Creditworthy Borrowers Lacking

President Barack Obama’s plan to push $30 billion in Troubled Asset Relief funds to community banks could turn out to be a boon to small business.

But there are Washington reasons it won’t. And some Main Street reasons it’s not the solution to the credit crisis for small businesses and the community banks upon which they rely. That’s because the landscape in which both operate has changed in the past two years in ways that more capital in community banks may not resolve.

The problem for bankers is one of basic trust. If they don’t think they’ll get paid back, they won’t lend.

Community and regional banks have been failing by the dozens for more than a year now. So far in 2010, 15 have failed.

Don’t look for that trend to slow down, said Joshua Siegel, managing principal of Stone Castle Partners LLC, a firm that invests in small and mid-sized banks. There are still about 1,000 banks under financial pressure and anywhere from 500-800 will fail, Siegel and his colleagues expect.

But it’s the reasons those banks have been failing that could complicate the president’s TARP plan, and small business lending as a whole. In the simplest terms, those banks are failing because they loaned money to individuals and enterprises that weren’t creditworthy.

Oh, the developer of a local strip mall or subdivision may have seemed creditworthy, and been creditworthy in the past, but lost that status because he or she was vulnerable to falling rents or rising vacancies in the strip mall.

So that starts to get to the nub of the problem.

Siegel pointed out that a majority of the 8,000 or so lending institutions in the United States are in good shape.

In fact, some of them are in very good shape indeed. They’re flush with deposits—otherwise known as money to lend.

What they lack are creditworthy borrowers. Sure, there are borrowers aplenty. But are they creditworthy? Right now, it’s hard for bankers to answer that question in the affirmative.

“Borrowers that are creditworthy aren’t borrowing,” Siegel said. “There aren’t enough creditworthy people. Just because you want a loan doesn’t mean you’re entitled to one. “They’re still making loans but there aren’t enough loans that they’re comfortable with.”

And it’s hard to see how $30 billion in new capital will change that.

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Kent Bernhard Jr. is News Editor of Portfolio.com