Half of small business debt is impaired, says regulator

Progress in resolving problem unacceptable, says Fiona Muldoon of the Central Bank

Fiona Muldoon, the director of credit institution supervision at the Central Bank. Photograph: Cyril Byrne

Fiona Muldoon, the director of credit institution supervision at the Central Bank. Photograph: Cyril Byrne


Half of all lending to small and medium business is in arrears, according to the Central Bank. Fiona Muldoon, the director of credit institution supervision at the bank told a conference in Tralee today that of the €50 billion lent to the sector by the domestic banks, some €25 billion was impaired and that the rate at which banks are facing up to the problem is unacceptable five years into the banking crisis.

Ms Muldoon – who is tipped as possible successor to outgoing deputy governor Matthew Elderfield – said there was a high level of property-related borrowing amongst SMEs. “In effect, in Ireland, literally and figuratively, all roads lead to property,” she said.

A single small business could be struggling by servicing a wide range of tangential debts, she told the Cantillon conference at the Institute of Technology in Tralee.

“In many cases family businesses borrowed to expand the business, invest in their premises and maybe a buy-to-let property for their pension. Some cases include personal guarantees or drawdowns on the family home. That same SME is now the only source of cash flow in servicing both direct and indirect debt,” she said.

The problem was particularly acute for indebted businesses that are “consumer-facing” as demand for their products was shrinking due to rising unemployment, falling consumer confidence and households choosing to pay off existing debt.

The Central Bank had little choice other than to work with domestic banks as they in turn worked through their problem loans and eventually returned to normal lending, she said.

Since being appointed in 2011 she had only seen one application for a banking licence and it was not from a general lender. “New banks need new money . . . Ireland is not an attractive prospect for a new bank,” she said.

Cleaning up the existing domestic retail banks was the only viable option she said. “It is a slow burn” and was taking longer than is acceptable five years into the crash. “But that is the reality.”

The Central Bank would be focusing this year on ensuring that banks addressed the issue and it was adopting a similar approach to the one developed for mortgage debt. The regulator had brought in external consultants, Blackrock, to assess the ability of the domestic banks to work through their problem SME loans. The study had uncovered many of the same problems that had held the banks back from facing up to their problem mortgage loans. They did not have enough appropriately trained staff or the correct systems or adequate legal back up, she said.

Following on from this study, the banks had to agree a strategy late last year with the regulator to address the problem of SME debt. “We believe that the banks now have credible credit assessment tools. We have overseen that operational skills and resources are improved and that appropriate external help is engaged where necessary,” she said.

As part of the process the banks’ management teams “must now be accountable for the implementation of the strategy and measured in terms of their success in that implementation”.

The strategy requires banks “to adopt appropriate restructuring or re-underwriting where possible on an individual case basis and identify appropriate debt resolution strategies that provide sufficient incentives to viable borrowers to work through the debt overhang,” she said.