AIB and Bank of Ireland reached the Government’s target of €3.5 billion in lending to small and medium-sized businesses (SMEs) and farms last year. But the two pillar banks should work to improve “the borrowing experience” of companies as the economy recovers, according to the Credit Review Office.

John Trethowan, who heads the office, said the successful appeal rate of 55 per cent of cases referred to him was evidence that “more can be achieved by banks”.

The two banks reviewed by Mr Trethowan sanctioned €8 billion in lending to SMEs in 2012, of which €2.5 billion was new lending drawn down.

His latest report states that he “continues to have concerns on the banks’ risk appetite for lending to more challenging but still viable businesses”, in particular as economic prospects improve and the demand for credit increases.

“Lending to such challenged businesses will be essential to support the recovery in the domestic economy, and will require leadership, enterprise and banking skills.”

Mr Trethowan describes his new report – the 10th since he took office in April 2010 – as the first in which “there is a backdrop of a sense of emerging optimism” on the economy. But he added that at present the optimism was mainly confined to demand for credit from larger businesses for acquisitions and to a more active commercial property market. “I know that everyone will hope that this permeates down to the lower levels of the domestic economy.”

Apart from the 27 per cent that is new lending, the €8 billion sanctioned by the two banks in 2012 comprised the restructuring of existing loans and refinancing debt from other banks no longer active in SME lending.

Mr Trethowan noted criticism from business and professional groups of a “remote and somewhat binary” application process.

SME lending typically takes three stages, he said. The first was “order taking”, sometimes by relatively inexperienced front-line staff. The second is a “yes/no” decision by a remote central credit scoring system, and the final stage, if declined, is a standard “menu-driven” letter that often leaves businesses puzzled about why their application has been rejected.

The report identified a trend whereby banks are slow to sanction lending in the first half of the year, but pick up the rate of approvals in the second half.

The process of deleveraging, meanwhile, is continuing with SMEs and farms repaying past debts faster than they are seeking fresh credit. Net repayment receipts of approximately €4.5 billion outweighed new credit plus interest charges, with the result that both banks contracted their balance sheets in 2012 cumulatively by about €2 billion.

There are just three banks lending to small and medium-sized businesses in Ireland – the two main banks and Ulster Bank.

In numbers

€4 billion– revised SME lending targets set by the Government for AIB and Bank of Ireland in 2013.

1,880– number of calls to the helpline operated by the Credit Review Office since April 2010.

118– number of credit refusals by AIB and Bank of Ireland that have been overturned on appeal.

€13 million– sum that has been made available to SMEs and farms as a result of upheld appeals.