Citigroup (C) plans to invest $200 million in community lenders that make loans to small businesses in low-income areas, the bank announced on May 5. The move makes Citi the latest among major lenders to tap Community Development Financial Institutions, known as CDFIs, to get money to small business borrowers that face a tough credit environment.
Citi is partnering with the nonprofits Calvert Foundation and Opportunity Finance Network, a network of CDFIs, to run the $200 million Communities at Work Fund. Those groups will run the fund and determine which CDFIs to invest in, while Citi will handle underwriting and risk management. Community development lenders can apply online starting May 5.
"The need is more apparent than ever," says Bob Annibale, Citi's global director of microfinance and community development. Community lenders typically give borrowers technical assistance along with loans, he noted, so they often have lower loss rates than regular banks. CDFIs are generally nonprofit lenders that lend to small businesses and consumers in distressed areas, often located in inner-city or rural markets underserved by conventional banks. They're funded through a combination of loans and investments from mainstream banks, philanthropies, and federal funding.
"Demand from small businesses in the United States has just gone through the roof" in the past two years, says Mark Pinsky, CEO of Opportunity Finance Network. Despite new infusions of cash under the Obama Administration, including making up to $1 billion in money from the Troubled Asset Relief Program available to CDFIs, Pinsky says many lenders still can't meet demand.
That's partly due to traditional lenders' retreat from small business lending that began two years ago and has not fully recovered. Citi's own total outstanding credit to small businesses dropped from $10.2 billion in April 2009 to $9.8 billion in February 2010, the latest month for which data are available, according to lending reports that the largest bailout recipients must file with the Treasury Dept.
Other banks have recognized CDFIs as an effective way to reach small businesses—which depositary institutions are required to by the Community Reinvestment Act. Goldman Sachs (GS) announced in November plans to loan $250 million to CDFIs as part of a larger program to support small businesses.Morgan Stanley (MS) is in talks with microlender Accion USA about a partnership, and recently provided a credit line to the group's Chicago affiliate. Neither Accion nor Morgan Stanley would comment on the discussions.
Disbursements of At Least $200,000
Citi has worked with CDFIs and microlenders in the past, including the Accion Texas branch, though it usually focused on developing affordable housing rather than small business lending. The Communities at Work Fund will make $200 million available to CDFIs in five-year loans at 4.3 percent interest. They will in turn loan the money out to small business and nonprofit clients, Annibale says. CDFIs can request loans as small as $200,000 or as large as $20 million. The fund expects to start lending money in the next couple of months and disburse most of the $200 million in 12 months, Pinsky says. The money won't be restricted to lenders in Citi's footprint—the areas where it must fulfill lending requirements under the Community Reinvestment Act.
Despite new Treasury funding in the last two years, CDFIs remain a small piece of overall business lending, with $22 billion loaned to 51,000 companies in the industry's 20-year history. Citi's plan reflects a growing recognition that community lenders effectively serve small businesses, even in a bad economy, and sometimes better than national banks. "The work that organizations have done in that sector has made it very clear that they're capable of absorbing larger amounts of capital," says Annibale.