THE primitive character of Hungary's banking system usually astounds Westerners who settle here.
Neither personal nor business checking accounts are available. ``When you do your payroll, you have to go to the bank and bring back a wheelbarrow full of cash,'' says Larry Hinkle, the American manager of the Hungarian subsidiary of Ford. And it takes six to eight weeks for a check from the United States to clear once it has been deposited in a bank here.
Despite their stated intentions to build an economic system based on entrepreneurship, Hungary's leaders have done little to help provide credit for businesses.
In a masterly piece of understatement, the government minister in charge of privatizing the country's state-owned companies recently described the bank sector as ``the weakest link in the chain'' of Hungary's economy.
The credit situation in Hungary is complex. On the one hand, commercial banks have substantial liquidity (Hungarians save about 15 percent of their income), even though most are undercapitalized. On the other hand, banks are reluctant to lend to businessmen, especially since the heavily indebted government, the country's biggest borrower, pays high interest rates.
AS a result, even the most successful entrepreneurs must borrow outside the banking system at exorbitant interest rates.
Attila Nador and his partners own a rapidly growing door-to-door sales organization with a monthly gross income of more than $1 million. They have borrowed money to expand and owe $1.5 million, on which they pay an average of 40 to 45 percent interest. One Hungarian lender is charging 60 percent. Mr. Nador has also borrowed from Austrians, Americans, and Canadians at 30 percent. Only 10 percent of the company's indebtedness is with a Hungarian bank, for which it pays 28 percent interest. Nador says he knows some businessmen who are paying 100 percent interest.
Part of the reason for such high interest rates is Hungary's 20 percent annual rate of inflation.
Usurious interest rates are not the only problem. Banks want loans secured with fairly liquid collateral worth 150 to 200 percent of the total amount of the loan and its interest. University of Tulsa economist J. M. Collins says Hungarian banks concentrate on collateral as evidence of ability to repay, rather than examining the borrower's potential revenues.
``The banking system in Hungary is not bad for companies like General Motors,'' says Liam Donahue, a consultant with Booz Allen & Hamilton. ``But if you're a small entrepreneur with little or no collateral, you have to attempt to get money from one of the programs set up for you.''
One such program is provided by the World Bank, which has offered $300 million in credit to Hungary, at least partly for the use of entrepreneurs. But obtaining a loan from the World Bank fund is no easier than getting it from any other source.
According to Christine Allison, of the World Bank office in Budapest, the National Bank of Hungary is responsible for distributing the money to Hungarian commercial banks. Because the National Bank has a policy of not ``subsidizing'' credit, it charges commercial banks 19 percent.
The commercial banks insist on collateral worth 150 percent of the loan and interest. If the loan is granted, it will be for up to six years and will cost 22 to 24 percent, plus a one-time ``bank management'' fee of 3 percent of the loan, and an annual ``premium'' of 1 to 3 percent as insurance. This brings the first year's cost to about 30 percent.
A big part of the problem, according to James Shuey, of the International Bankers Training Center in Budapest, is also that Hungarian bankers simply do not know how to separate the good from the bad. ``They haven't had much experience at assessing credit risks,'' he says.
``You have to prove you really don't need the money in order to get the loan,'' Nador says. For now, the best solution for a Hungarian entrepreneur, he adds, is to have a rich uncle.