Dayton Watkins may be sitting on top of the best-kept secret in the capital.

Mr. Watkins heads the Rural Business and Cooperative Development Administration, a federal program with authority to guarantee up to $500 million in loans for business creation outside of overbanked metropolitan areas.

"We focus strictly on rural America," he said.

But bankers are not exactly beating a path to his office at the Department of Agriculture. Since the fiscal year began Oct. 1, the program has guaranteed only $36 million in loans, even though small-bank lenders are worried about the future of the Small Business Administration.

Like the more widely used SBA programs, Mr. Watkins says, his program can provide capital for a wide range of businesses - with some limits.

For instance, the USDA program can guarantee up to 70% of loans as large as $10 million. Proceeds cannot finance hotels, tourism and recreation projects or farm operations handled by the Farmers Home Administration.

Nonetheless the program can help agriculture-related industries.

"We can do financing for a business that may have an indirect relation to farming," Mr. Watkins added. "Say a farmer wanted to build a slaughter house on his farm, we could finance the building and equipment used in that kind of operation."

In fiscal 1994, the program guaranteed 106 loans worth $128 million. Mr. Watkins says the agency is working to streamline the program and he believes many bankers are waiting for those changes before using the program.

Mr. Watkins is no stranger to revisions. He was acting administrator of the SBA before Erskine Bowles took over in 1993, and stayed on as an adviser prior to joining the USDA. At the SBA, he helped develop policies to streamline the agency.

While he hopes to use his SBA experience to make the rural program more user-friendly, there are limitations. One of the toughest problems is the amount of paperwork that bankers need because of the sheer size of some loans, which can be 20 times the largest SBA loan.

"We've found the reason the program is moving slowly is that the loan transactions themselves are more complicated," Mr. Watkins said. "To get to the point of submitting the loan for our approval, the business has many more hurdles to jump for the bank."

To solve the problem, the agency is looking at cutting regulation and may name certified and preferred lenders to give frequent lenders authority to directly approve loans.

One hurdle Mr. Watkins has not faced is funding shortfalls. While limited funding and high demand has the SBA facing a $1.2 billion shortfall this fiscal year, the rural business loan program is in its third straight year of budget increases.

But it has not always been that way. Since its birth in 1972, the program has ridden the congressional funding roller-coaster. By 1980, the program grew to 1,161 loan guarantees for $855.8 million in credit.

But budget-cutting fever reduced the program to only 39 loans worth $55 million in 1986.

The program has ballooned in size under the Clinton Administration, and Mr. Watkins said the agency will ask for even more loan authority in the 1996 budget now being developed.

Despite being cash rich, the program remains anonymous to most lenders.

John Stull, executive vice president at Lincoln Savings Bank, a $101 million asset bank in Reinbeck, Iowa, has never heard of the program, even though his location 75 miles northeast of Des Moines makes it ideal for such job-creating loans.

"If it's something we can use, we'd like to try it, because we are rural," said Mr. Stull.

Bankers who have used the program like it. Brian Gardiner, a vice president with Machias Savings Bank in Machias, Maine, said his bank has about $25 million in loans supported by the program.

Mr. Gardiner says the effectiveness of the program depends on the willingness of the state to promote it. The reason is that the USDA makes allocations directly to the states who administer the programs.

"This state has always had somebody willing to come out and sit with the customer and the bank and go through the paperwork," said Mr. Gardiner. "This is a good program, and one that any banker that made an attempt could make good use of."

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