Published: Tuesday, 27 Oct 2009 | 4:05 PM ET

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Community bankers are responding coolly to the Obama administration's plan to free up small business lending, saying the programs unveiled last week involve unattractive government capital injections and mountains of paperwork.

Bankers who gathered for the American Bankers Association annual meeting were hesitant to dismiss the administration's efforts, but said the government's programs have largely been unappealing for smaller banks.

"I just haven't heard a lot of interest," said Mark Tenhundfeld, senior vice president for regulatory policy for the ABA.

He said the issue is not the willingness of community banks to lend, but the scarcity of small businesses seeking loans.

"The biggest issue first and foremost is demand," he said. Tenhundfeld said he did not want to be too negative about the programs, but banks don't want the taint of the bailout perception.

The administration last week unveiled new efforts to improve small businesses' access to credit. The programs largely rely on community banks to provide that credit.

Under one program, the government would provide low-cost capital to the banks, contingent on the banks submitting a plan on how the capital will allow them to increase lending to small businesses.

The other program would increase the maximum Small Business Administration loan size to $5 million from $2 million and would provide partial guarantees on the loans.

Bankers said they are hesitant to take capital injections from the government because of the stigma and the potential restrictions on dividends and compensation.

"I think if it doesn't come with a lot of strings, it might be OK," said John Boyer, chief executive of Kanza Bank, a Kansas-based, family-owned community bank that has been operating since 1905.

But he was quick to add that his bank does not want to take a capital injection. "I wouldn't be in support of participating in the program," he said.

"We don't really think a lot of banks would take advantage of that," Diane Casey-Landry, chief operating officer for the ABA, told the conference attendees on Monday.

Norman Williams, CEO of Illinois Service Federal, a Chicago-based savings and loan, said the administration has a good vision on how to improve credit for small businesses.

However, he said, the government has not smoothly distributed funds from the Troubled Asset Relief Program and he is not sure the newly announced plans will do any better.

"There's no incentive for me to take TARP money," he said. "Unless these initiatives really accomplish what they're designed to do, we may lose a lot of small businesses."

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He said some small businesses have been hesitant to reach out to banks for a loan because they have been rejected multiple times by risk-averse banks.

The bankers said the SBA loan program has promise but involves a lot of paperwork and takes a long time to process the loans.

The ABA's Tenhundfeld also said he doubts how much demand there is for loans in the $2 million to $5 million range.

Small businesses are a critical component of the U.S. economy, with more than 50 percent of workers on their payrolls, according to U.S. Census Bureau data in 2002.

As the economy shows tentative signs of recovery, there is some evidence that bank credit is loosening slightly.

In a quarterly U.S. Federal Reserve survey of bank loan officers in July, 3.7 percent of respondents said their lending standards had "eased somewhat" to firms with annual sales under $50 million, the first easing since July 2007. But 35.2 percent of respondents also said their lending standards had "tightened somewhat," indicating there is still a long way to go.

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