Bank finds firms not getting credit

CREDIT CONDITIONS for Irish small and medium enterprises are worse that for their European counterparts, a conference organised by the Central Bank was told yesterday.

The conference also heard that though Irish SMEs may be less productive than foreign companies, they employ considerably more people.

Central Bank governor Patrick Honohan said SMEs were facing a dual challenge in terms of funding. On the one hand, there is “massive credit misallocation”. On the other, the depletion of the personal wealth of many families leaves them unable to fund start-ups and expansions with their own funds and “the lack of bank credit is likely to be a more serious drag on the recovery than it might otherwise be”.

When it comes to credit conditions, research presented yesterday shows Irish SMEs are facing tougher conditions than their European counterparts. Three-quarters of Irish firms say they must pay higher interest rates for new lending, compared with 62 per cent in the euro area, while it is also more difficult to get larger loans in Ireland and collateral requirements are also higher.

Focus was also given to employment amongst SMEs. In his presentation, Fergal McCann, an economist with the Central Bank, illustrated the dichotomy that exists between the Irish and foreign sector.

Sixty-four per cent of workers are in indigenous, non-exporting firms, with 56 per cent in the SME sector, and 23 per cent of the total employed in “micro” firms, employing less than 10 people. Exporting companies, which account for just 11 per cent of employment, account for 85 per cent of exports.

Moreover, when it comes to productivity, foreign firms are a lot more effective, contributing 38 per cent of overall productivity, compared with 29 per cent for Irish non-exporting SMEs.

However, as Mr Honohan pointed out, “the much vaunted capacity of small firms to create employment is also matched by an above-average incidence of job destruction: much of the churn in any economy happens in small firms”.

The research also showed a distinct lending strategy of moving away from sectors most affected by the downturn, such as hotels and restaurants, in favour of sectors which continue to perform well, such as agriculture and services.

However, some of those credit-strapped sectors are the biggest employers, highlighting a difficulty facing policymakers – whether to ensure that credit is allocated to non-exporting, less productive Irish SMEs in order to protect employment.