Banks survey shows tighter lending

CLAIMS BY the small business sector that companies are finding it difficult to access credit are borne out by the latest Euro Area Bank Lending Survey, which shows that the credit standards adopted by Irish banks lending to businesses tightened in the third quarter of 2009.

In addition, the survey shows that Irish banks predict that credit standards will remain unchanged throughout 2010. This is despite the establishment of Nama, one of the aims of which was to increase the supply of credit to small businesses.

Five Irish banks participated in the Europe-wide survey which is conducted on a quarterly basis. According to the Irish banks surveyed, the main factors behind the tightening of credit standards were a rise in the cost of banks’ funds, balance sheet constraints, and an increase in the perception of risk.

The tightening of credit standards was reflected in a variety of ways – higher loan margins, smaller loan sizes and more restrictive collateral requirements, the survey found.

Demand for credit from businesses also decreased in the third quarter of 2009.

According to the survey, this was due to a reduction in the financing needs of enterprises, in particular lower levels of fixed investment and declining volumes of mergers and acquisitions activity.

In contrast to the tightening credit situation for small and medium-sized enterprises, the survey showed that credit standards for lending to households remained unchanged in the third quarter of 2009 – the first time since the fourth quarter of 2007 that credit standards for household loans have not tightened quarter-on-quarter.

However, the third quarter of last year continued to see a decline in the demand for household loans, as well as a fall in the demand for consumer credit.