Bank lending to Irish business tightened, says ECB

IRISH BANKS tightened their credit standards on loans to businesses and households at the end of last year, and expect to continue doing so into 2009, according to the European Central Bank’s (ECB) latest bank lending survey.

The ECB found that businesses faced higher loan margins and more restrictive collateral requirements in the final quarter of 2009.

Tougher credit conditions applied to enterprises of all sizes, and were caused by the banks’ cost of funds, balance sheet constraints and greater risk perception, the survey found.

“The ongoing challenges faced by Irish banks attempting to access wholesale funding markets translated into a reduction in their willingness to lend during the final quarter of 2008,” the Irish Central Bank commented yesterday.

Figures published last week by the Central Bank showed that lending to Irish businesses fell by €2.8 billion in December.

The survey also showed that demand for business loans contracted during the final quarter of last year. This was attributed to a reduction in the financing needs of enterprises, due mainly to a lower volume of mergers and acquisitions.

However, Patricia Callan of the Small Firms’ Association said yesterday that the apparent fall in demand for loans was due partly to the fact that business owners are “told ‘No’ too often, and are afraid to go back into the bank”.

“They’ve heard so much bad news about [loans],” she said.

Ibec chief economist David Croughan said the ECB survey backed up the feedback that it has been receiving from its members. “Our recent survey on lending conditions showed that about one-third of respondents indicated that the availability of working capital to their company had decreased in the past six months,” he said.

Despite reductions in official interest rates, the cost of finance has increased for over half of the companies surveyed, he added.

“This underlines the need for Government guarantee supports for lending to sustainable businesses,” he said.

Ms Callan said that, although banks claim that demand for business loans is down and that their loan approval levels haven’t fallen, an independent study needed to be carried out to determine “exactly where the level of lending is, compared to where it would be in the absence of a credit crunch”.

“There is an onus on the banking sector to contribute, to keep as many businesses afloat that are viable,” she continued. “There could be a bit more tolerance and scope to companies with established track records.”

Consumers encountered tighter lending standards on mortgages in the last quarter of 2008. In particular, they faced higher loan margins, more restrictive collateral requirements and reduced loan-to-value ratios. The demand for loans to households decreased during the final quarter of 2008.

These patterns are expected to persist in the first quarter of 2009.

Overall, the ECB found that credit standards toughened across the euro area. However, although conditions are likely to tighten further in 2009, it expects that this will be at a slower pace than at the end of 2008. “[The survey] shows that the tightening in credit conditions might have reached its most acute phase with a little glimmer of hope for some stabilisation going ahead,” UniCredit economist Marco Valli said. – (Additional reporting Reuters)