Mortgage arrears 'hampering' lending to SMEs

MORTGAGE ARREARS are hampering the ability of banks to lend to small and medium-sized enterprises (SMEs), the president of the Irish Banking Federation has said.

“In effect, loans in arrears utilise scarce capital to the detriment of other lending such as SME finance and new house purchase,” John Reynolds, who is also chief executive of KBC Bank Ireland, told delegates at the March lunch of the Leinster Society of Chartered Accountants yesterday.

The Irish Banking Federation also had “a number of serious concerns” about the impact of the Government’s proposed insolvency legislation, he said, particularly the decision to include secured, or mortgage, debt.

“The proposal to include secured debt in a non-judicial insolvency regime is without precedence in that it has not been tested in any other jurisdiction,” he said.

Mr Reynolds added that the banking federation was concerned that the proposed €3 million limit would apply to large, commercial borrowers. “It is crucial that legislation only gives effect to resolution strategies for borrowers who cannot pay and are in an unsustainable situation.”

Noting that the level of repossessions remains “very low” in Ireland – it has a repossession rate of 17 per 100,000 mortgages compared to 76 per 100,000 in the UK – he said a “legal flaw” was impeding banks from repossessing residential property that had been bought for investment purposes.

Mr Reynolds was referring to a legal loophole – highlighted in a 2011 judgment by Ms Justice Elizabeth Dunne – which prohibits banks from repossessing a property taken as security prior to December 1st, 2009, unless a letter of demand has also been issued prior to that date.

“The legal flaw which this judgment highlighted must be resolved as it is impeding the progress of necessary measures to repossess and sell rented property in situations of significant arrears.”

Mr Reynolds added that the unique nature of each individual’s mortgage situation had led to a time-lag in the banking response to the mortgage arrears issue.

While highlighting the importance of SME lending to the economy, Mr Reynolds said the Mazars report on SME lending, commissioned by the Department of Finance, was the “main driver for policy and practice” for the banking federation. “Amongst other things, this revealed a subdued demand for credit . . . Just 36 per cent of respondents had sought credit,” he said.