Financing SMEs and Entrepreneurs 2020

19. Hungary

Key facts on SME financing

According to the preliminary data of the Hungarian Central Statistical Office, at the end of 2017, 724 000 enterprises operated in Hungary, 99.86% of which — i.e. 723 000 enterprises — qualified as SMEs.

In 2018, the Hungarian economy expanded at an exceptional rate, exceeding analysts’ expectations. The swift rise of Hungarian GDP was substantially influenced by corporate investment growth. In parallel with output and investments, the loans taken out by companies increased more than predicted during the year.

Corporate credit increased by 13.5 per cent annual growth rate in 2018. Half of the expansion was linked to the SME sector. Loans to SMEs rose by 10 percent year-on-year, within which the micro-firm segment expanded the most, with a 14% year-on-year increase.

Banking competition intensified according to Hungarian National Bank’s (MNB) report. This trend was accompanied by an improvement in economic prospects and an easing of credit terms. Based on the banks’ responses to the Lending Survey, credit conditions were eased for all corporate size categories in the fourth quarter, which mainly affected non-price conditions.

The Funding for Growth Scheme and the Market-based Lending Scheme both contributed to incentivising the SME lending market, however they did not have any significant impact on the lending structure in 2018. Based on the experience gained from these, at the beginning of 2019 the MNB will launch the Funding for Growth Scheme Fix (FGS fix) with more targeted features: a total amount of HUF 1 000 billion to finance new investments by SMEs.

The interest rate on small-amount HUF loans has remained unchanged. There was no major change in the average interest rate of forint loans below EUR 1 million, as they came in at 2.44 per cent, respectively.

2018 was one of the most active years in the history of the Hungarian venture capital and private equity market. Not only the number of transactions but also the total amount invested increased significantly. The majority of transactions were made at the seed stage.

The proportion of guaranteed loans and the ratio of government-backed loan guarantees to GDP is at an exceptionally high level in Hungary, in comparison to other European countries.

Table 19.1. Scoreboard for Hungary

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	HUF Billion	5 280	5 823	5 379	4 783	4 797	5 014	5 064	4 831	4 942	4 889	4 802	5 296
Outstanding business loans, total	HUF Billion	8 466	9 613	8 959	8 770	8 825	7 892	7 648	7 761	7 355	7 073	7 545	8 562
Share of SME outstanding loans	% of total outstanding business loans	62.36	60.58	60.05	54.54	54.36	63.53	66.21	62.25	67.20	69.13	63.65	61.86
New business lending, SMEs	HUF Billion	3 851	4 384	3 660	3 531	3 585	3 870	4 662	4 302	3 665	4 187	4 443	3 743
Short-term loans, SMEs	HUF Billion	2 473	2 966	2 832	2 775	2 767	3 052	2 654	2 570	2 424	2 708	2 727	2 002
Long-term loans, SMEs	HUF Billion	1 377	1 418	828	756	818	818	2 008	1 732	1 241	1 478	1 274	1 741
Share of short-term SME lending	% of total SME lending	64.23	67.66	77.37	78.59	77.18	78.86	56.93	59.75	66.14	64.69	68.16	53.48
Government loan guarantees, SMEs	HUF Billion	308.8	352.1	409.2	377.1	343.4	251.9	350.0	346.2	348.7	469.3	525.7	725.5
Government guaranteed loans, SMEs	HUF Billion	381.4	436.4	600.3	472.0	437.2	314.8	458.0	433.8	429.4	568.6	731.0	894.2
Non-performing loans, total (amount)	HUF Billion	..	..	..	832	1 155	1 272	1 124	961	697	577	526	472
Non-performing loans, total	% of all business loans	3.10	4.70	10.10	12.8	17.4	17.7	16.1	13.7	9.6	5.4	3.3	5.5
Non-performing loans, SMEs	% of all SME loans		5.40	8.90	12.8	15.9	20.5	18.6	20.7	13.7	6.3	4.4	3.8
Interest rate, SMEs	%	10.19	11.25	12.31	8.99	9.38	9.7	7.4	5.1	4.7	4.2	3.3	2.44
Interest rate, large firms	%	8.97	10.28	11.07	..	..	8.9	5.9	4.1	2.4	2.8	1.8	2.0
Interest rate spread	% points	1.22	0.97	1.24	..	..	0.80	1.50	1.00	2.30	1.40	1.50	0.44
Collateral, SMEs	% of SMEs needing collateral to obtain bank lending	..	..	..	..	..	..	..	71	64.5	60.1	53.4	..
Rejection rate	1-(SME loans authorised/ requested)	..	..	..	..	..	..	68.8	67	84.4	71.6	49.2	..
Utilisation rate	SME loans used/ authorised	..	..	..	..	..	..	81.5	..	..	..	..	..
Non-bank finance
Venture and growth capital	HUF Million ('000 000)	3 949	13 782	720	6 982	11 308	19 361	15 880	18 759	27 742	12 070	11 470	28.6
Venture and growth capital (growth rate)	%, Year-on-year growth rate	..	249.00	-94.78	869.72	61.96	71.22	-17.98	18.13	47.89	-56.49	-4.97	149.88
Leasing and hire purchases	HUF Million ('000 000)	..	..	..	..	..	..	..	..	..	274 766	243 743
Factoring and invoicing	HUF Million ('000 000)	..	..	..	..	..	..	..	..	..	126 038	25 951
Other indicators
Payment delays, B2B	Number of days	16.30	19.00	19.00	15.00	22.00	20.00	..	17.40	17.40	..	..
Bankruptcies, total	Number	153	168	212	232	279	301	376	644	488	377	322	401
Bankruptcies, total (growth rate)	%, Year-on-year growth rate	..	10.35	25.65	9.5	20.4	7.9	24.7	71.3	-24.2	-22.9	-14.4	24.34

Source: See Table 19.5.

SMEs in the national economy

Hungary defines SMEs using the standard criteria provided by the European Union. An SME is an enterprise with fewer than 250 employees and which has an annual turnover less than or equal to EUR 50 million. The definition is stipulated in Law No. XXXIV. of 2004 on Small and medium–sized enterprises and support of their development.

According to the preliminary data of the Hungarian Central Statistical Office, at the end of 2017, 724 000 enterprises operated in Hungary, 99.86% of which — i.e. 723 000 enterprises — qualified as SMEs. Based on the European Commission’s data on the business economy that ensures comparability between EU member states, the number of persons employed by Hungarian SMEs somewhat exceeds the EU average. Meanwhile the value added generated by these SMEs stands slightly below the EU average.

Table 19.3. SMEs in Hungary 2018, basic figures

Number 525 857	Share (%)			Share (%)			Number
94.0 %		93.1 %	912 599		EU-28	Hungary		EU-28
				Share (%)	Share (%)	EUR billion	Share (%)	Share (%)
Micro					33.4 %	29.4 %	11.2	18.0 %	20.7 %
Small	27 939	5.0 %	5.8 %	520 731	19.0 %	20.0 %	10.9	17.5 %	17.8 %
Medium	4 604	0.8 %	0.9 %	450 171	16.5 %	17.0 %	11.4	18.3 %	18.3 %
SMEs	558 400	99.8 %	99.8 %	1 883 501	68.8 %	66.4 %	33.5	53.7 %	56.8 %
Large	936	0.2 %	0.2 %	852 759	31.2 %	33.6 %	28.9	46.3 %	43.2 %
Total	559 336	100.0 %	100.0 %	2 736 260	100.0 %	100.0 %	62.4	100.0 %	100.0 %

Note: These are estimates for 2018 produced by DIW Econ, based on 2008-2016 figures from the Structural Business Statistics Database (Eurostat). The data cover the ‘non-financial business economy’, which includes industry, construction, trade and services (NACE Rev. 2 sections B to J, L, M and N), but not enterprises in agriculture, forestry and fisheries and the largely non-market service sectors such as education and health. The following size-class definitions are applied: micro-firms (0-9 persons employed), small firms (10-49 persons employed), medium-sized firms (50-249 persons employed), and large firms (250+ persons employed). The advantage of using Eurostat data is that the statistics are harmonised and comparable across countries. The disadvantage is that for some countries the data may be different from those published by national authorities.

Source: European Commission SBA Fact Sheet 2018.

Macro-economic overview1

Real GDP grew by 5% in 2018 in Hungary, reaching 5.3% in the third quarter due to working days and seasonality. Public debt-to-GDP ratio has been declining as well and the government deficit was substantially lower than the Maastricht level of 3% in recent years. Hungary’s net financing capacity reached 2.2% of GDP in 2018, aided by European Union funding. The MNB noted that Hungaryʼs net financing capacity relative to GDP was the highest in the V4 region last year. Hungary recorded the fastest investment growth among its neighbours, and investments relative to GDP were also the highest.

Between 2010 and 2017, successful labour market and tax structure reforms gave rise to a strong increase in employment and value added in the Hungarian business sector. However, the lion’s share of this increase can be attributed to large firms. At the same time, the expansion rate in value added was much faster than that of the number of persons employed. The resulting increase in the productivity of Hungarian enterprises surpassed, in all size classes, the growth rate registered in the V4 and EU-28.

Table 19.3. Change in labour productivity in Hungary, the V4 and EU-28 by size classes in 2010–2017 and the ratio of Hungarian productivity to the V4 and EU-28 average

	Change in labour productivity between 2010 and 2017 (%)			Productivity of Hungarian enterprises relative to the country group averages in 2017 (%)
Hungary	V4	EU-28*		V4	EU-28
Micro-enterprises	140.9	94.4	108.4		103.3	34.1
Small enterprises	150	112.5	107		92.2	46
Medium-sized enterprises	121.1	119.1	113.9		91	45.7
SMEs	131.6	106.3	109.8		97.2	40.6
Large enterprises	117.7	116.8	115		95.2	51.2
Total	130.7	110.8	112.2		96	44.4

Note: *In 2010 EU-27

Source: Data extracted from the European Commission SBA Fact Sheets 2011, 2018

In 2018, the Hungarian economy expanded at an exceptional rate, exceeding analysts’ expectations. The dynamic rise of Hungarian GDP was substantially influenced by corporate investment growth. Therefore corporate investment-to GDP ratio is now higher than before the crisis. In parallel with output and investments, the loans granted to companies increased more than predicted during the year. The financing needs of non-financial corporations increased due to investments but also due to falling operating results in the context of high wage outflows.

SME lending2

Overall, outstanding corporate bank loans increased by HUF 892 billion in 2018, with a year-on-year growth of 13.6%. The expansion mainly took place in loans with a maturity of over one year. Their growth amounted to HUF 661 billion, while short-term loans grew by HUF 303 billion. In regional comparison, Hungary exhibited the greatest corporate credit growth in the past year. Half of the expansion was linked to the SME sector. This surge is the highest rate in the past ten years in Hungary. Loans to the SME sector rose by 10 percent year-on-year, within which the micro segment expanded the most, with an increase of roughly 14 per cent in annual terms. This annual growth of corporate credit was driven not only by SME sector’s demand, but also by several large-scale transactions by larger enterprises.

Figure 19.1. Growth rate of bank loans outstanding of the total corporate sector and the SME sector

Source: MNB trends in Lending charts.

Statlink

The volume of new loans granted in the last quarter of 2018 declined compared with previous quarters. The Central Bank’s expected New Funding for Growth Scheme programme (FGS fix, which was launched in 2019) may influence this indicator. Some corporations may have postponed their borrowings in the last quarter of the year to make use of the more favourable opportunities available under the FGS fix scheme instead.

Credit conditions and interest rate

Credit conditions were loosened in the corporate segment in 2018. With respect to specific conditions, collateral requirements were reportedly eased in the last year. Most credit institutions attributed the easing of the conditions to the increasing competition among banks and the achievement of their objectives in terms of market shares.

Figure 19.2. Changes in credit conditions in the corporate segments

Source: MNB trends in Lending charts.

Statlink

Credit conditions have been eased in all corporate size categories. A net one-quarter of banks reported looser conditions in the last quarter of 2018, in both corporate size categories. With respect to the first half of 2019, banks expect easier access to credit, especially for micro and small enterprises, which is probably due to the increased interest for the favourable loans available under the FGS fix scheme. Looking ahead to the first half of 2019, a net half of banks have predicted a tightening in the conditions of commercial real estate loans, which was attributed to the risk of property overvaluation and avoiding the overrepresentation of these loans within the portfolio in order to satisfy capital adequacy rules.

The interest rate on small-amount HUF loans has remained unchanged. There was no major change in the average interest rate of forint loans below EUR 1 million, standing 2.44 per cent. The interest rate of high-amount HUF loans had fallen to 1.8 per cent by the end of the year. The average interest rate on high-amount euro loans sank to 2 per cent.

Alternative sources of SME financing

Venture Capital Market 3

2018 was one of the most active years in the history of the Hungarian venture capital and private equity market. Not only the number of transactions but also the total amount invested increased significantly.

Similarly to the previous years, the Hungarian VC-market is a strong one, both according to market and industry statistics. In the vast majority of the VC investments, early-stage companies got new sources.

During 2018, 191 companies received EUR 346 million in investment from Venture Capital and PE funds. The total invested value represents a 141% increase compared to the invested EUR 144 million in 2017 and the total number of transactions increased by 84%. The majority of transactions were concluded in seed stage (154 out of 191). EUR 337 EUR million were raised in 2018, provided by various types of investors.

Table 19.4. Private equity investments into Hungarian companies 2017-2018

In EUR thousand

Stage focus	2017				2018
Amount	%	Number of companies	%	Amount	%	Number of companies	%
Seed	21 908	15.24	93	89.42	23 350	6.75	154	79.79
Start-up	15 790	10.99	4	3.85	40 065	11.58	27	13.99
Later Stage Venture	139	0.10	1	0.96	7 208	2.08	4	2.07
Total venture	37 837	26.33	98	94.23	70 623	20.42	185	95.85
Growth capital	42 531	29.59	3	2.88	19 259	5.57	5	2.59
Rescue/Turnaround	0	0.00	0	0.00	0	0.00	0	0.00
Replacement capital	0	0.00	0	0.00	0	0.00	0	0.00
Buyout	63 349	44.08	3	2.88	255 996	74.01	3	1.55
Total investment	143 717	100.00	104	100.00	345 878	100.00	193	100.00

Source: Invest Europe, Investments: market statistics

Government policy responses

The government had created a favourable atmosphere of SMEs and entrepreneurs. Several SME loan or other financial programmes were available in Hungary in 2018 either directly or indirectly supported by the government or the National Bank.

In 2018-Q1/2019, several changes were introduced in SME taxation. Firstly, the social contribution tax decreased by an additional 2 percentage points to 17.5%. Moreover, the eligibility criteria for choosing small business tax forms was broadened. By 2019, 310 000 entrepreneurs opted for the Small Taxpayers’ Itemised Lump Sum Tax, the so-called KATA tax scheme; their total tax burden varies between 6 and 20%. The Small Enterprise Tax (KIVA), aimed at offering a preferential tax scheme for SMEs wishing to grow, has been chosen by nearly 30 000 enterprises. Prior to 2010, the tax burden on an average medium-sized enterprise was between 52% and 56%, while according to the Doing Business competitiveness ranking of PWC/World Bank, it currently stands at 39%.

Within the framework of the ‘Funding for Growth Scheme’4, almost 40 000 enterprises obtained financing in excess of HUF 2 800 billion between 2013 and 2016. The scheme contributed to a turnaround in lending: from 2015 SME outstanding loans show an increase, the dynamics of which has already reached 15% annually by 2018 Q2. In parallel with the third phase of the FGS, in 2016 the MNB launched the Market-based Lending Scheme (MLS), in order to facilitate smooth transition to market-based lending, i.e. without central bank refinancing, and ensure sustainable economic growth through SME lending. The MLS continued to support growth in lending to SMEs in 2018, but it was terminated at the end of the year.

During the FGS, long-term, fixed-interest loans gained ground; however, after the phasing-out of the scheme, the ratio of these declined, and the MLS was unable to reverse this trend. Based on the experiences of the past years, the facilitation of lending in a healthier structure by the central bank may be implemented by returning to the FGS in a more targeted manner, since this scheme was able to exert favourable impact both on the volume and structure of lending. Therefore, at the beginning of 2019, the MNB will launch the ‘Funding for Growth Scheme Fix’ (FGS fix) only for investment purposes, with a total amount of HUF 1 000 billion. In terms of its most important parameters and its operation, the new scheme will be identical to the previous phases of the FGS. The ‘Funding for Growth Scheme Fix’ will provide 0% interest loans for credit institutions for a maximum of 10 years (the minimum lending period is 3 years). The financing can then go toward SMEs in the form of a loan or financial lease.

The MNB aims to improve access to financing for SMEs by also creating the Standardized Loan Application Interface. This measure influenced access to loans, increased the competition between banks, and contributed to a significant increase in SME investments.

EU funded loans also contributed substantially to SME financing. Outstanding loans disbursed by commercial banks, acting as intermediaries in the refundable funds, reached altogether nearly HUF 500 billion in the whole EU budget cycle. The programmes are running by the Hungarian Development Bank and provides zero interest rate loans or combined loans for SMEs for various purposes.

Besides new JEREMIE5 (Joint European Resources for Micro to Medium Enterprises), new funds have appeared on the venture capital market. Within the framework of the smart specialisation venture capital programme GINOP 8.1.3/B-17, seven new venture capital funds are created, supported by EU funds and private capital. The Programme is worth approximately HUF 75 billion. Each fund manager will be able to distribute around HUF 10 billion. The fundraising can be accessible in determined sectors: “Healthy society and wellbeing”, “ICT technologies and services”, “Agrarian innovations”, “Intelligent technologies and services”, “Developed vehicle and other machine technologies”, “Sustainable environment, clean, and renewable energies” sectors. The seven companies are allowed to allocate capital between HUF 200 million and HUF 1.5 billion per project.

From 2016 to 2018, the National Research, Development and Innovation Fund directed HUF 100 billion worth of funds from the Hungarian budget towards SMEs’ innovation activities. Several new types of sectoral policy programmes have been launched in recent years. The Government channelled HUF 9 billion into the Supplier Development Programme and HUF 28 billion into the Construction Sector Support Programme. SMEs received HUF 6 billion under the Irinyi Plan focusing on industrial development.

The proportion of guaranteed loans and the ratio of government-backed loan guarantees to GDP is at an exceptionally high level in Hungary, in comparison with other European countries. In 2018, 18% of SME bank loans were backed by subsidised guarantee scheme. In the past ten years, the two Hungarian guarantee institutions under partial state control have increased their guarantee stock by more than 60%.

Figure 19.3. Trends in SME and entrepreneurship finance in Hungary

Source: See Table 19.5.

Statlink

Table 19.5. Definitions and sources of indicators for Hungary's scoreboard

Indicators	Definition	Source
Debt
Outstanding business loans, SMEs	Amount of outstanding loans at the end of period (stocks). Gross bank and financial institution business loans to nonfinancial enterprises. In 2007-09 the data contains loans to all SMEs including financial ones, in 2010-12 only non-financial SMEs. Excludes sole proprietorships. Includes lines of credit, overdrafts, leases, business mortgages, business credit cards, factoring and securitised loans.	Hungarian National Bank (From 1 October 2013 the Hungarian Financial Supervisory Authority works within the Hungarian National Bank)
Outstanding business loans, total	Amount of outstanding loans at the end of period (stocks). Gross bank and financial institution business loans to all non-financial enterprises. Excludes sole proprietorships. Includes lines of credit, overdrafts, leases, business mortgages, business credit cards, factoring and securitised loans.	Hungarian National Bank (From 1 October 2013 the Hungarian Financial Supervisory Authority works within the Hungarian National Bank)
Short-term loans, SMEs	New loans (flow) equal to or less than one year. The data doesn’t include the loans of financial institutions. In 2007-09 the data contains loans to all SMEs including financial ones, in 2010-12 only non-financial SMEs.	Hungarian National Bank (From 1 October 2013 the Hungarian Financial Supervisory Authority works within the Hungarian National Bank)
Long-term loans, SMEs	New loans (flow) longer than one year. The data doesn’t include the loans of financial institutions. In 2007-09 the data contains loans to all SMEs including financial ones, in 2010-12 only non-financial SMEs.	Hungarian National Bank(From 1 October 2013 the Hungarian Financial Supervisory Authority works within the Hungarian National Bank)
Government loan guarantees, SMEs	New guarantees (flow) available to banks and financial institutions, guaranteed (partly) by government.	Administrative data from Hungarian Development Bank, Garantiqa Hitelgarancia Zrt, AFGHA (Agrárvállalkozási Hitelgarancia Alapítvány), and the EU SA financed Economic Development Programme
Government guaranteed loans, SMEs	New loans (flows) guaranteed (partly) by government.	Administrative data from the EU SA financed Economic Development Programme
Direct government loans, SMEs	Sum and number of new direct loans (flow) to SMEs from Hungarian Development Bank, microfinance programmes financed from state resources.	Administrative data from the Economic Development Programme
Non-performing loans, total	% of non-performing business loans within total business loan portfolio (90+ days delinquency ratio) to total business loans at the end of the year.	Hungarian National Bank (From 1 October 2013 the Hungarian Financial Supervisory Authority works within the Hungarian National Bank)
Non-performing loans, SMEs	% of non-performing business loans within total business loan portfolio (90+ days delinquency ratio) to total business loans at the end of the year.	Hungarian National Bank (From 1 October 2013 the Hungarian Financial Supervisory Authority works within the Hungarian National Bank)
Interest rate, SMEs	Average annual interest rate for all new SME loans.	Hungarian National Bank
Non-bank finance
Venture and growth capital	Venture and growth capital, total amount invested. Includes seed, start-up, early and later stage expansion capital (excludes buyouts, turnarounds, replacements).	Hungarian Venture Capital Association
Other indicators
Payment delays, B2B	Average number of days beyond the agreed date for business-to-business in 2008 and 2009. For 2007, average number of days beyond the agreed date for business-to-business, business-to-customer and public entities. All enterprises.	Intrum Justitia, European Payment Index 2014
Bankruptcies, total	Number of officially published bankruptcies and liquidations per 10 000 taxpayer enterprises.	National Tax and Customs Administration

Notes

← 1.  https://bbj.hu/economy/external-balance-improved-in-2018-says-mnb_163862

← 2.  MNB Trends in Lending 2019 March, Chart1

← 3.  https://www.hvca.hu/documents/Investment_monitoring_report_2018_Final.pdf

← 4.  MNB: Considerations behind the launch of the Funding for Growth Scheme Fix (FGS Fix) and main features of the programme, https://www.mnb.hu/letoltes/nhp-fix-eng-vegleges.pdf

← 5.  https://bbj.hu/business/huf-80-bln-of-eu-jeremie-funds-to-be-distributed-in-hungary_156854