Connecticut is sweetening its small-business loan programs in hopes of enticing bankers there to increase lending.

Marie O'Brien, the president of the Connecticut Development Authority, said the state has committed $100 million to two programs designed to help banks get more comfortable with extending credit to small businesses.

The commitment includes at least one important change: The state is doubling the amount of money it puts into a reserve fund that helps cushion participating banks against losses.

John J. Patrick Jr., the chairman, president, and chief executive officer of the $1.1 billion-asset First Connecticut Bancorp Inc., said the state programs give him "a greater comfort level" in making loans and the added incentive is going to be even more helpful. "What it allows us to do, rather than saying no to a company that might be marginal from a collateral perspective, is get a credit enhancement from the state."

In announcing the commitment last week, Republican Gov. M. Jodi Rell said the national credit crunch is making it difficult for many businesses to get credit, stifling job growth.

The state earmarked $40 million for the development authority's Urbank small-business loan guarantee program and $60 million for its junior participation loan program.

Mr. Patrick, a member of a task force that worked on the initiative, said state banks matched the government effort with a lending commitment of $100 million.

He said the figures are largely symbolic and meant to signal to potential borrowers that credit is available. There is no requirement for the state or the banks to complete that much lending within a particular time.

The Urbank program offers a 30% guarantee on loans of up to $350,000, plus cash reserves.

The development authority had been putting 3% to 5% of the loan amount into a deposit account at the lending bank, creating a pool of reserves that the bank could use in the event of losses on any Urbank loans, Ms. O'Brien said. With the latest commitment, that contribution will rise to 6% to 10% of the loan amount.

In the junior loan participation program, the bank makes a portion of the loan, and the development authority makes the rest, up to half the total amount. This program, which had been available only for job creation, now allows the loans to be used for job preservation.

The bank sets the terms of the loan and shares the fees and interest proportionally with the authority.

The fact that the authority is extending part of the loan reduces the risk for the bank; the authority's collateral position is subordinated to the bank's, and the participation can be repurchased at any time without penalty.

Gov. Rell initially asked banks to commit $1 million each to create a loan pool that would be earmarked for small businesses, but questions arose about how the pool would work. A task force that included the Connecticut Bankers Association and the development authority worked on a proposal to achieve the same goals in another way, Mr. Patrick said. "The state has some good programs in place, so why reinvent the wheel?"

Bernard Sweeney, the Small Business Administration's district director for Connecticut, said the state programs complement federal ones, helping small businesses that might not be able to get an SBA loan qualify for funding elsewhere. About 40 SBA loans have been made in the state so far this fiscal year, which began Oct. 1, down from about 140 in the same period a year earlier.

Some of the drop is a result of a reluctance to take on debt, but another factor is that potential borrowers are being turned down because of weak collateral value, Mr. Sweeney said.

James C. Smith, the chairman and CEO of the $17.5 billion-asset Webster Financial Corp. in Waterbury, said the state programs enable his company to make more loans to small businesses than it might otherwise.

"I think that's the wisdom of these programs," he said. "People who are stressed ought to have access to credit and, to the extent that the stress has made it hard to cover their debt service or has reduced the value of their collateral, the banks will be able to make loans without missing a beat, because they know they have the state as a partner."

Mr. Smith also said that the $100 million commitment from the state will help to get small businesses through the economic downturn and that he expects more states to undertake similar initiatives. "I would say Connecticut is ahead of the curve in anticipating the need and in providing a ready mechanism to make this work."

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