Irish Government Announces Findings Of Investigation Into Credit Lending To SMEs

by Jason Gorringe, Tax-News.com, London

15 July 2009

The Report of the Independent Review of Credit Availability published on July 10 shows that lending to the Irish SME sector (excluding speculative construction and real estate sectors) remained static over the period from June 2008 to February 2009. The report, which was conducted by Mazars, also shows the value of new applications for credit had fallen by 42%.

The number of SMEs seeking credit remained high at 52% while the refusal rate ranged from 19% to 30% depending on the size of the applicant.

Welcoming the Report for the clarity it brings to the pattern of credit flow to the economically important SME sector, the Irish Minister for Finance, Brian Lenihan said: “The Report confirms that while some SMEs are facing significant challenges accessing credit, and the sector in general is more conservative in its borrowing, nevertheless new lending is still taking place. The proportion refused credit, especially in certain sectors, remains a concern for Government.”

The Minister said the Government remains determined to ensure that every viable business should be able to access credit: “All our actions in relation to the banks since the crisis intensified last Autumn have been aimed at increasing the flow of credit to the real economy. Under the recapitalisation of the two main banks, we secured a commitment that a dedicated pool of lending would be made available to SMEs. I can confirm that this commitment has been honoured and verified by the Financial Regulator. In addition, the Vice Prime Minister and Minister for Enterprise Trade and Employment has recently set up a Credit Supply Clearing Group bringing together representatives of the banks and business interests to identify blockages in the flow of credit and to find solutions. Viable businesses being denied credit can bring their difficulties to the attention of the Clearing Group.”

The Minister also pointed to the establishment of NAMA - the government-funded ‘bad bank’ - as the next big step in the process of restoring the banks to health so that they can provide additional credit to the economy: “NAMA will remove the uncertainty surrounding the riskiest assets on the bank’s balance sheets. This will enable them to access funding that they can then lend on to SMEs. The Government remains fully aware of the need to protect taxpayers from the risk of lending to businesses that will default on their loans.”

The Review, in which AIB, Bank of Ireland, Anglo Irish Bank, National Irish Bank and Ulster Bank participated, shows that SMEs with less than ten employees have higher refusal rates (30%) than larger SME’s (19%). It also shows that SMEs are requesting credit for working capital or cash flow purposes, reflecting reductions in revenue and difficulties collecting debt.

The Irish government is to formulate proposals based on the report’s findings:

• Total lending to the SME sector by the banks which participated in the review (excluding speculative real estate and construction sectors) remained static in the period at EUR34.5bn but the value of new applications for credit decreased by 42%.
• Demand for credit remains significant with 52% of those surveyed indicating that they had requested credit in the previous year. SMEs surveyed about demand reported reduced revenues and employee numbers.
• Banks data indicate rates of refusal of credit applications of an average of 14% while the demand side survey indicates a refusal rate of 24%. The difference primarily results from a difference in perception on what constitutes an application for credit. Banks do not record informal queries or requests but a customer whose informal request is rejected counts that as a refusal.
• Refusals to businesses with less than 10 employees were highest at 30% with lower refusal rates for larger businesses.
• Requests for new credit were predominantly for working capital/cashflow reasons to address reductions in revenue and slow downs in debtor collection.
• The review concluded that formal lending policies have not changed but that the application of policies on the ground has resulted in a more cautious approach to lending. Terms and conditions have not changed significantly but there is an increased level of emphasis on personal guarantees and security.
• The cost of new credit to SMEs decreased in the period reflecting reductions in base rates.
• There has been a reduction in the quality of SME loan books with more loans being placed on “watch” or becoming impaired.
• Types of bank credit requiring credit insurance represented only EUR44m in lending in the period (out of EUR34.5bn total). It is known, from work done by Forfás that credit insurance has become difficult or even impossible to obtain for many businesses in recent months. However, no significant increase in demand for alternative products offered by the banks is apparent following the reduced availability of credit insurance and only 8% of the participants in the demand survey used credit insurance.

The report made a series of recommendations including the further development of a framework for monitoring credit availability and measures to improve communications between the banks and SMEs. It is envisaged that the members of the Steering Group will meet to progress this aspect of the recommendations. The Report also suggests consideration of specific supports to ease the working capital requirements of SMEs, and measures to help investment levels in SMEs.

Recommended