In Jefferson City, Missouri, the new year ushered in a fervent rush for state-subsidized, low-interest loans, a clear indication of the pressing demand among small businesses, farmers, and affordable housing developers. Missouri Treasurer Vivek Malek, on the first business day of the year, opened applications for approximately $120 million in loans. However, the overwhelming response led to a closure of applications within just six hours.

Malek observed, “The demand is huge, and it is real.” This situation in Missouri, though extreme, mirrors a growing trend across states like New York, Illinois, and Montana. There’s an escalating public interest in relatively obscure state programs that utilize state funds to encourage private investment through attractively priced loans. This surge in interest is a direct consequence of a series of significant interest rate hikes by the Federal Reserve, impacting loans across the board – from agriculture to business expansion.

To tackle inflation, the Fed raised its benchmark interest rate 11 times between March 2022 and July, reaching a two-decade peak. States have responded by deploying linked-deposit programs, where states deposit funds in banks at sub-market rates. These banks, in turn, offer short-term, low-interest loans to specific sectors, primarily agriculture and small businesses. Borrowers stand to save substantially, with interest rate reductions averaging 2-3 percentage points.

Given that these programs yield lesser earnings for states, caps are usually placed on the available amounts. However, with pandemic-era revenue surpluses, states have more funds for such deposits.

Despite not being universally available, some states that had previously shelved these programs due to low interest rates are now reconsidering them. Illinois Treasurer Michael Frerichs, also the president of the National Association of State Treasurers, noted a growing interest in treasury funds for such purposes. Illinois, for instance, has nearly $950 million in deposits linked to low-interest loans, a significant increase from past years.

New York’s program has also seen a dramatic rise in applicants. In 2022, there were 42 applications for state deposits linked to $20 million in loans. The following year, this skyrocketed to 317 applications tied to over $220 million in loans, according to Rafael Salaberrios, a senior vice president at Empire State Development.

Missouri’s program neared its statutory cap of $800 million last May. After a temporary closure, it reopened on January 2, only to approach the cap again by 4 p.m. that day, with 142 applications totaling over $119 million.

The high demand led to some institutions missing out, like BTC Bank in rural Bethany, Missouri. Its CEO, Doug Fish, expressed disappointment as the bank couldn’t submit its dozen applications. One of its clients, farmer Jason Bernard, was left without a low-interest loan for essential farming inputs.

To address this burgeoning demand, the Missouri treasurer’s office is advocating legislation to increase the program’s cap from $800 million to $1.2 billion. Though this expansion could cost the state $12 million in potential earnings, it is expected to be offset by the economic activity generated from the loans.

Meanwhile, in Montana, a new program aimed at addressing affordable housing shortages received $77 million of applications within two months, reaching its self-imposed cap. This response, according to the legislation’s sponsor, Republican state Rep. Mike Hopkins, was a testament to the acute need for affordable housing solutions in the state.

Similar trends are observed in Iowa, Kansas, and Ohio, with significant increases in demand for such loan programs. Even in Oklahoma, where the linked-deposit program has been dormant since 2010, there’s renewed interest in restarting it. Texas Agriculture Commissioner Sid Miller also noted a shift, approving his first linked deposits for low-interest loans last year after a hiatus since 2015.

This nationwide uptick in demand for state-subsidized, low-interest loans reflects a broader economic trend and a changing landscape in the wake of rising interest rates, underscoring the critical role of such programs in supporting key sectors during challenging times.