Banks and SMEs at odds over loans

A SIGNIFICANT disparity has emerged between the volume of credit that banks say they will offer to small businesses and the loans the companies say are being made available to them.

Minister for Finance Brian Lenihan told the Dáil yesterday that banks’ data show an average of 14 per cent of credit applications from small businesses are refused. Businesses, however, claim an average refusal rate of 24 per cent, with this rising to 30 per cent for the smallest companies.

Mr Lenihan was quoting from an independent review on credit availability for small and medium enterprises (SMEs), which was commissioned by the Department of Finance. The review, completed by Mazars, covered AIB, Bank of Ireland, National Irish Bank and Ulster Bank and surveyed 1,000 companies.

The Minister said there had been a “lack of clarity” about lending to business, “with the banks saying that they are open for business from viable businesses and business representatives saying that credit is difficult to obtain”. The reason for the disparity between bank and customer experiences could be explained in part by different perceptions of credit refusal, he said.

Often, according to the Minister, a customer takes an informal refusal as an official refusal “whereas a financial institution tends to take a more formal view in devising statistics”.

“The difference primarily results from a difference in perception of what constitutes an application for credit,” said Mr Lenihan.

The research, which is expected to be published in full over coming days, shows the credit refusal rate experienced by SMEs rises to 30 per cent where firms had fewer than 10 employees.

The Minister said the report had been commissioned in conjunction with the State’s recapitalisation of AIB and Bank of Ireland. Under those arrangements, the two banks said they would increase lending capacity to SMEs by 10 per cent. Public campaigns to promote lending to SMEs also formed part of the deal.

The Minister said the research showed the value of lending by the banks was static at €34.5 billion in the period under review, while the value of applications for new credit fell by 42 per cent. The two main banks had met their commitments under the recapitalisation agreements but went on to highlight “a substantial deleveraging in Ireland by the external banks which had provided credit”.

“That has reduced the overall amount of credit available in the economy. As a response to this, the Government has established a clearing group, comprised of representatives of both business and State agencies, to monitor the availability of credit for the recapitalised banks.”

Slightly more than half the companies surveyed said they had requested credit in the previous year, while many reported reduced revenues and lower staff numbers. Requests for new credit were mostly for working capital and to address cashflow problems. Slower debt collection was also cited as a reason for needing loans.