At least 17 Vermont banks have agreed to lend up to $10 million to recapitalize the state's overburdened economic development authority while state officials search for a permanent solution.

A significant rise in loan demand during the past two years has overwhelmed the 21-year-old agency, which hasn't had a consistent source of funding from the state despite its status as a full government organization. The agency provides below-market-rate loans to small businesses and local development corporations around the state.

Under legislation passed earlier this year, beginning in 1996 the agency will use the funds from the 17 banks to support its lending efforts, pledging the loans as collateral. The loans are not backed by the full credit of the state, but are "stable," said Paul S. Denton, manager of the authority.

So far, the authority has informal commitments from all 17 banks, but has formalized agreements with only a few.

But Mr. Denton said he expects to get the entire $10 million without a problem, noting that a preliminary survey by the Vermont Bankers Association showed bankers were willing to lend up to $12.6 million.

"We have very active and cooperative commercial bank arrangements," Mr. Denton said. "We work very closely with the banks, and it seemed like the right thing to do at the time."

This is the first time that the agency has turned to the banks for support for its business lending, though banks provided $20 million to start an agricultural loan program in the late 1980s. The agency has also borrowed $7.5 million from the state treasurer in 1992 and received a $2 million appropriation in 1994.

But the rise in loan demand wiped out that funding. Loans to small businesses were only $3.9 million in 1993, but rose to $7.5 million in fiscal 1994 and $6.9 million in fiscal 1995.

And loans to development corporations went up from $775,000 in 1993 to $2.7 million in 1995.

The new loans are intended only as a stop-gap measure for about two years, while a study group authorized by the legislature searches for a permanent solution.

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