SMEs and banks to remain ‘economic bedfellows’ - Roux

Despite the growth in alternative sources of finance, Ireland's SMEs and banks are to remain "economic bedfellows", the deputy governor of the Central Bank said on Wednesday.

"Despite new and welcome initiatives to diversify sources of funding, SMEs cannot but rely on banks to provide the credit they seek to function and expand," Cyril Roux told the audience at an event for the Leinster Society of Chartered Accountants.

While he recognised the importance in developing alternative sources of finance for small and medium sized businesses, noting that investment vehicles such as the Ireland Strategic Investment Fund and the Strategic Bank Corporation of Ireland are “welcome additions” to the funding mix, he said that banks will remain the most important source of finance.

“While there are fledgling new avenues of non-bank lending, Irish SMEs will rely on banks to function and to grow for many years to come”.

Peer to peer lending, whereby individuals lend to small businesses, will, at best likely be “a marginal source of funding”, Mr Roux said.

“Rules around the protection of investors that have been painstakingly developed in the markets, securities and fund industry are missing and so are time and tested processes and procedures to assess the creditworthiness of borrowers, to ensure professional collection, and to devise and implement workouts of non-performing loans,” he said.

Lending by investment funds, following the introduction of domestic regulation for loan originating funds last year, is also a possibility, but “time will tell the place it will take in the market for SME lending,” he said.

Non-performing loans

Recognising that creating the right environment for SMEs to prosper is “of vital importance to the economy”, said that non-performing loans remain an issue, but that it “will take time” to resolve..

“Commercial loans still make up the sizable majority of distressed loans in Ireland and will take time to work through, even with an improving economic outlook,” he said.

Inspections

As part of the bank’s implementation of the Single Supervisory Mechanism (SSM), the regulator created a division dedicated to the performance of on-site inspection. This new division is now set to perform a programme of credit risk and other inspections, Mr Roux said.

“We expect that the inspection teams will be on-site in our largest credit institutions throughout the year with targeted inspections taking place in other institutions based on our risk assessment.”

With respect to new lending, Mr Roux said that it has conducted a number of inspections, and it will receive first reports from this work in the coming months.

“Overall, we are satisfied that governance and underlying standards are much improved relative to the crisis”.