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News : Irish Economy Last Updated: Aug 29, 2011 - 11:25 AM

Bank and Ireland and AIB not expected to meet lending targets of €3bn each to SME businesses this year
By Finfacts Team
Aug 29, 2011 - 8:09 AM

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Bank and Ireland and AIB are not expected to meet lending targets of €3bn each to small-and medium-sized (SME) businesses this year because of low cred, according a report published today.

The Credit Review Office, which was launched following an announcement in the December 2009 Budget by the late Brian Lenihan, then minister for finance, to provide a simple and effective review process would be set-up for SMEs, sole traders and farm enterprises that have been refused credit from banks participating in the NAMA scheme, and to examine credit policy to assist the Minister in deciding what further actions may be necessary to increase the flow of credit.

The latest report (should be available on the website Monday) covers the period April to June and John Trethowan, the head of the agency, says that Bank of Ireland and AIB are unlikely to meet their targets, mainly because of low demand for credit from such businesses is low.

Trethowan said the "slowdown in demand, coupled with high repayment inflows on existing lending, was reflected in a contraction of the SME loan books as existing loans continue to be repaid at a faster pace than new loans are being demanded.

"The rate of credit sales and sanctioning is lower this year than the figures from the previous year, and it will be a challenge for each of the banks to reach their €3bn sanction target for new and restructured facilities in the current year.

"It may be that some of the term-loan restructuring activity conducted last year has dealt with the issue and consequently has fallen out of this year's sanctioning figures," he added.

The report says the CRO has been responsible for €2.5m worth of credit being released, protecting 366 jobs. It upheld bank decisions to refuse credit in 27 cases, with SMEs being refused some €1.8m in credit.

“It is unacceptable at a time when access to finance remains the single biggest issue for the small business community that the banks claim that the reason they can’t lend is because there is no demand,”  said Patricia Callan, director of the Small Firms Association (SFA).

The SFA says that the prudential lending policies being set down by the Central Bank are in practice diametrically opposed to Government commitments to restore lending to SMEs and to allow the €3bn targets to be met by the pillar banks. "The banking system cannot return to efficient working, where the overseeing body, i.e. the Central Bank, is insisting that the banks be ultra risk averse, so as not to incur any more bad debt liability, in direct contrast to a whole raft of senior Government Ministers who espouse the importance of getting credit flowing to small businesses again, as an essential pre-requisite to growth and job maintenance and creation.  The pendulum has clearly swung too far,” said Callan.

Maybe or maybe not.

The Irish Banking Federation (IBF) said it welcomed the CRO's  statement that SMEs which present a sound business proposition supported by proper financial information and credible projections tend to be successful in their credit applications. 

However, the IBF said the CRO's finding that many SMEs need to improve their business  planning and financial skills requires a response across the wider business community and business organisations, relevant State agencies and the banking sector. 

"For its part, the banking sector is committed to working with other stakeholders in providing the financial and non-financial supports that the small business sector needs to help drive our economic recovery.  As things stand, a wide range of information and mentoring supports are made available to SMEs by the various business-lending banks. 

However, it is clearly opportune that IBF and its member banks are currently collaborating with Chambers Ireland in the development of a new designated website which will provide a one-stop source for small businesses that will provide access to all the information they need to finance their business.

Notably, the Credit Review Office reports a continuing slowing demand for credit from SMEs.  IBF and member banks are currently participating in the work of a Dept. of Finance Stakeholder Group which includes the commissioning of new, independent market research to provide further insight into the nature and extent of SME demand for credit," the IBF said.

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