Cantillon

Inside the world of business

War of words breaks out over demand for loans

THE LATEST report from the Credit Review Office, which was set up to review whether banks are unfairly refusing small businesses loans of up to €500,000, drew a predictable response from the various small firms lobby groups.

John Trethowan, the head of the office, said the demand for loans was just not there and that Bank of Ireland and AIB would each struggle to sanction a target of €3 billion in loans to small firms this year.

Mark Fielding, chief executive of business pressure group Isme, said it was “an absolute disgrace and highly irresponsible” for the banks to claim – and for Mr Trethowan to support the view – that small firms were not seeking loans.

Strong stuff indeed. But the real problem in the perennial debate about whether the banks are unfairly refusing credit or whether small firms are not demanding it (or putting in adequate applications) is the lack of information.

It is incredible that in the fourth year of this financial crisis – and €65 billion in State bank recapitalisations later – there is no accurate way of assessing the demand for credit from small businesses and whether taxpayers’ money is not just filling black holes at the banks but helping the economy.

The Department of Finance plans to rectify this by establishing a survey, which should be put in place as quickly as possible.

In its absence, there will be claims and counterclaims from the banks and the business groups about the actual level of loan demand and credit flowing into the economy.

Trethowan’s general view of the appetite for new loans tallies with that of the banks when they presented their results – the demand for loans is muted and customers are more focused on repaying old loans than drawing new ones.

It is difficult to assess whether businesses are being deterred from applying for loans in early discussions with their bank manager.

A survey measuring demand for credit should fill in more gaps but not all of them.

Tourism boost

RETAIL SALES data published by the Central Statistics Office yesterday showed something that’s not to be sniffed at: signs of stabilisation.

Still, a 0.5 per cent increase in core sales in July is hardly evidence of a resounding rush back to the shopping rails by consumers.

Indeed, though it’s difficult to prove, retail groups suspect it is the resurgence in tourism numbers that partially explains the rise.

Some 1.78 million people visited Ireland from overseas in the April to June quarter, up from 1.54 million in the same period in 2010 and, while figures are not yet available for July, it is entirely possible that an ongoing recovery in tourist custom may have provided a slight lift. One supporting piece of evidence comes from bar sales, which rose 3.3 per cent in July compared to June, yet are flat annually.

It would certainly be a misnomer to interpret the retail sales figures as a pointer to a more buoyant cycle of consumer sentiment.

It is not quite September, yet already Ibec is laying down its markers for budget 2012, warning of the vicious-cycle dangers of damaging the domestic economy by decimating incomes further in the hope that export growth alone will save the day. The business group wants the Government to “provide as much clarity as possible to taxpayers on how the budget will impact household incomes”.

Come December, of course, the exact impact of the budget on household incomes will be expressed in terms of the monthly or annual drain on the pockets of “typical” individuals and families. But the knock-on effect this will have on the domestic economy will be more difficult to quantify, and harder to argue against.

Arrears action

THE GOVERNMENT has yet another review group evaluating options for dealing with mortgage arrears. Figures published yesterday by the Central Bank show the urgency of their work. More than 55,000 homeowners were “in arrears” on their payments at the end of June. This means they are more than 90 days behind in their payments.

The figure does not include 40,000 borrowers who have already agreed restructuring plans with their lenders. More significantly, the majority of those in arrears – 40,040 – are more than six months behind on their loans.

The figures are rising by about 5,000 or more every quarter. In total, 7.2 per cent of all homeloan accounts are in arrears – nine months ago the figure was just over 5 per cent.

The Government and the banks have taken some steps, with banks barred from charging excessive interest and stripping people of the most advantageous mortgages. Under Government mandate, they must work with borrowers over a considerable period before foreclosing.

With all that, the figures continue to rise inexorably. It appears that a small but significant number of borrowers are simply out of their depth. The time for talking needs to end; the Government needs to introduce arrangements where people can settle their debt and walk away or opt for haircuts that will see the lender take a stake in the home and the prospect of an upside on any future sale.

We are not short of options, just action. And time is not on the side of the beleaguered borrowers.

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