Banks' rate of lending to SMEs disputed

A GOVERNMENT-commissioned report has disputed the level of loan refusals to small and medium-sized companies reported by five banks, saying that the banks’ limitations mean they do not report refusals “on a consistent basis”.

The rate of credit refusals to small and medium-sized enterprises (SMEs) may be almost a third higher than the figure reported by five banks participating in the survey, according to a report by accountancy firm Mazars, seen by The Irish Times.

In a second and final report on the level of SME credit refusals, Mazars reported that the banks’ refusal rate of 14 per cent in the two reports may not be accurate due to “limitations” within the banks and that a rate of 18 per cent “may be more representative”.

Mazars said that the banks were “addressing these limitations” but that it was “unlikely” they would ever be able to completely address the limitations or “to fully record informal requests for credit”.

The five banks participating in the survey were Allied Irish Banks (AIB), Bank of Ireland, State-owned Anglo Irish Bank, and two foreign-owned lenders, Ulster Bank and National Irish Bank. The Government has invested €11 billion in State capital into AIB, Bank of Ireland and Anglo Irish Bank.

The level of SME lending has been a contentious issue since the credit crunch began, with SMEs claiming that refusals on credit applications are much higher than the levels reported by the banks.

The second Mazars report finds that banks and small businesses continue to contradict each other on the level of credit application refusals reported by each side.

The first Mazars report, published last July, said the banks were declining, on average, 14 per cent of credit applications, while SMEs said the refusal rate was higher, at 24 per cent on average.

Mazars’ second report – which has just been finalised and submitted to the Department of Finance – found that the banks reported a refusal rate of 13.6 per cent, while SMEs said the refusal rate had since risen to 28 per cent.

The first report covered credit applications from June 2008 to February 2009, while the second report covered the period from March to September 2009.

The second report said that again, the conflicting figures were based on a difference of opinion on what constituted a credit application, and how and when they are recorded by the banks.

“Given the limitations of existing credit application processes and systems in participating banks, the fact that informal requests for credit are in most cases not recorded, that banks do not record declines on a consistent basis, and following our analysis of bank records, a declining rate of approximately 18 per cent in this and the prior period may be more representative,” Mazars said.

The accountants said that the banks were “attempting to address these limitations and we understand will do so over time”.

However, Mazars said it was “unlikely that it will be possible to ever completely address the limitations associated with credit application processes and systems and in particular to fully record informal requests for credit”.

The firm was unable to separate formal applications for loans from those for overdrafts “due to limitations inherent in the systems of certain of the participating banks”.

“Enquiries are not recorded and formal applications are only logged after an initial assessment has been completed by lending and branch managers,” they said.

Mazars said that in a small number of cases where customers seek a top-up on a loan, both the existing loan and the new credit are included in credit applications and “cannot be separately identified”. In some cases applications were not recorded in full until lending decisions were made.

Applications for loans and overdrafts, which represent about 85 per cent of applications, “cannot be split in most banks”, it said.

Quality of loans  to small firms ‘deteriorated’

THE QUALITY of loans to small and medium-sized enterprises (SMEs) deteriorated significantly between March and September 2009 on the previous seven-month period, according to the second report from accountancy firm, Mazars.

“Watchlist” or “impaired” SME loans – where customers are unable to make their repayment obligations – across five participating banks surveyed rose to 32 per cent in September 2009 from 22 per cent in February 2009.

Banks are experiencing “a continued decrease in demand for new credit” as they reported a 27 per cent decline in the value of formal applications in the seven months down from 42 per cent in the earlier period covered in Mazars’ first report published last July.

The number of formal credit applications decreased by 23 per cent on top of a 11 per cent decline in the previous seven months.

Mazars restated the total SME loans at February 2009 by €818.5 million down to €33.6 billion from €34.5 billion in the first report, saying that additional information obtained resulted in “the technical reclassification of lending in a small number of instances”.

The banks reported that total SME loans fell to €32.7 billion in September 2009 from €33.6 billion in February 2009 and about €34.5 billion in June 2008.

Some €2.6 billion or 48 per cent of approved overdrafts had not been used, compared with 51 per cent in the previous seven months.

The Mazars’ review of SME lending was agreed and funded by the banks under the terms of the Government’s €7 billion recapitalisation of AIB and Bank of Ireland.

Of the 1,052 SMEs surveyed, 46 per cent made one or more requests for credit over the seven months and that of those 79 per cent made a formal application.

A “change in bank lending policy” was the most common reason cited by SMEs for banks refusing credit, while substantially more companies recognised a “decline in business performance” as a reason in the second period.

Some 78 per cent reported continued declines in turnover with 45 per cent reporting turnover dropping by 20 per cent or more.

Companies reported “a levelling off” in the rate of decline in the number of employees over the seven months, but no increases in staff numbers were reported.

“Micro companies”, which were defined as firms with less than 10 employees and a turnover of €2 million or lower, reported the highest level of decline for credit, representing a rate of 31 per cent.

SME customers drew down €2.6 billion between March and September 2009 on approved loans, and finance and leasing facilities. A comparative figure was not provided for the earlier period as Mazars reported this figure for the first time in the second report.

Lending to SMEs declined the most to companies involved in electricity, gas and water supply, followed by firms in real estate.

SIMON CARSWELL