more information. I have it here. Loans of less than $100,000 are over 46% of our activity. Loans below $250,000 are over 70% of our activity, just to give you an idea.

Mr. Charlie Penson: Sure.

Mr. Luc Provencher: So we're basically a small-business bank. That's the core of our activity.

Mr. Charlie Penson: Mr. Provencher, I can understand the credit union movement, because they have investors' money they're putting out and loaning into the communities. And I can understand the banks. Again, they have individual investors' money, in many cases. But I can't understand the need for a bank that's owned by the Government of Canada. Aren't you really just another bank out there competing with the banks that are in business right now? Why is there a need for the government to be in the banking business?

Mr. Luc Provencher: I think we have to go back to why our law was amended in 1995. Our law was amended for us to help small businesses to have more alternative ways of financing. The 40-plus partnership we have signed with different financial organizations is good proof that these people are working together with us. From our understanding, it's working fairly well, and it is helping them to master some of the new economic business that they had difficulty managing.

On the other hand, the bank doesn't cost any money to the taxpayer. We pay dividends to the government. We pay a return on all the money we borrow. We are just an alternative for small business, and we try to create synergy and momentum around the financial institutions.

Mr. Charlie Penson: I understand what you're trying to do—

Mr. Luc Provencher: We're more than trying; we're doing it.

Mr. Charlie Penson: I understand, but I have had a number of meetings with small businesses throughout the country and they tell me that they still have a lot of difficulty. They tell me that your bank is really no different from any other bank, in their view. They have a lot of difficulty getting funding, and there's the same kind of misunderstanding that comes from the large banks. I've talked to a lot of small-business people who tell me you're not serving their needs, that they may as well be dealing with a chartered bank, or in some cases a credit union or trust company.

Mr. Luc Provencher: I think it would be pleasant to exchange further with your constituents and our local branch to see what the impairments are. We have 19,000 clients, sir, and their level of satisfaction with us is over 90%. So I think there is a certain level of confidence. The people who are in small business have a certain level of satisfaction dealing with us.

Mr. Charlie Penson: That's debatable, I guess.

I want to switch to Mr. Topp from the credit union. The credit union seems to me a logical place to fill a void that the chartered banks are creating by moving out of a lot of small communities. I know that's the case in Alberta, where I live, and I think they're doing a pretty good job. But there are cases too where the credit union movement does have to be bailed out—or has had to be bailed out in the past.

How would you address that issue? If they are going to move into filling that need more in the community, there's probably going to be growth, but how are you addressing the need to make sure they're stable and not having to be bailed out by using taxpayers' money in the future?

Mr. Brian Topp: By being careful. There's no question there have been lessons from the past. Avoiding being bailed out in the banking business is a pretty big topic, but credit unions have been increasingly effective in pooling capital to make sure they don't run into trouble. A big piece of the job at the provincial and national centrals was to manage the liquidity pool for the credit union system.

The banks don't have this problem because they have a reasonable access to capital. Some credit unions, by their nature, have a lot of capital—typically the huge credit unions, like the ones in Vancouver. Small rural credit unions, like the ones you're perhaps speaking about in Alberta, sometimes have trouble getting hold of capital. One of the big jobs of the system, provincially and federally, is the management of the liquidity pool, and I think we're increasingly doing a good job at it.

Mr. Charlie Penson: Is it necessary to have a fairly diverse base in order to try to stop the problems that a narrow lending base might create, where some credit unions would get hit hard because they invested in a certain sector? How does a credit union handle that part of it?

• 0955

Mr. Brian Topp: Well, a piece of it is what we've discussed today. For example, Alberta Central is doing a great job of diversifying into small-business lending. About 30% of the business in the Alberta Credit Union Central right now is in small-business lending, which is up significantly. The result is that you have an increasingly diversified loan portfolio, and a pretty good one as well.

Mr. Charlie Penson: But how does that tie together with your national organization? You're aware of the failure of a lot of the western banks in the 1980s largely because they were focused in an area of the country that got hit very hard by resource sector shocks and so on. If you have a larger base spread across the country, it would seem to me that would offset some of that. How does your national organization help to ensure that this wouldn't happen?

Mr. Brian Topp: The key role of the national organization heretofore has been the liquidity function, but in a way this gets to your question, “What's the future?” The white paper lays out a vision for the credit union system that involves a bigger national role for the credit union system. If the bill eventually comes down in the form we're hoping it will, it's going to permit credit unions to use national structures to do more than provide the trade function we're used to providing, and provide a liquidity function.

To stay on small business services, I talked about the two pilots we're running in Saskatchewan and British Columbia. Those suites of services aimed at different categories of the business market might in future be good candidates to migrate to the national system, either as a joint venture of all the credit unions across the country or in the national CUCC structure. By doing that, by diversifying across the country, by being careful in the types of business loans we take on, we'll avoid the risks you're talking about, which I remember well.

So you're right, still bearing in mind that the strength of the credit union system is always going to be in communities, in banking for individuals, and in a well-diversified small business portfolio drawn from across the country.

In a way, then, we're already quite well diversified. We're in fact extraordinarily well diversified, and in some ways better diversified than the banks. While they are increasingly concentrating their branches, we're going to try pretty hard to stay available to folks across the country.

The Chair: Thank you, Mr. Penson.

Madam Jennings, please.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you very much for your presentations. Mr. Topp, you said that with the white paper the new financial institutions regulatory framework might allow credit unions, called caisses populaires in Quebec....

An hon. member: Caisses pop.

Ms. Marlene Jennings: ... to meet several of the SMEs needs that you have a hard time addressing right now. Can you give me a few good very specific examples of what you would like to see in the legislation—be it mentioned or not in the white paper—in order to be able to put into place some sort of national institution offering the necessary protection without hindering the role that constituent members must play? What gives a caisse pop or credit union its own character is the fact that it is solidly anchored in the community. This is my question.

Mr. Provencher, the question I will ask you is closely akin to that of Mr. Penson from the Reform Party. We were wondering if you were the SMEs bank of last resort. In some way, your mandate is to take the place that is not presently occupied by the traditional financial institutions. This means that you take bigger risks.

I was part of a working group on youth and entrepreneurship. Two pictures, two definitions were given of youth: one based on the age of the entrepreneur the other on business experience.

• 1000

Several witnesses came and told us that what they were lacking was venture capital. They were not talking small amounts. They were saying that in order to get a project going one needed possibly one, two, three or four million dollars.

I had the opportunity to visit Silicon Valley in California where we met venture capitalists. They told us that it was not unusual in their line of business to lend five million dollars to a young university graduate with maybe one year of professional experience who presented them with a good idea.

I would like to know if the mandate of the Business Development Bank of Canada allows you to grant such a request and how.

Mr. Luc Provencher: I should maybe explain that in fact we help finance smaller businesses.

Ms. Marlene Jennings: Yes.

Mr. Luc Provencher: I mentioned students. We help them by giving them....

Ms. Marlene Jennings: $3,000.

Mr. Luc Provencher: Yes. For people with a small business, we have a project called the Youth Entrepreneur Financing Program under which we can go up to $50,000. We also have what we call micro-loans for micro-businesses. We are talking here about very small businesses in need of coaching. It is a mixture of financing and mentoring services.

The Development Bank is the biggest venture capital investor in Canada. We are financing 75% of Canadian activities in a certain market. This is a market where there is no action at the private sector level.

Ms. Marlene Jennings: Yes, indeed.

Mr. Luc Provencher: The Bank, through its venture capital activities, has commitments in 75% of that market. This shows that the market is not responding well, unlike what we see in the United States.

Ms. Marlene Jennings: Right.

Mr. Luc Provencher: It is not developed here yet but things are coming along. The fact that we have a large financial commitment in that type of business allows us to meet some that are very successful, that are born from ideas of young entrepreneurs. We are starting to see results.

With less than one million dollars in venture capital, it is very difficult to make money, because the businesses are not solid enough. And this is where we do most of our business. With a lot of coaching, we manage to succeed.

To give you an example, out of 10 businesses, one becomes very successful, two are living dead and the others are not working. In the end, we manage to achieve a balance and make a small profit. This has been our experience so far. You understand why that market is not very dynamic.

One of my associates, Ms. Mary Macdonald, does an annual study on the issue. We would be pleased to provide members of the committee with that study.

Ms. Marlene Jennings: Thank you very much.

Mr. Topp, if my question....

Mr. Brian Topp: I would like to add, so that it is clear for everybody, that the Mouvement des caisses Desjardins is strictly provincial.

Ms. Marlene Jennings: Yes, I know.

Mr. Brian Topp: It is not part of CUCC.

Ms. Marlene Jennings: Yes, I know. I am a member.

Mr. Brian Topp: There you are. And most credit unions in the rest of the country are also provincially regulated.

Ms. Marlene Jennings: That's right.

Mr. Brian Topp: The federal government makes provincial centrals and the CUCC itself possible. The CUCC vision concerns the national aspect of credit unions. It is essentially a trade association.

You asked me for a very concrete example of what we would like to do. Let me go back to the example of CUCORP which targets a very specific part of the business market, about 5% of the market. In Saskatchewan, things are going very well.

• 1005

We are nevertheless taking quite a serious risk. Even though we are talking about a small number of accounts, there are large amounts involved. It is a very good candidate which represents an interesting business opportunity for credit unions. It is possibly a good model, a good candidate, which will be able to go into business at the national level after a while. It is a new avenue that could open to us—hopefully—if some key elements in the white paper are implemented. We will be able to go into business nationally and implement joint ventures between the provinces under federal legislation. A large part of credit union activities would fall under federal legislation as opposed to provincial legislation.

Ms. Marlene Jennings: Would it not be difficult for you to operate under two different legislative frameworks, one provincial and the other one federal?

Mr. Brian Topp: It is always interesting to....

Ms. Marlene Jennings: Let me explain my thought process. I have been a member of this committee for almost three years. On many occasions, the government tabled bills dealing with various lines of activity under the jurisdiction of the Industry minister. We sometimes heard objections from the members of the opposition who were claiming that there is already a provincial law dealing with the matter and that a federal law would complicate the life of businesses working in a particular field as they would be governed by two legislative regimes.

You seem to want to carry on business within the federal framework because it would open doors for you.

Mr. Brian Topp: I wish to make clear that we would like to have the opportunity to establish partnerships beyond provincial boundaries. This is our goal.

The new tools that the federal legislation provides to credit unions seem very interesting to us and are the ones that we are looking for. There is no doubt whatsoever that we will have to have numerous complex discussions with our partners in provincial governments. One of the things we learn when we start doing business within the credit union system is that we must live with complexity. It goes without saying that new problems and some complications will crop up, but we have to recognize that this also opens doors for us.

Ms. Marlene Jennings: We live in complexity, but it is sometimes the driving force behind innovation. That's it.

The Chair: Thank you, Ms. Jennings.

Mr. Dubé, please.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): This is a very interesting discussion; in fact, I was about to raise the same issues as Ms. Jennings. I could maybe explore them a bit further.

An hon. member: I am surprised.

Mr. Antoine Dubé: I understand all the precautions Ms. Jennings took, and she knows why I do. Even though we are politicians, we could set aside the political aspects for a moment to talk business. It is public knowledge, as it shows through Quebec newspapers, that the Mouvement Desjardins and the credit unions from the rest of Canada are talking about joint ventures, as you just did yourself. Some of those unions even alluded to a possible merger and a common structure. Would such a theoretical merger be allowed under the present legislative framework?

Mr. Brian Topp: You are supposing that it would have already been replaced?

Mr. Antoine Dubé: Yes.

Mr. Brian Topp: Let's be very clear: the Mouvement des caisses Desjardins has no intention whatsoever to merge with credit unions. That is not a possibility that they envision. However, they could be interested in joint ventures with credit unions, and even with partners from other countries such as the Dutch bank Rabobank and American credit unions, which may be small on the market but very big in terms of their assets. We started discussing what we could do together. However, the model that we are looking at is not that of a merger. In some way, mergers represent an old business model. Virtual banks and joint ventures are the way of the future. You know the history of the movement very well and you understand that a merger is out the question.

• 1010

However, we have already started a modest joint venture with the movement that is now selling ethical funds. The future is promising in that regard but we are not anticipating the possibility of becoming partners working under the same structure. That is out of the question.

An interesting aspect of the new legislation is that it will give caisses populaires and credit unions elsewhere in the country more flexibility to engage in joint ventures at the national level. It will also allow them to undertake joint ventures with Rabobank branches all over the world and American credit unions. This is what we are interested in.

Mr. Antoine Dubé: I am very interested in Desjardins as I have always been a member of the caisse populaire at home. I also happen to be the member of Parliament for Lévis-et-Chutes-de-la-Chaudière, where the Mouvement des caisses Desjardins has its headquarters. You can easily understand that I often meet people from those circles.

The Mouvement des caisses Desjardins is everywhere. You mentioned among other things the African fund if my memory serves me right. There are other funds internationally aimed at developing credit unions. You are surely working on developing the cooperative formula all over the world.

Our committee is not the one who studied the white paper, as the clerk confirmed to me. We are wondering if it was the Finance Committee or most probably a special committee set up for that purpose. I did not read the white paper and I must admit my ignorance regarding its content.

Can you tell us if the white paper's recommendations have been implemented in the form of statutory amendments? Could that satisfy your need to form partnerships?

Mr. Brian Topp: Let's talk about the essential aspect of the matter. The headquarters of the Mouvement des caisses Desjardins being in your riding, you are very well aware of what is going on. You know that an important reorganization is under way. Caisses populaires were less and less concentrated, unlike credit unions in our system, and it was decided that a three tier system was too complex. It is the reason why regional federations are in the process of merging and will be consolidated under a single caisse with regional branches.

The message from the white paper of most relevance to us is that federal legislation should allow the credit union system everywhere else in the country to do the same thing. It is essentially an internal matter as I said in my short brief. The credit union system is too complex right now. Eventually—there won't be a big bang tomorrow morning like that of the Mouvement des caisses Desjardins—the credit union system will try to evolve in the same direction.

Mr. Antoine Dubé: The rest of Canada would have a single structure that would serve local branches.

Mr. Brian Topp: One of the visions the credit union system is looking into is very similar to that of the caisse.

We are talking here about a system that would be implemented not in one province but in the other nine. Therefore, it is a lot more complicated to get to the same result. We will need to allow for more time and we will probably have to adopt a different model. What we have to keep in mind is that step by step and even project by project we will try to do more together. This is roughly the governing idea of the legislation. This is what is of interest to us. One of the consequences of this goal would be a better opportunity to undertake joint ventures nationally with other partners like the caisses.

The Chair: One last question.

Mr. Antoine Dubé: I understand. At the beginning of the hearing, we talked about the Small Business Loans Act. Though we heard the banks' views on it, I don't remember hearing yours. Maybe it eluded me.

You often resort to the provisions of this act when you deal with small businesses. How do you evaluate it? Does it satisfy your needs right now?

• 1015

I worry when I hear you say that outstanding accounts amount to $10 billion. It should not be the case under the Small Business Loans Act as the loans are supposed to be backed by the government of Canada.

Mr. Brian Topp: Have I talked about outstanding loans in the order of $10 billion, sir?

Mr. Antoine Dubé: Yes, in your document.

Mr. Brian Topp: There might be a misunderstanding.

Mr. Antoine Dubé: Maybe the translation is wrong. You wrote that the assets amount to $110 billion but you also say on page 4, under credit unions and small businesses, that in 1997 small businesses owed the Mouvement des caisses Desjardins $10 billion.

Mr. Brian Topp: I don't have the document that you are talking about with me but I can assure you that this assertion is not part of our message. I can guarantee you that we never said that outstanding accounts amounted to $10 billion.

Rather I said that loans granted by caisses populaires and credit unions to small businesses amounted to about $19 billion in 1997, including $10 billion in loans to Quebec SMEs.

Mr. Antoine Dubé: Alright.

Mr. Brian Topp: We are not talking about outstanding debts but about the loan portfolio for SMEs.

Mr. Antoine Dubé: Then it must have been a translation error.

Mr. Brian Topp: It looks like it.

Mr. Antoine Dubé: Basically, this comes down to saying that you lent $19 billion to small businesses.

Mr. Brian Topp: That's right.

Mr. Antoine Dubé: How many loans are guaranteed under the Small Business Loans Act?

Mr. Brian Topp: I will inquire and let you know.

Mr. Antoine Dubé: Thank you.

[English]

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

Mr. Pickard, please.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you very much, Madam Chair.

I want to first of all say to Mr. Topp, congratulations on the image you've projected. I looked at the survey of the Canadian Federation of Independent Business, and right across the country you are rated number one. I think that's great for the image of a business that is basically in aid of small business in this country.

There's one thing I really couldn't get my head around, though. I realize that caisses populaires and your development in Quebec are very extensive, and certainly in western Canada you're very extensive, but the figures show almost a lack of being in Atlantic Canada and also in Ontario. Yet when the survey was done, you're still rated number one in those areas. Is there a reason why Ontario in particular...? That's my home province, and I look at opportunities for loans, I look at the demand for small-business loans, and I look at the entrepreneurial desire of many people in Ontario who are demanding more and more capital. You don't seem to be into that market as I would expect you to be. Can you help me with why you're not there?

Mr. Brian Topp: I think a good place to start when talking about Ontario is that there are some areas of tremendous strength in Ontario. For example, there is the Saint Willibrod's Credit Union in Niagara. One out of every nine pigs that is grown and killed in Ontario...the farmers get their debt through that one credit union. It's a tremendously successful credit union and an inspiration to us all. In rural Ontario, in some markets like Niagara, and in northern Ontario, we're doing just fine, thank you.

The credit union system's challenges are in the 905 area and in Ottawa, which are in the core markets of the chartered banks. The credit union system, by its nature, does not do $10 million and $20 million re-branding campaigns organized by New York and Toronto advertising agencies and aimed at those markets heretofore. You're really competing against the big boys in those markets, and that's where the chartered banks have focused a great deal of their marketing. There's no question about it: the great way to put it is that it's where we have our best opportunities for growth.

Mr. Jerry Pickard: I ask the question from where I'm at, though, and there isn't as much exposure of credit unions as I would like to see and as I think people in our area in general would like to see. I'm talking about outside of the 905 area. I'm talking about moving into all the fingers, I guess, coming out from Toronto and the metro area.

• 1020

Mr. Brian Topp: You're putting your finger on an absolutely key challenge to the credit union system in the next ten years, which is to expand our market share in Ontario and in Atlantic Canada. We've done a remarkable job in western Canada and in Quebec, bearing in mind that Quebec has its own system, and we need to do better in Ontario and in Atlantic Canada.

To take us back to my third point in my little presentation today, I think the government's white paper on financial services and the legislation that we're hoping to see later this spring will help us to do it. It's an opportunity for us to pool resources across the country and to focus on building up in markets where we need to develop. It could very well be that some of the opportunities that will be open for the credit union system in the new federal financial legislation will help us to do a better job.

But you have to bear in mind another thing about credit unions: that they build from the base. A credit union system is not going to do a big bang anywhere, including a big-bang entry into the Ontario market. What we're going to do is to quietly build our branches and build our business services Ontario and Atlantic Canada, as we will across the country, and we'll hopefully do a better job—and the bill will hopefully help us to do it.

Mr. Jerry Pickard: Madam Chair, if I might go to Luc of the Business Development Bank. I see both the Business Development Bank and the Farm Credit Corporation in my area doing a job—because I'm a rural area person—but I'm hearing more and more that they're not as flexible and as open. I know that your mandate has dramatically changed and you're there not to lose money any longer; you are not the institution of last lending, that's for sure.

But when I look at it, I rather have to ask the question in my own mind: what exactly are you doing that is so much different from the general banking system, the credit union system, and other financial systems in the country that it justifies the effort and expenditure and all that is going on?

Mr. Luc Provencher: It's a good question, and I'm pleased to answer that. If you look at it from the perspective of a bank, we have the word “bank” in our name, but you have to look at it as a bank of resources. First, we have a lot of people working within the bank and in partnership with others, either as consultants to help small business or in partnership with other banks.

Our role is to be an instigator to get the business started, and then we move on. That's basically what we're doing, and we're doing it at all of the different stages of growth of businesses. When people are going through these different stages of growth, they always have problems of the sort that mean they don't meet the standards of investors or lenders or private people to do investment with them. Our role is always to fill that gap.

That gap is evolving continually, depending on where we stand. Looking at Farm Credit, which you mentioned, we are working closely with them. We have a memorandum of agreement and with them we did transactions where we could exchange expertise and provide joint financing to small business. That agreement was done after our new law and we're working very closely with them.

Mr. Jerry Pickard: I see that relationship improving in my area in the last two years.

Mr. Luc Provencher: Sure.

Mr. Jerry Pickard: Before that, I didn't see as much. I think it seems to be evolving.

I want to ask another question, which I think is pertinent to our committee's information, and that is, how much of your resources do you direct toward consultation, business approaches, business planning, differently to what I guess a normal financial institution would? You're there as an aid, a structure, and an adviser in many.... That's the only reason I can see for your existence and, quite frankly, that of the FCC as well. How much of your resources are being directed toward that to help that process?

• 1025

Mr. Luc Provencher: I think it's across the bank in everything we do. It's a mix of support, mentoring, and financing. Either we deal with students who want to go into business, to whom we offer financing and give support, or small businesses or even when we do venture capital. For instance, we have about a thousand people who are working full-time for the bank. We have nearly 500 people who are working in partnership with us as consultants and who are required, depending on their expertise, on an ad hoc basis.

Our account managers, in relation with the clients, have about one-third of the number of accounts they have to deal with, so they devote more time to nurturing the relationship with small business. In the case of investment, they have at the most five or six accounts. They work with the businesses to help them grow. What we found in all the years we've been there is that money does not do everything for small businesses. Money certainly is a good part, but having the right mentoring and environment is most likely a good ingredient for the success of small business, most likely when small businesses are smaller rather than bigger.

Mr. Jerry Pickard: And on average, what is the premium you charge for the extra service you provide?

Mr. Luc Provencher: The bank in itself charges about half a point over the chartered bank, and it can go up to two or three points, depending on the level of risk. What we are doing, instead of saying the credit is not available to people, is we charge in line with the risk and this price evolves as the risk is different from one to the other.

The Chair: Last question.

Mr. Jerry Pickard: Do you have a blanket kind of 1% across the board? I'm trying to get a picture. I realize how you're structured—the higher risk, the higher the difference—but what are the average dollars?

Mr. Luc Provencher: Let's look on our floating rate, what could be compared to the prime rate. The basic difference between the chartered banks and ourselves is 2%.

The Chair: Mr. Riis.

Mr. Nelson Riis: Thank you very much.

To continue along the same line as my colleague, Mr. Pickard, what would your bank charge for a business plan for a typical medium-sized business coming in wanting to do a business plan? What do you charge?

Mr. Luc Provencher: First, what we aim to do is to ask the business person to do it themselves. And our role is not to do it for them, but ask them to do it. So they had better understand the different elements and then know what are the possibilities and the risks for them. That's basically what we do; we don't—

Mr. Nelson Riis: So when people come to me with a business plan from the bank, the bank actually hasn't done the business plan. Is that what you're saying?

Mr. Luc Provencher: What do you mean?

Mr. Nelson Riis: People come and they have the Business Development Bank business plan, and I assume they did the business plan. But you're saying they didn't do the business plan.

Mr. Luc Provencher: What we do is we give them a framework to help them work with and we advise them how to do that. That's basically what we do.

Mr. Nelson Riis: And do you charge for that?

Mr. Luc Provencher: No. And this is information we provide them with.

Mr. Nelson Riis: I'm trying to get back to the question that Mr. Pickard asked. If we had the chartered banks sitting here beside you, and we said we're trying to determine what it is that you do that they don't do.... You said consulting and management. They do that, they finance, and they would say they do mentoring and they....

What I caught you saying is that most of your managers—how many accounts do they have, did you say?

Mr. Luc Provencher: About fifty.

Mr. Nelson Riis: Fifty accounts.

Mr. Luc Provencher: Yes.

Mr. Nelson Riis: Okay.

Mr. Luc Provencher: And it goes to five to the venture capital; for the larger accounts, 10 to 12. An average for a chartered bank is over 100 to 150.

Mr. Nelson Riis: So what you're saying is that—

Mr. Luc Provencher: We give more time.

Mr. Nelson Riis: That's my question. If we went to two of our constituents, one who's been working with the Royal Bank and one who's been working with the Business Development Bank, they would say to us that the Business Development Bank person spends a lot more time with them.

Mr. Luc Provencher: And that's why we are in business. We try to devote as much time as they need, depending on the needs they have. So if we go with a venture capital, they need much more growing than businesses that.... And as the business gets bigger, they have less need for that sort of thing.

• 1030

Mr. Nelson Riis: You've emphasized all morning the grassroots, build from the base, approach of your movement, which, as you describe, is your strength, and over the years you've evolved into the small business financing from the personal service financing and so on. That's the fundamental, philosophical basis of credit unions and caisses populaires. Now you're moving into an area called banking, almost the National Credit Union Bank of Canada or whatever, through the new legislation that we'll soon see.

My question is rather a general one. How do people in Rosebud, Saskatchewan, or wherever, feel about this? Because obviously if there's a national bank, the folks on the board in Rosebud or wherever aren't going to have much to say, probably, in what goes on. Is there some nervousness in terms of where the credit union is moving in that respect?

Mr. Brian Topp: Do you want to get briefed on our internal debates, Mr. Riis?

Some hon. members: Oh, oh!

Mr. Brian Topp: Let me put it this way. The credit union system is not going to suddenly convert itself into the Chase Manhattan Bank after federal legislation is revised. I can guarantee you that. At the end of the day, the interests of the credit union in Sturgis, Saskatchewan, are going to be to do a better job at providing credit union services to its members and owners and to the small businesses in Sturgis. At the end of the day, the interests of the provincial centrals and the national centrals are going to be helping that credit union to do a better job.

This means it's highly unlikely that any of the activities that are going to be undertaken either by centrals themselves or the centrals and joint ventures between each other, or in services that are migrated by credit unions and provincials centrals to the national organization, are going to be designed to compete with local credit unions. The idea is either going to be to provide better back office services to help them do a better job—and I've described some of how that can be done in the B.C. central pilot project—or it's going to be in providing complementary services that our system isn't providing now.

That being so, the upshot is it will help credit unions do a better job of serving their communities, so they stay there and do a better job, and stop missing opportunities—as for example Saskatchewan was starting to do, as the system was being asked to bid on accounts that it couldn't do because it wasn't geared to do it—and enable us to diversify. So I think what you'll see is that we will take up the new opportunities that are in the legislation that hopefully we'll see, a step at a time, and carefully in a way that's designed to do a better job and not to offset what we're doing now.

Mr. Nelson Riis: Thank you.

The Chair: Thank you, Mr. Riis.

Mr. Lastewka, please.

Mr. Walt Lastewka: Thank you, Madam Chair.

Mr. Provencher, I wanted to get some comfort with the Business Development Bank. I know that your consulting section and so forth has been doing a lot of work, but are we staying within this small and medium-sized business area, or are we moving into working with larger automotive and larger companies? Can you assure this committee that the Business Development Bank is staying within small business?

Mr. Luc Provencher: This is the primary goal of the bank. It is our mandate that we have to work with small and medium-sized businesses, and it is our only business in all of the activities we do. We don't deal with large businesses; that's not our goal, and it is not the mandate we have from the government.

Mr. Walt Lastewka: I'm sorry that Mr. Penson has left.

My next questioning is going to be on access to capital. I've convinced myself that access to capital is not the problem, that the support to business, as Mr. Riis had said earlier, toward being able to get themselves prepared properly for financial institutions, the support for those people who might be great inventors but not good business people.... I would like to have the reaction from both of you on my comments and on what each of you are doing to make that happen.

• 1035

A lot of home businesses are now trying to expand. Their product or service is good, but their business requirement needs a lot of support. I'm convinced more and more that it's not a matter of access to capital but access to good entrepreneurship support. Can I have your comments on that?

Mr. Luc Provencher: I support your view, because that's basically the reason the bank is offering that. We know that small businesses don't have much money to get the proper support, so if the cost of expertise is too much, they don't go for it. They go only for capital. Our position on this is that it's a combination of the two that enables small business to be successful.

All the approaches we have with entrepreneurs are this way. For instance, when we give a small loan to a summer student, there is a person, most likely a retired person, who is working with that person to help the person make a business plan and to help the exercise to be a success. If we go to micro-business, home-based, either staying home or moving there, an integral part of the program is running someone through a process to make sure they understand what they're doing. They have their business plan developed, and they do it themselves. We help them to build it in such a way as to make sure that what they do makes sense for them and will make them a success.

We do the same for youth, and we do the same when we invest in, most likely, technology businesses that have a very smart inventor but need business acumen.

That's basically the core of what we do on a daily basis. That's what the bank is for.

Mr. Brian Topp: That's a very interesting question.

I think you can identify three key challenges in financial terms and, seguing into management terms, in small business's space. I don't think there's any question that Canadian small business tends to be undercapitalized. Just on a business case when it comes to debt, many small businesses are undercapitalized. It's an interesting debate where small businesses need to get access to capital. I think you can't take it off the table. It's evident in their balance sheets.

The second challenge they face is the typical cashflow crunch in the launch phase. You get your small business going, and frequently it's undercapitalized, but off it goes. You get your equipment in and typically more and more in an e-commerce situation get your website up, and off you go. About six to eight months into your business, you suddenly hit a cashflow crunch. That's the next place where banks start to talk to their new small-business customers.

The third challenge small business faces, and in many ways the most interesting one, is that small conversion from a threshold firm that has launched and made it through its cashflow crunch to one that now needs to move from an entrepreneurial to a management phase. It needs to start doing more and more marketing. It needs to start thinking about export, and it increasingly needs to start thinking about e-commerce.

Each stage where we deal with our customers involves different issues. The Federal Business Development Bank does some interesting work in helping businesses over some of those humps, and a lot of what we're trying to do in tailoring our services is to address some of these issues. It's that threshold stage, when you get a conversion from launch into whether it is going to grow and expand or just be what it is. In many ways it's the most interesting stage for a banking partner. If you look at the list of services we're piloting in British Columbia, you can see that we're thinking a lot about this: How do you take a small business and convert it to a slugger?

Mr. Walt Lastewka: The reason I ask these questions is that I've done a lot of work in Niagara with all the financial institutions, including the credit unions, and once all of us were working together it became very evident to us that the support at that level is critical. We have to be very careful that it doesn't cost the small entrepreneurs a lot of money, because what they do is look at that money and not the value, and they shy away from it. Then they make mistakes and come back six months or a year later and say maybe I should have taken that investment. But I stand back and look at that and say it's those small businesses that become the medium-sized businesses, so why aren't all the financial institutions spending a little more time and money at that level?

• 1040

Mr. Luc Provencher: We are also part of a network that was started with the banks, particularly the Royal Bank, which is called ViaSource. Basically, the goal there is to try to get in a different area a group of people who have business acumen and who can give at least some of their time to some business. These people do it for free, but they anticipate that as this business grows, they will become clients of theirs.

I thought it was a very good initiative. They started that last year. As a development bank, we've been part of that, and we try to do that in many areas. The credit union system is also part of it in certain areas. So I think it's starting to be interesting to look at it. But as far as we're concerned, it's the only initiative like that that was started privately.

The Chair: Mr. Topp.

Mr. Brian Topp: We're basically talking about helping businesses make good decisions in the launch phase. Is that what you mean?

Mr. Walt Lastewka: Yes.

Mr. Brian Topp: My comment is that the issue of stability in your staff is a big piece of the puzzle there. I've spoken my piece about that. The turnover of staff in branches working with businesses is a serious obstacle to the financial industry being helpful to businesses in making good decisions. Again, one of our key competitive advantages is that we have a better approach, I think.

Mr. Walt Lastewka: One of the things I've seen over and over—and I've dealt with small businesses from across the country—is that small business is looking for support and thinking that might come from the credit union or other financial institutions. In the meantime, they have to hire consultants. I've seen too much raping of small business by consultants and them not really helping that small business move up. Shouldn't our financial institutions be playing a more important role in that development?

Mr. Luc Provencher: As far as our answer to that is concerned, we do networking with the professionals who deal with customers. We network with accountants, lawyers, notaries, all kinds of people like that, around the country. We deal with the same people. We do round tables with them. We have formal discussions, and we try to make sure that we work together on this. We may have a big name as a bank, but if you look at the resources we have as an organization, they're very small in relation to the needs of small business. So we must act as a catalyst in order to get others to work with us to help them, and that's basically what we're doing.

The Chair: Thank you, Mr. Lastewka.

I just want to ask a couple of quick questions. This committee has been doing a study of productivity, innovation, and competitiveness, and a couple of times the tax system has come up. Right now there seems to be some hesitation for small businesses in Canada to grow into larger businesses because of the tax system. I'm just wondering if you run into that in your lending practices.

Mr. Luc Provencher: As far as we're concerned, it's not something that has come up on a regular basis. I don't think the taxes for small business are really impairing them, because there is good relief for them when they categorize themselves under small business.

The Chair: That's my point, Mr. Provencher. What we've heard at the committee during our study is that small businesses don't want to grow into larger businesses because of the tax consequences that come with that. We know that there are tax incentives for small businesses, but once they cross that threshold, they don't seem to want to do that. I'm just wondering if you see that in your lending practices.

• 1045

Mr. Brian Topp: Madam Chair, are you talking about that interesting stage when you have arrived at the point in your business where you no longer qualify for the small-business tax rates and you've suddenly inherited all the wonders of the full tax regime?

The Chair: Yes.

Mr. Brian Topp: Common sense will tell us that there's no question that's an obstacle. It's evident in other parts of the tax system too. For example, low-income folks face similar challenges when they move from one income bracket to another. There's no doubt about it.

The Chair: I was wondering if you have businesses that come and....

Mr. Brian Topp: Deliberately seek to remain small in order to keep their tax credit?

The Chair: I guess that's one way of putting it.

Mr. Brian Topp: I'm not aware of such a case, I must say.

The Chair: What we've heard as testimony at this committee is that businesses will set up other small businesses instead of growing one small business into a larger business to avoid the tax consequences.

Mr. Nelson Riis: Five small businesses are essentially the same. They're just all under the small business—

Mr. Brian Topp: They farm their business—

The Chair: Do you have clients who have more than one small business?

Mr. Brian Topp: The model of diversifying is not unheard of in our clients. There's no doubt about that. It hasn't been a point of great controversy in the credit union system. This is the nature of the business we do.

The Chair: Okay.

I have one other quick question. The bells are ringing, so obviously there's going to be a vote in about 30 minutes.

We are entering the knowledge-based economy and a lot of the capital of corporations is the human beings in that economy. How are the banks dealing with this when it comes to lending?

Mr. Luc Provencher: In relation to the new economy?

The Chair: Well, dealing with a knowledge-based economy. A lot of that means that the capital of that company is human beings and their knowledge. How are you lending on that capital, which is actually human beings instead of fixed assets?

Mr. Luc Provencher: Basically, it's a big issue for small business, because if you look at the special mandate we have from government, it's to pay special attention to that sort of business because they don't have assets to pledge. The assets are going back home every day. So that is the issue they're facing.

Our approach, as a bank, is to deal with people on their potential, on their ability to be in business, and to help them to grow their business. We figure that this is probably the best chance they have of success, rather than having assets to pledge toward us.

Seventy percent of the people who deal with us don't offer us the full security we require—70%. In the knowledge economy and exports, most of them don't have any guarantee to offer us. The best guarantee we have is the people having expertise in their business, being well aware of all the changes that are coming in the world market they're faced with, and making sure they get the expertise they don't have, either through us or through others, so they have a better chance for success.

The Chair: Mr. Topp.

Mr. Brian Topp: That is a fascinating question, because I think what you're talking about is an increasingly typical e-commerce start-up—which is basically a loft room, a bunch of computers, and some very bright people who might be able to achieve some remarkable things after a lengthy period with zero cashflow—and the challenge the financial institutions are confronted with when they think about how to lend to such a company. Is that basically what you mean?

Again, because of the nature of the credit union system, outside of Vancouver, and some in Saskatchewan, that's not the kind of account we typically see. But we have ambitions to do more of that kind of business. So if what you're asking is what do financial institutions do when they try to understand a client like that, we're all going to have to develop—and are developing—in effect a banking centre of excellence that understands the industry.

At the end of the day, what you need is lending officers who can understand what a company like that is all about. You need to make a bet based on the skills of the folks who are in there instead of on their assets, which the financial industry is not used to doing.

Bear in mind that a financial institution is not a venture capital outfit. Some of us have venture capital wings, but at the end of the day we land on a balance sheet. So the long-term solution is lending officers who understand the e-commerce world.

• 1050

Our banking rules are going to have to change so that you can figure out a way to express skills on a balance sheet and be able to lend against that. You're now into the cutting edge of the debate in the accounting business about how to deal with human capital. We're not there yet, but if the economy continues to evolve the way it's doing, we're going to have to get there.

The Chair: Just to clarify, it's more than just e-commerce. It also is how you take that step of research and create the end result. And there's a middle ground that lending seems to be hesitant to do.

What we're hearing is it may be holding back innovation in Canada as well, because there doesn't seem to be that middle step because of past lending practices, because of non-existent past histories, etc.

I'm going to leave that, because the bells are ringing.

I have one point for clarification. Mr. Riis asked a question earlier, Mr. Provencher, and I didn't want to misunderstand this, but did you say there's no fee for assisting in lending?

Mr. Luc Provencher: No. He was asking me if there's a fee when we do a business plan with the client. We don't charge a fee. What we provide the people with is documentation to help them do it themselves, and we help them if they have problems doing it themselves. Most likely that's what we're aiming at, so that people themselves understand their own business and they build their own plan.

The Chair: Mr. Riis.

Mr. Nelson Riis: The reason I asked the question is that I asked one of our local managers what they charged for a business plan last week, and they said it was $5,000 to start with. I'm not sure if I'm asking my question correctly. Obviously I'm not.

Mr. Luc Provencher: You could be very right. We charge to do some business plans if you ask our consulting group to do a business plan for a business that wants to do something else.

If a business visits us and they want to do a business plan to do a project, we'll first help them to do their own, because this is what we're aiming at first. If they want to go further to make a bigger plan, we can assist in that if they don't want to do it themselves. But the first choice is for them to do it.

Our position is that it's better for them to do it because they will better understand their business. We can guide them through it, and we do that in the lending area of the bank, not necessarily in the consulting area. We can provide that in the consulting area and we will charge for it, but this is not our first thing.

The Chair: I want to thank all of you for joining us today. We appreciated the discussion and we look forward to meeting with you again.

The meeting is adjourned.