Hey mister, can you spare a few thousand dollars? The answer from local banks often is “yes,” under R.I. General Treasurer Seth Magaziner’s BankLocal initiative.
A little more than two years into the program, the state has moved about $22 million in deposits into Rhode Island community banks and credit unions in exchange for them making loans up to $250,000 to local small businesses. When a loan goes to an “underserved” small-business owner – such as a minority, a woman, or a military veteran – the state will deposit double the amount of the loan.
The idea is to spread a small portion of the state’s cash to relatively small financial institutions in amounts equal to the loans they make to small businesses, generally those with 100 or fewer employees. As a loan is paid off, the state withdraws the deposits provided as the incentive for making that loan. However, a participating lender can hold onto that money – or even increase it – if it continues to make new loans under the program.
Normally, nearly all the state’s available cash for deposits – which can range from $100 million to $500 million at any given time – has been kept in large banks, according to Magaziner’s office. But community banks have their advantages.
“Local banks and credit unions tend to know local businesses better,” Magaziner said. BankLocal isn’t riskier for the state, he added, as the deposits go into interest-bearing accounts.
Like any large depositor, however, the state’s deposits would be at risk if a bank failed, though that risk is “miniscule,” said Magaziner spokesman Evan England.
If an individual loan fails, the lending risk falls to the bank, he said, though the state would have to decide whether to pull out its deposits equal to whatever amount is owed on those loans.
“That would depend on how the bank chooses to address” the bad loan, England said.
Magaziner came up with the idea after hearing about problems that small businesses were having getting loans. He got approval from the State Investment Commission, which he chairs, to use up to $30 million in state funds for BankLocal. It’s the first time the state has made deposits with credit unions.
Eight banks and two credit unions have joined the program.
Smithfield-based Navigant Credit Union has made about 100 loans under the program, some for as little as $5,000 to $10,000, said Jeffrey Cascione, Navigant’s vice president of commercial lending.
Cascione said Navigant must show a loan has been closed before receiving any state money for it. It also must provide details of each loan, such as the amount, the type of loan, the interest rate attached to it, as well as details about the borrower’s business.
The concept “makes perfect sense,” he added. “It’s been a really good partnership.”
Scott Blake is a PBN staff writer. Contact him at Blake@PBN.com.
