Review finds banks need better SME strategies

A REVIEW by the Central Bank of lending strategies to small and medium enterprises (SME) has found that improvements could be made regarding planning, credit reviews and board involvement.

However, the Central Bank also said there was no evidence that banks had reduced credit standards to meet SME lending targets set by the Government under its recapitalisation programmes.

In a statement yesterday, the bank said strategic planning by the institutions would be improved if boards became more actively involved at an earlier stage. More detailed information would also help banks use plans for risk management, it said.

The report, which included six banks, focused mainly on AIB, Bank of Ireland and Ulster Bank as the most active lenders in the SME space.

KBC Bank Ireland, ACC Bank and Danske Bank Group, which trades as National Irish Bank, were also included.

The report also found that some banks had completed a limited number of credit reviews in the past two years.

“Strong credit review processes are an essential component of strong risk management and banks need to ensure this particular control is implemented regularly and to a high standard,” it said.

Skills gaps within the banks were also being addressed, the report found, describing this as encouraging.

Jonathan McMahon, director of Financial Institutions Supervision, said the Central Bank anticipates that banks would, over time, increase SME lending as a proportion of their overall loan portfolios.

“The SME sector is large and diverse, and it offers banks revenue streams beyond interest income, including deposit revenue and transaction and advisory fees,” Mr McMahon said. However banks must develop the particular skills required for SME lending in order to price risk and manage it effectively, he added.

“As SME lending is essential to future economic performance, we welcome the positive steps the banks are taking to facilitate this business in a controlled manner.” The Central Bank would continue to monitor the maintenance of credit standards, he added.

Avine McNally, director of the Small Firms Association, said while the review outlined the progress made by some banks in relation to SME lending, it also highlighted a weakness in the area of lending skills.

“Lending to the SME sector requires particular skills,” Ms McNally said. “Obtaining a greater understanding of the environment in which small firms are trading will ultimately translate down to the operational level and assist with credit decisions and ensure that those firms who require credit can access it easily and promptly.”

She added that many small firms were “crying out for credit” now and that immediate assistance was required.

“With almost one in four small businesses in Ireland not getting enough credit, we have a very serious problem,” she said.

She warned that this situation could potentially lead to 62,500 small business closures and 200,000 jobs lost.