Survey finds 24% of SME loans declined

Banks are refusing almost a quarter of credit applications from small businesses and have become more cautious in their lending, according to an independent review.

The study, by consultants Mazars, examined lending by Bank of Ireland, AIB, National Irish Bank and Ulster Bank between June 2008 and February last and also surveyed over 1,000 small firms.

Although bank records suggested a loan refusal rate of 14 per cent, this rose to 24 per cent when data from the survey of small firms was included, according to Mazars.

The variance was attributed to a "difference in perception between banks and customers as to what represents an application for credit."

Other than becoming more cautious, it found no evidence banks had changed their lending policies. Rather, the way existing credit policies were applied had been changed with increased emphasis on personal guarantees or loan security.

The most common reason cited for a refusal of credit was "a change in bank lending policy".
The review also found a deterioration in the quality of loans to small firms. The number of loans under "watch" or "impaired" increased by 8 percentage points to 22 per cent during the survey period.

Minister for Finance Brian Lenihan welcomed the survey saying it had brought "clarity" about credit flows to small firms. While some firms faced “significant challenges” securing credit, "new lending was taking place", he said.

The transfer of the riskiest assets from banks' balance sheets to the National Asset Management Agency would allow them access funding to increase lending to SMEs, the Minister added.

Credit refusal rates differed across the banks in the study, ranging from 18 per cent to 33 per cent, and also with regard to sector and company size.

Firms in construction or property had the highest refusal rates with over 40 per cent of applications declined.

By size, the smallest companies with less than ten employees had the highest loan refusal rate at around 30 per cent.

Some 52 per cent of firms said they had applied for credit over the last 12 months. Outstanding loans to the sector remained stable during the period at approximately €34.5 billion, despite a fall of 42 per cent in the value of new credit applications.

According to Mazars, the fact overall loan values did not decline suggested "credit facilities are being re-negotiated, re-structured, or extended to facilitate longer repayment periods or interest-only repayment and that banks are taking on more risk in that regard".

The report recommended a number of "risk-sharing measures" to support the need by small firms for credit and also to improve the relationship between banks and small firms.

The report was commissioned by the Department of Finance to investigate the disparity between the level of loan rejections companies say they face and the volume of loans bank say they have issued.