A flawed credit policy
NO ONE is better placed than the Central Bank to settle a long-standing dispute between banks and small and medium-sized enterprises (SMEs) about the availability of credit. The repeated claims of viable small firms that banks were not lending to them have always been rejected by banks and met with robust counterclaims by the Irish Banking Federation (IBF). Credit was available, the banks have long maintained, but weak demand in a contracting domestic economy has meant less demand by businesses for loans.
The Central Bank now disputes this. Banks have pointed out – rightly – that they could not lend to businesses in difficulty, where the loan was unlikely to be repaid. Indeed, given the banks’ dismal record of reckless lending to property developers and others and the resulting legacy of many billions of euro in loan write-offs bequeathed to taxpayers – their prudence and caution in this regard is understandable, and indeed welcome.
The Central Bank in its study of the credit market finds that the facts favour business rather than the banks on the matter of credit availability. However measured, bank lending to business has declined in relative and absolute terms. Gross new lending (€407 million) to SMEs in the first three months of 2012 was one-third less than in the previous quarter, and 42 per cent lower than the same period a year ago. The report found that in the euro zone, only Greece refused more loans to small businesses than Ireland. Businesses in Ireland are twice as likely to have a loan application rejected as elsewhere in the euro area. In the last six months one in four businesses seeking credit facilities were refused; in Germany, just one in 28 was turned down.
The IBF has rejected the Central Bank’s findings. The federation’s chief executive, Pat Farrell, has claimed this report is at odds with the Mazars report, which he said established clearly that banks were lending to small businesses. Whatever consolation banks may take from Mazars’ findings, they cannot be happy either with Central Bank’s findings, or with some of the report’s damning conclusions: one of which was that the high rejection rate of loan applications “cannot be explained by the quality of the pool of potential borrowers”. Mr Farrell has taken issue with technical aspects of the survey in what seems like a diversionary tactic. However, the data used by the Central Bank cannot be seriously questioned given that it relies on research conducted by the European Commission and the European Central Bank. The Government has tried to improve the relationship between lender and borrower but to judge by the Central Bank report, with little success. Irish credit conditions are, undoubtedly, difficult given the huge size of household and corporate debt. But the very high level of outright loan rejection by banks and the large number of discouraged borrowers – those who fail to make loan applications fearing rejection – which proportionately is double the euro area average, are causes for major public concern. They should serve as the cue for Government to challenge banks – already largely in State ownership – to explain and justify a flawed credit policy.