Credit where it's due

A report released by the Central Bank last week stated that the credit supply in Ireland to small and medium enterprises (SME), is the second worst in Europe, with only Greece ranking lower. Peter Horgan spoke with the Cork Business Association to see how members are faring

The economic research, entitled ‘Irish SME credit supply and demand: comparisons across surveys and countries’ compares survey sources for the period September 2011 and March 2012. The economic letter was penned by Central Bank economists Sarah Holton and Fergal McCann.

The key findings of the research were that rejection rates for SME loans and overdraft applications in Ireland are the second highest in the euro area, behind Greece. Changes in terms and conditions of bank credit in Ireland are also the least favourable in the euro area.

Worryingly the research also shows that Ireland has the second highest share of discouraged borrowers – firms that do not apply for a loan despite requiring credit.

“The concern is the domestic economy will remain stagnant,” says Donal Healy, CEO of the Cork Business Association (CBA).

“Unless lending to businesses throughout the city begins anew, that will remain so. We are aware of members who used to have overdraft facilities now changed to a term loan – which has a significant impact especially on seasonal businesses and their ability to pay certain bills throughout the year.”

Mr Healy confirmed that all banks are undertaking this operation, according to his members.

“Banks now also want loans repaid in the short term while previous relationships between businesses and bank managers are not being brought to bear. Before, a relationship with the bank manager meant that the bank knew the business and understood. Instead people are being told when they are rejected for loans that the decision is coming from Dublin.”

Mr Healy urged for a return to the more traditional aspect of bank managers as a system of confidence which he describes as “absent”, from the current set up. The CBA also aired their worries on the crippling amount of paperwork and hoops that must be jumped through to secure a loan as a deterrent to people securing credit.

“Businesses are frustrated. There is a lack of consumer spending, because there is a lack of disposable income. We need an ease on the qualification procedure to make it easier for businesses to secure much needed credit. This is for amounts that are relatively small, perhaps, €50,000 to €150,000.”

Insistent

A statement from AIB insisted that the bank is aware of the importance of providing credit to fuel businesses.

“It is a matter of major concern to the bank that a perception continues to persist among many Irish SMEs that they cannot approach banks for credit,” said the bank.

“The reality is that AIB exceeded its SME lending target of €3bn in 2011 and is 17 per cent ahead of its year to date target of €3.5bn for 2012. To date this year AIB has sanctioned 92 per cent of formal applications. We fully recognise that today’s credit process is more extensive than it was in previous times. We believe this is appropriate and is in no way meant to be an obstacle to obtaining credit.”

Representations have been made to various banking groups by interested parties over the last number of months. However, given the financial restrictions on a vast majority of the banks following the bank guarantee, it remains to be seen how much leeway they can provide.