Geithner: Small businesses' tight credit hurts recovery

WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner on Wednesday said tight credit for small business would hinder the economic recovery and called on banks to boost lending to smaller firms.

"Without increased access to credit for American families and small businesses, growth will be weaker, companies will defer long-term investments and we will not be able to create a recovery that is self-sustaining and led by private demand," Geithner told a small-business financing forum hosted by the Treasury Department.

The day-long forum aimed to give the Obama administration more ideas to aid small business and help shape a new Obama administration initiative to provide low-cost capital to community banks so that they can increase lending to smaller firms.

The size of the program, which will use money from the government's $700 billion financial bailout fund, has not yet been determined, and will depend partly on demand for loans from small firms as well as demand for government aid from smaller banks.

The plan also asks Congress to raise caps on the Small Business Administration's most popular loan program to $5 million from $2 million, allowing for bigger expansion projects.

The Obama administration is hoping that if small businesses can obtain credit for expansion, stubbornly high U.S. unemployment levels can start to be reversed. Small businesses have been credited with creating about 65 percent of all new U.S. jobs in the past 15 years.

The lending forum is also a precursor to a December 3 forum on accelerating job creation hosted by President Barack Obama, which will be followed the next day by a national tour starting in Allentown, Pennsylvania and spread over several months to discuss the economic recovery.

But anecdotal evidence suggested that many small firms are finding bankers to still be in a stingy mood.

William Ortiz-Cartagena told the forum he could not get a loan from a traditional bank to launch his 12-employee San Francisco parking lot company, Gentle Parking LLC, earlier this year.

"I couldn't even get an appointment with a traditional lending institution," Ortiz-Cartagena said, adding that he turned to a community development loan fund for financing.

Other small business owners complained about the lack of credit forcing them to finance inventory on their personal credit cards, which is pushing down their credit scores.

"We had several people talk about the importance of extending the 90 percent guarantee in the recovery act," said Treasury adviser Gene Sperling, referring to increased percentages for loans guaranteed under Small Business Administration programs.

The administration is working with Congress on a possible extension of the higher guarantee past its current expiry of December 31.

Sperling said another common theme among business owners were ways to address challenges they face in refinancing commercial real estate loans.

BANKERS' OBLIGATIONS

Geithner also admonished banks to use their U.S. government-provided capital to increase lending.

"We need our nation's banks to put the assistance the government provided to work and get back to the business of lending, helping companies raise capital and investing in the promise of American innovation," Geithner said. "We need banks to be working with us, not against recovery,"

He added that all banks -- strong and weak alike -- have benefited from government rescue actions. "Banks bear some responsibility for the extent of the damage caused by the crisis. And you carry a substantial obligation to help our communities get back on their feet," he said.

Geithner also cautioned bank supervisors to not err to far on the side of caution and cause banks to rein in lending.

Sheila Bair, the head of the Federal Deposit Insurance Corp, said recent guidance by the regulator aims to strike a "balanced approach" in assessing institutions' commercial real estate portfolios.

"This latest guidance encourages banks to continue making good loans to commercial real estate borrowers, most of which are small businesses, and to work with borrowers that are having difficulties because of economic conditions," Bair told the forum. "It emphasizes that restructured loans will not be subject to adverse classification by examiners solely because the underlying value of collateral has declined."