copy the linklink copied!23. Italy
copy the linklink copied!Key facts on SME financing
Small and medium-sized enterprises dominate the business landscape in Italy, accounting for nearly 80% of the industrial and service labour force, and generating about two-thirds of turnover and value added.
Weak cyclical conditions in the second half of the year swiftly affected lending markets: after increasing at a sustained pace throughout 2018, business loans resumed their decline in the first half to 2019. Credit weakened slightly for large firms, but contracted markedly for smaller ones, exacerbating an already sluggish loan dynamics.
Credit standards remained loose overall, but gradually tightened from the second half of 2018, owing to higher funding costs for banks and a gloomier economic outlook. Business borrowing rates stood at historically low levels, but collateral requirements remained stable at a high level compared with the past.
Credit quality continued to improve, partly reflecting the cyclical upswing observed in recent years: the ratio of SME new non-performing loans to outstanding loans fell below the levels observed before the global financial crisis. The stock of non-performing loans dropped further, mainly as a result of large sales.
Equity financing for SMEs rose sharply in 2018 compared to the previous year, driven by an unprecedented growth in the early stage segment; resources devoted to firms of all sizes almost tripled, after plummeting by more than 40% in 2017.
Business-to-business payment delays stabilised overall, but the economic slowdown gradually led to a worsening in payment patterns: both agreed timeframes and average delays in the settlement of invoices increased somewhat for smaller firms.
Bankruptcies fell for the fourth year in a row, down by nearly 7% compared to the previous year and well below the peak observed in 2014.
The wide range of policies enacted or ramped up in response to the financial crisis gradually shifted in recent years from a broad-based countercyclical support to more targeted initiatives aimed at pursuing specific goals.
Credit guarantee schemes traditionally played a crucial role in easing SME access to finance. The Central Guarantee Fund continued to expand its activity, reaching a new high in 2018: it provided EUR 13.7 billion in guarantees for EUR 19.3 billion worth of loans. Its recent reform, aimed at better fitting the need of the potential beneficiaries through the introduction of a new evaluation system of firms’ creditworthiness, came into effect in early 2019.
Long-term individual savings plans (piani individuali di risparmio or PIR) were introduced in early 2017 to channel private savings towards investments in financial instruments issued by Italian companies. In order to foster the development of small and medium-sized enterprises, the 2019 Budget Law amended the rules on PIR funds by requiring them to invest part of the portfolio in financial instruments issued by Italian SMEs and in venture capital funds. However, these investments were relatively risky and characterised by low liquidity, partly owing to the limited size of the markets for securities issued by smaller firms. Since January 2019, net subscriptions virtually dried up following legislative changes.
Initiatives have been recently undertaken to support the development of a more mature innovation ecosystem. The National Innovation Fund, established by the 2019 Budget Law, is slated to become one of the leading European venture capital operators, acquiring qualified minority stakes in start-ups, scale-ups and innovative SMEs, while acting as a catalyst for private and international capital.
copy the linklink copied!SMEs in the national economy
Small and medium-sized firms account for 99.9% of Italian businesses; the share of micro-enterprises exceeds 95 per cent (see Table 23.2) and stands above the EU average. In 2017, SMEs employed around 80% of the industrial and service labour force and generated about two-thirds of turnover and value added (see Figure 23.1).
A decade after the onset of the crisis, SMEs have not yet fully recovered. Micro firms, in particular, are still reeling from the economic fallout of the double-dip recession, as evidenced by the sharp fall in turnover and value added; large firms, by contrast, have outperformed pre-crisis levels (see Fig. 23.2).
Country definition
In accordance with Eurostat standards, the Italian National Institute of Statistics defines small and medium enterprises as firms with fewer than 250 employees. In detail, micro-enterprises and small firms have, respectively, less than 10 and 10-49 employees, while medium-sized enterprises are defined as those with 50-249 employees.
The SME definition used by financial institutions
The Bank of Italy classifies data on business lending by firm size: small firms are defined as limited partnerships, general partnerships, informal partnerships, de facto companies and sole proprietorships with fewer than 20 workers. This data disaggregation has been used for most indicators on the debt side.
copy the linklink copied!SME lending
The Italian economy posted a subdued growth in 2018, following a slight decline in GDP in the second half of the year. Weak cyclical conditions curbed the ongoing recovery in firms’ profitability and translated into a sharp resizing of investment plans.
Credit markets continued to be buttressed by the ECB’s accommodative monetary policy measures. Against a backdrop of supportive supply conditions and historically low borrowing costs, lending to firms recorded the highest growth since the start of the sovereign debt crisis: nonetheless, the downswing later in the year was reflected in business loans, which resumed declining in the first half of 2019 (see Figure 23.3). The contraction was far more marked for small enterprises, worsening the already weak credit dynamics. The share of SME loans in total business loans further decreased to 17.2%, the lowest level since 2007. Trends in loan maturities confirm the clear shift from short-term to long-term lending observed over the last decade.
copy the linklink copied!Credit conditions
Credit supply policies gradually tightened from the second half of 2018, though remaining relaxed overall. According to the banks interviewed in the euro-area bank lending survey, higher funding costs, coupled with the worsening economic outlook, translated into a gradual deterioration in the terms and conditions applied to loan agreements (see Figure 23.4).
Likewise, signs of concern surfaced from business surveys, which reported a progressive worsening of credit access conditions since the spring of 2018, more markedly for small firms.
Consistent signals emerged from the Survey on Industrial and Service Firms carried out by the Bank of Italy: the SME rejection rate, which had peaked at 12% in 2012 and sharply dropped afterwards, rose slightly for the second year in a row.
Business borrowing rates were virtually unchanged at historically low levels in 2018, bolstered by the highly accommodative stance of monetary policy. As the cost of credit held steady in all size classes, the interest rate spread between average SME and large firm rate stabilised at 1.3%.
Collateral requirements remained broadly stable at a relatively high level in recent years: from 2016 to 2018 SME loans backed by real guarantees stood at 57%, above the average level of 54% recorded over the seven previous years.
Credit quality continued to improve: the ratio of SME new non-performing loans (NPLs, which include bad loans) to outstanding loans fell below the levels observed before the global financial crisis (see Figure 23.5). The stock of non-performing loans dropped significantly, mainly as a result of large sales.
copy the linklink copied!Alternative sources of SME financing
Total early stage and expansion capital investments almost tripled in 2018, after plummeting by more than 40% in the previous year (see Table 23.3). Resources directed to small and medium-sized firms rose sharply, driven solely by an unprecedented growth in the early stage segment; expansion capital, conversely, bottomed out, increasing nearly four-fold only for large firms due to a few deals of significant amount.
Access to the stock market, though still limited, broadened in recent years. Such a trend was fuelled by the rise in initial public offerings (IPOs), especially by small and medium-sized firms. SME listings mostly occurred on the Alternative Investment Market (AIM Italia), a second tier market with simplified admission procedures. Recent measures as the tax credit on consultancy fees for SME listings on the stock exchange should further promote SME access to market-based financing sources.
Online finance, albeit restricted in volumes, gained ground as an alternative source of funding for SMEs. Equity crowdfunding ̶ originally intended for start-ups and later extended to innovative SMEs ̶ now enables all types of SMEs to raise capital through dedicated online platforms. In the twelve months ending in June 2019, fundraising amounted to EUR 49.0 million, more than double compared to the previous period. Lending crowdfunding provided EUR 84.2 million to SMEs, up by 88% over the previous year. The market is expected to grow, partly due to capital inflows from professional investors.
copy the linklink copied!Other indicators
The economic slowdown gradually led to a worsening of payment patterns, virtually halting the downward trend that had dominated since 2013. Business-to-business payment delays stabilised overall, but both agreed timeframes and average delays in the settlement of invoices rose somewhat for smaller firms. According to Payline database, which tracks the commercial transactions of over three million Italian companies, payment delays increased slightly for SMEs (9.3 days, up from 9.1 in 2017), while declining further for large firms (14.7 days, down from 15.1, see Table 23.4).
Bankruptcies fell for the fourth year running since the outbreak of the financial crisis: 11 254 Italian companies went out of business in 2018, down by nearly 7% compared to the previous year and well below the peak recorded in 2014 (see Figure 23.5). The incidence of insolvencies dropped again to 20.0 per 10 000 enterprises.
In February 2019, an overhaul of the rules of insolvency procedures, aiming at better tackling corporate crises, was implemented. The ‘Code for business crisis and insolvency’ (Codice della crisi d’impresa e dell’insolvenza), which will enter into full force in August 2020, introduced early warning procedures to timely detect hardship cases, better ensuring business continuity, and addressed assisted crisis settlements and out-of-court debt restructuring agreements.
copy the linklink copied!Government policy response
Over the last decade, a wide range of SME policies were enacted or ramped up in the wake of the financial crisis. These measures were gradually refocused in recent years from a broad-based countercyclical support to more targeted initiatives aimed at promoting specific goals.
Credit guarantee schemes have traditionally played a crucial role in easing SME access to finance. The Central Guarantee Fund continued to expand its activity, reaching a new high in 2018: it provided EUR 13.7 billion in guarantees for EUR 19.3 billion worth of loans (see Figure 23.6).
The recent reform of the Fund, which came into effect in March 2019, aims at better fitting the needs of its beneficiaries. It shifts credit towards firms that would hardly have access to bank financing through the introduction of a new credit risk assessment based on the borrower’s probability of default.
Long-term individual savings plans (piani individuali di risparmio or PIR) were introduced in early 2017 to channel private savings towards investments in financial instruments issued by Italian companies. In order to foster the development of small and medium-sized enterprises, the 2019 Budget Law amended the rules on PIR funds by requiring them to invest part of the portfolio in financial instruments issued by Italian SMEs and in venture capital funds. The new rules increased the risk profile of PIR funds, which are products intended for household savings. After recording a sharp fall in the second half of 2018, net subscriptions virtually dried up since January 2019 following legislative changes.
The 2019 Budget Law set out the National Innovation Fund to support the development of a more mature innovation ecosystem. Managed by the Deposits and Loans Fund (Cassa Depositi e Prestiti, CDP) and with an initial endowment of EUR 1 billion, the Fund aims at streamlining public resources devoted to the strategic topic of innovation, while acting as a catalyst for private and international capital. Slated to become one of the leading European venture capital operators, it will acquire, both directly and indirectly, qualified minority stakes in start-ups, scale-ups and innovative SMEs.
In order to promote the uptake of alternative financing, specific tax incentives were introduced over the last years for investors in equity capital of innovative start-ups. More recently, the fiscal benefit was increased from 30% to 40% for tax year 2019 only; the deduction from taxable corporate income was raised to 50% for investors acquiring the entire share capital of the innovative start-up for a minimum 3-year holding period.
References
Bank of Italy (2018), Annual Report for 2017, Ordinary Meeting of Shareholders, Rome. https://www.bancaditalia.it/pubblicazioni/relazione-annuale/2017/index.html?com.dotmarketing.htmlpage.language=1
Bank of Italy (2018b), Financial Stability Report, November 2018, Rome.
Bank of Italy (2019a), Annual Report for 2018, Ordinary Meeting of Shareholders, Rome. https://www.bancaditalia.it/pubblicazioni/relazione-annuale/2018/index.html?com.dotmarketing.htmlpage.language=1
Bank of Italy (2019b), Financial Stability Report, May 2019, Rome. https://www.bancaditalia.it/pubblicazioni/rapporto-stabilita/2019-1/index.html?com.dotmarketing.htmlpage.language=1
Bank of Italy (2019c), Bank Lending Survey, Rome. https://www.bancaditalia.it/statistiche/tematiche/moneta-intermediari-finanza/intermediari-finanziari/indagine-credito-bancario/index.html?com.dotmarketing.htmlpage.language=1
Bank of Italy (2019d), Survey of Industrial and Service Firms in 2018, Rome. https://www.bancaditalia.it/pubblicazioni/indagine-imprese/index.html?com.dotmarketing.htmlpage.language=1
Bank of Italy, Economic Bulletin, various issues, Rome
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