Many SMEs still saddled with property loans, Philip Lane says

Ireland has one of the highest shares of non-performing SME loans in the European Union, with many property-related loans secured on SME businesses during the boom, Central Bank governor Philip Lane has said.

Speaking at ISME’s annual conference, Mr Lane added that the stock of outstanding balances in default had declined, with fewer SMEs entering default and more returning to performing-loan status.

“The SME sector has undergone substantial deleveraging: the stock of loans to SMEs in 2016 is about half that in 2010,” he said. “Survey evidence shows that debt-to-turnover ratios are declining and the share of SMEs with no debt is increasing.”

Mr Lane said that while there had been a sharp tightening in credit conditions for SMEs during the crisis, there has been a “significant turnaround” over the past three years with rejection rates declining steadily and now in line with euro-area averages.

Restructuring

The governor also noted that after the crash in late 2008 SMEs sought loans to cover the deterioration in trading conditions and to support balance-sheet restructuring.

“In 2012, 40 per cent of credit applications from micro-SMEs were for stressed reasons, which included revenue declines, increased bad debts, or a slowdown in debtor collection,” he said. “By 2016, this figure had dropped to 13 per cent.”

Data compiled by the Central Bank regularly shows that interest rates on smaller company loans are higher in Ireland than the euro-area average. And while rates in other vulnerable countries have declined since 2014, they have remained high here.

Mr Lane said macro-financial factors rather than differences in SME characteristics were the primary explanation for these interest rate differentials.

“Interest rates tend to be higher in countries in which there is a higher share of non-performing loans, unemployment is atypically high, banks are under stress and the banking system is more concentrated. From these results, we can expect that further improvements in the health of the Irish banking system (which in turn may trigger the entry of new lenders) and continued macroeconomic improvement will help to narrow cross-country interest-rate differentials.”

Lending

He said the Strategic Banking Corporation of Ireland, which is a State agency, accounted for 9 per cent of total new lending to SMEs last year. The SBCI began "on-lending" through a number of bank and non-bank partners in March 2015 and has issued more than 8,500 loans with a value of €347 million.

“There is also evidence that interest rates on SBCI loans are lower than market rates,” he said.

The European Investment Bank also supports Irish SMEs – about €188 million in 2015 – while the Ireland Strategic Investment Fund, another State agency, has invested €355 million in debt and equity SME funds.

The governor acknowledged that Brexit was the biggest concern facing Irish SMEs, given the shift in the exchange rate and and the prospect of new trade barriers with the UK.

“It is also important to point out that a weaker sterling may benefit some SMEs that rely on imported inputs from the UK and that real income gains to households due to cheaper imports from the UK may be recycled into higher spending on domestically-produced goods and services,” he said.

“In response to higher trade barriers between the UK and the EU, some firms may plan to serve UK customers through FDI [foreign direct investment] into the UK, while others may search for new export markets. In the other direction, some UK firms may look to set up affiliates in Ireland both to serve the Irish market and as a platform for EU-wide trading.”