Bankers cautious as quality of outstanding loans deteriorates

BANKS HAVE become more cautious in their lending to small firms and the quality of loans already extended to the sector has deteriorated, according to an independent review.

The study, by consultants Mazars, examined lending by Bank of Ireland, AIB, National Irish Bank and Ulster Bank between June 2008 and February last and also surveyed more than 1,000 small firms.

It found the number of loans under “watch” or “impaired” increased by 8 percentage points to 22 per cent during the survey period.

A number of key findings – including an average loan refusal rate of 24 per cent – had been revealed in recent days.

In its report, Mazars noted the divergence between bank records which suggested a loan refusal rate of 14 per cent and its estimate of 24 per cent based on the survey of small firms.

This variance could be attributed to a “difference in perception between banks and customers as to what represents an application for credit”, it said.

Other than becoming more cautious, Mazars found no evidence banks had changed their lending policies. Rather, the way existing credit policies were applied had been changed with increased emphasis on personal guarantees or loan security.

Mazars also noted that a number of banks – which it did not name – had introduced a funding premium during the survey period which had the effect of “increasing the margin applied to certain products for SMEs”.

The most common reason cited for a refusal of credit was “a change in bank lending policy”, the report said.

Minister for Finance Brian Lenihan welcomed the survey saying it had brought “clarity” about credit flows to small firms. While some firms faced “significant challenges” securing credit, new lending was taking place, he said.

The transfer of the riskiest assets from banks’ balance sheets to the National Asset Management Agency would allow them access funding to increase lending to SMEs, the Minister added.

Credit refusal rates differed across the banks in the study, ranging from 18 per cent to 33 per cent, and also with regard to sector and company size. Firms in construction or property had the highest refusal rates with over 40 per cent of applications declined.

By size, the smallest companies with less than 10 employees had the highest loan refusal rate at about 30 per cent.

Some 52 per cent of firms said they had applied for credit over the last 12 months.

Outstanding loans to the sector remained stable during the period at about €34.5 billion, despite a fall of 42 per cent in the value of new credit applications.

According to Mazars, the fact that overall loan values did not decline suggested credit facilities are being renegotiated or extended to facilitate longer repayment periods or interest-only repayment and that banks are taking on more risk in that regard. The report was commissioned by the Department of Finance.