A small-business loan program sponsored by the state of Kentucky has come under criticism by several participating banks, and its future appears uncertain.
One bank, which borrowed $100,000 through the program, said it had to overcome numerous procedural obstacles to receive the funds. Another found that it was ineligible because it already held public deposits.
"We had a major problem with it," said Kimberly D. Cheatham, administrative vice president at Peoples Bank, in Mount Washington. "Everything was great until we tried to get the money. I must have made 20 long-distance phone calls trying to find out what the problem was. It was a disaster."
Peoples Bank eventually received the funds and made the loans - $15,000 to a beauty shop and $45,000 to a bridal business - but Ms. Cheatham said the bank will not participate again.
The program, called a linked-deposit loan program, is designed to stimulate small businesses and farming through the use of public funds loaned at as much as 3% below the market rate.
The Kentucky program is unique because it is not funded by taxpayer receipts. Instead, all of the funding comes from abandoned property, such as savings accounts that have gone unused for at least seven years or money left behind by the deceased who have no heirs.
Bankers in the state said they were excited about the idea when it was introduced last March, particularly as a way of meeting Community Reinvestment Act requirements, but only five have signed on to date.
Just eight linked-deposit loans, totaling $259,200, have been made out of the $5 million that was initially allocated for the program, according to the state treasurer's office.
The numbers do not bode well for the future of the program, particularly now that its principal creator - state treasurer Francis Jones Mills - is out of office. The state's new treasurer, John Kennedy Hamilton, took office earlier this month.
"This is one of the things on our radar screen to look at early," said F. Michael Haydon, the new assistant state treasurer. "In the coming weeks, we'll try to determine the best strategy to pursue.
Few observers believe the program will be completely scrapped, but perhaps modified somewhat. Its current administrators, the State Investment Commission, could also change, Mr. Haydon said. Some of the banks said they believe the commission has been uncooperative.
"The concept of the program is diametrically opposed to what the Investment Commission is charged with doing, which is to maximize investment earnings," Mr. Haydon acknowledged. "It may well be that the commission is not the appropriate agency to conduct the program."
Though the linked-deposit program is new to Kentucky, 17 other states have implemented similar operations, usually with a high degree of success. Ohio, for example, which pioneered the idea in 1983, currently has more than $250 million in these types of loans, using about 60% of the state's 270 eligible banks.
The First National Bank of Clinton, Ky., had sought funds under the program last year but was told that since it already held about $500,000 in public deposits, the bank was ineligible. Others banks reportedly ran into the same barrier.
