The Rural Development Foundation has in some cases distributed loans regardless of the effects of the crisis and has not treated loan applicants equally

Priit Simson | 6/15/2021 | 12:00 AM

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TALLINN, 15 June 2021. – The Rural Development Foundation (RDF) has in some cases distributed the credit funds meant to mitigate the effects of the COVID-19 crisis to enterprises that did not notice the effects of the crisis themselves or saw only the effect of the bank not lending them money. Also, when issuing loans, the RDF often did not make it clear whether the need for loans was caused by the COVID crisis. During the audit, the National Audit Office (NAO) also found that the foundation has treated loan applicants differently, asking some enterprises for more detailed information than others.

Although the main precondition for obtaining a loan was the detrimental economic impact of the spread of COVID-19, the NAO found that in ten applications loans had been granted to enterprises which stated that they had not noticed the effects of the virus crisis. Such applications costed €5 million in loans. In total, 86 million was distributed to applicants.

"In the case of more than fifty enterprises applying for loans, the statement that the bank does not lend money to the enterprise was enough to prove the impact of the crisis," commented Auditor General Janar Holm. "Unfortunately, the foundation did not find out how the need for loans in specific cases had been caused by the coronavirus crisis."

Most (41) of these more than fifty enterprises requested and received investment loans in the total amount of €17 million. Of these, 14 companies that received loans have even increased their turnover during the crisis, and this was also predictable on the basis of the financial data submitted to the Rural Development Foundation.

"The audit has shown that the foundation often did not check the statements of enterprises that they would not receive a loan from the bank, or that the conditions offered by the bank would be unreasonable," explained Auditor General Holm. "At the same time, it was precisely the fact that the enterprise could not attract additional financial resources from other sources, or that it would be too burdensome for the enterprise that was one of the preconditions for obtaining a loan."

The practice of the RDF to prove that banks are not willing to lend money to an enterprise was also irregular. While one loan applicant submitted five negative decisions from banks, the other did only one. There were also those who did not provide this information, and the foundation accepted it. On the other hand, among the loan applicants there were enterprises from which the RDF explicitly required to submit loan refusals by banks.

"The organization of the RDF's work does not guarantee the transparency of the procedure and equal treatment of loan applicants," told Auditor General Janar Holm. The NAO points out that, when performing a public task, the foundation is required to thoroughly explain the decisions to grant and refuse a loan, as prescribed by the administrative procedure. Unfortunately, the reasons for refusing the loan remained unclear in some cases. For example, there were no rationale containing the factual and legal basis, no considerations, and no reference to the disputability of the decision. 109 loan applications were not satisfied, the most common reason being insufficient creditworthiness (in 30 cases). What this consisted of was not always clear, as it was not reflected in the decision: the conclusion was merely, for example, that "the project is too risky". Enterprises were often only notified of the decision by telephone.

The National Audit Office has recommended the Minister of Rural Affairs ensure that the Rural Development Foundation follows the principles of administrative procedure when performing its public duty, makes decisions transparently and supports them with factual circumstances. The NAO also recommended ensuring the separation of the roles of the governing bodies of the foundation in establishing internal procedures and a much more relevant set of rules. Besides, the National Audit Office recommended increasing the capacity of the supervisory board by way of creating a permanent internal audit function either under the supervisory board, or organised by the ministry. Finally, the NAO issued a recommendation to determine more precisely and with specific factual circumstances the indications of the impact of COVID-19, if anti-COVID measures are planned to be implemented through MES in the future. If a loan measure will be implemented, it is necessary to specify how to prove a market failure.

In their reply to the recommendations, the Minister of Rural Affairs considered that application of administrative procedure to the activities of the RDF, as well as to other state foundations, is not yet a generally accepted and undisputed position. The issue needs to be discussed nationwide in a broader context and not only in the context of the RDF’ activities. In its response, the Minister for Rural Affairs also found that the RDF should have applied the administrative procedure only if it had granted loans on more favorable terms than market conditions provide, i.e. with state aid. The Minister for Rural Affairs promised to consider the recommendations to guide the reorganization of the internal work organization of the RDF and to introduce an internal audit at the RDF.

Background: The COVID-19 loan for bioeconomy and rural enterprises was one of the largest anti-crisis measures in terms of financial volume. For this purpose, €100 million was allocated from the state budget. 347 companies applied for the loan, of which 248 received a loan in the amount of approximately €86 million. The largest loan granted by the PDF was €3.4 million, and the smallest one was €5,000. The interest rate on these loans was 1–6.5%, the average was 2%; duration was 5 to 120 months, the average was 72 months. Loans were in most cases (78%) secured by a mortgage. Half of the applications and granted loans went to the agricultural sector. The measure was officially open from 15 May to 26 October 2020.

Priit Simson
Head of Communications of the National Audit Office of Estonia
+372 640 0102
+372 5615 0280
priit.simson@riigikontroll.ee
press@riigikontroll.ee
http://www.riigikontroll.ee/

  • Posted: 6/15/2021 12:00 AM
  • Last Update: 6/14/2021 11:26 PM
  • Last Review: 6/14/2021 11:26 PM

The practice of the RDF to prove that banks are not willing to lend money to an enterprise was also irregular.

Elmo Riig, Sakala/Scanpix Baltics

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