One-in-four SME loans in default at end of last year

One in every four loans to Irish small and medium-sized businesses was in default at the end of last year, according to official figures due to be published today.

The amount of money owed by small and medium-sized enterprises (SMEs) to the Republic’s banks has fallen steadily over the last year three years, while new lending to the sector remains static, the Central Bank’s SME Market Report shows.

The study finds that these businesses, responsible for most of the employment in the Republic, owed a total of €21 billion at the end of December 2013, down from between €26 billion and €28 billion in January 2011.

At the end of 2013, the average SME owed its bank €71,101 and was paying interest at 6.41 per cent. The numbers show that just over 26 per cent of all loans to the sector were in default, meaning that repayments on these debts were 90 days or more overdue.

The report states that 41.4 per cent of the total balance owed by the sector was overdue at that time. Default rates were highest amongst building companies, which had fallen behind on more than 60 per cent of the amount that they owed their banks.

The Central Bank states that in most sectors, the balance-weighted default was higher than the share of loans in default, which indicated that borrowers with larger individual debts were most at risk of falling behind with repayments.

Demand stable

From the beginning of 2010 to the final three months of last year, new lending to SMEs remained between €450 million and €750 million. The Central Bank says that there had been “little discernible upward trend” over that timeframe.

Demand for credit was stable between 2011 and 2014, with 35 per cent to 40 per cent of SMEs seeking loans from their banks. Applications hit a peak of 40 per cent in March 2013 but had slipped back to 35 per cent in March of this year.

Only one-in-four applicants were seeking cash to fund growth and expansion, while 61 per cent cited working capital requirements as the reason for their credit application.

The most commonly requested type of loan was renewal or restructuring of an existing overdraft.

“Irish SMEs’ emphasis on bank overdrafts as opposed to bank loans suggests that credit demand is skewed towards shorter-term,” the report says.

Rejected

Between October and March, the rate at which the banks rejected these applications was less than 10 per cent lower than in Italy, France or Spain, according to the report.

However, it states that the percentage of those companies which did not apply for credit as they believed they would be rejected is significantly higher here and in Greece than in other euro zone countries.

The report points out that last month, the Government announced the creation of the Strategic Banking Corporation of Ireland, which has funds of €500 million, and which loan money to a SMEs through resident lending institutions.