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On the first business day of the new year, Missouri Treasurer Vivek Malek began accepting applications for approximately $120 million in state-subsidized, low-interest loans to small businesses, farmers, and affordable housing developers.
Within six hours, Marek had so many requests for funding that she had to close her application.
“The demand is huge and it’s real,” Marek said.
Missouri’s situation, while extreme, is not entirely unique. In states from New York to Illinois to Montana, public interest is growing in little-known programs that use state funds to encourage private investment with cheap loans. The program was launched after a series of large interest rate hikes by the Federal Reserve made loans more expensive for virtually everyone, including farmers buying seeds and companies looking to expand their operations.
To combat consumer price inflation, the Federal Reserve raised the benchmark interest rate 11 times from March 2022 to July last year, setting it at the highest level in 20 years.
Under so-called indexed deposit programs, states deposit money with banks at below-market interest rates. Banks then leverage those funds to provide short-term, low-interest loans to specific borrowers, such as agriculture and small businesses. This program allows borrowers to save thousands of dollars by lowering their interest rates by an average of 2 to 3 percent.
Because the program reduces state revenue, states typically limit the amount available at such discounted rates to a flat amount or percentage of the fund balance. Many states have built up large surpluses from pandemic-era revenues, meaning more money is in the bank.
Most states currently do not offer such programs, but some states that shelved them during the low interest rate era are now bringing them back to help financially strapped businesses and residents. Are considering.
Illinois State Treasurer Michael Frerichs, president of the national association, said, “What I can tell you from my meetings with other state treasurers is that there is no interest in state funds, whether through linked deposit programs or other means. This means that it is definitely increasing.” State Treasurer.
Illinois has nearly $950 million in deposits tied to low-interest loans to farmers, businesses and individuals. This is a significant increase compared to previous years. As of 2015, the state’s agricultural investment program had only two low-interest loans, Frerichs said. By 2022, the loan amount had increased to $51 million. Last year, Illinois made $667 million in low-interest deposits for agricultural loans.
In response to growing demand, Frerichs recently raised the overall program cap from $1 billion to $1.5 billion.
Although smaller, the New York program is also seeing a rapid increase in applicants.
In 2022, New York State had 42 applications for state deposits with financial institutions related to $20 million in low-interest loans. Last year, the number of applications related to loans of more than $220 million rose to 317, said Rafael Salaberios, senior vice president of capital access programs at Empire State Development in New York.
“Banks are recognizing the benefits and are flooding us with applications, which is good,” Salaberios said. He added: “Linked deposits have allowed small businesses to continue to grow even in this high interest rate environment.”
Increased demand pushed Missouri’s indexed deposit loan program closer to its legal limit of $800 million last May. The Treasury was able to reopen applications at 10 a.m. on January 2, as some existing loans had expired. By 4 p.m. on the same day, the limit had been reached again, with 142 applications totaling over $119 million, and applications closed.
About half of the applications came from customers of just two financial institutions: Oakstar Bank and FCS Financial, a large agricultural lender. FCS Financial had submitted more than 100 additional applications at the time the application was closed, said Brian Zimmersied, vice president of the commercial crop financing team.
BTC Bank, located in rural Bethany, Missouri, planned to file about a dozen applications on behalf of its customers. But Doug Fisch, the bank’s CEO, said the quick deadline was a complete missed opportunity.
Among those disappointed was Jason Barnard, a farmer near Bethany who was hoping for a low-interest loan to buy seeds, fertilizer and chemical sprays this year.
When interest rates rise, “it becomes a lot harder to just keep making payments,” Barnard said.
The Missouri Department of Treasury is supporting a bill that would increase the program’s cap from $800 million to $1.2 billion, which would increase capacity by 50%. The expansion could cost the state $12 million in potential revenue, which could be partially offset by the economic activity generated from these loans, according to the Legislature’s fiscal analysis.
In Montana, lawmakers last year approved a new program to address the affordable housing shortage. The Montana Investment Commission launched its linked deposit loan initiative in October and received $77 million in applications within two months, reaching a self-imposed limit and closing applications earlier than expected.
Republican state Rep. Mike Hopkins, who sponsored the housing incentive bill, was thrilled by the response.
“Affordable housing is kind of at a standstill in Montana,” Hopkins said, but “we were able to get funding as quickly as possible.”
Officials in Iowa, Kansas and Ohio also told The Associated Press that they are seeing increased demand for programs that put state money in banks and provide low-interest loans. The number of recipients of these loans in Kansas tripled from 2022 to 2023. In Ohio, the amount provided for such loans increased by two-thirds during that time, reaching more than $600 million.
Oklahoma’s indexed deposit program has been suspended since 2010 amid low interest rates, but at least two banks have recently contacted the Treasury Department about the possibility of restarting it, said Deputy Treasury Secretary Jordan Harvey.
Texas Agriculture Commissioner Sid Miller said he had not approved deposits related to low-interest loans since taking office in 2015 until last year, when he approved the first two.
“Interest rates were low, so I didn’t really need it,” Miller said.
“But now that interest rates have gone up, it could be a viable program and could help some people,” Miller added.
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