SMEs struggle with low lending

A combination of a weak economic outlook, over-indebtedness, plummeting domestic demand, and previous over-investment are all responsible for the low levels of borrowing among SMEs, according to a major survey by consultancy firm DKM and commissioned by the Irish Banking Federation.

Last July the Central Bank released a report which found that Irish SMEs faced some of the most challenging conditions across the eurozone in accessing credit, including punitive levels of interest on loans that are sanctioned and comparatively high levels of loan rejections. The Irish Banking Federation challenged the findings of the Central Bank report when it was released.

The DKM report says the SME lending landscape is nuanced and a number of factors can be attributed to constrained levels of borrowing. It says the cross-country analysis of SME lending ignores credit supply conditions.

During the boom years between 2003 and 2008, total private sector credit expanded by €222.5bn. Much of the lending was funded by the wholesale money markets. When the financial sector imploded, the Irish banks were left dangerously exposed and forced to shrink their balance sheets.

However, DKM says this deleveraging process did not act as a constraint on SME lending. “Based on information provided by the Department of Finance in November 2012 in regard to progress to the PLAR targets, the banks’ deleveraging was broadly on target with respect to non-core assets. In regard to core lending — SMEs form a substantial part of core lending — the PLAR requirements do not currently act as a constraint on lending to SMEs by the pillar banks.”

It noted that AIB and Bank of Ireland both exceeded their €3.5bn SME lending targets for 2012.

Furthermore, credit restraint exists when potential borrowers have the capacity to use funds productively, but these funds are denied. DKM says there is little evidence to suggest firms that could use the funds productively were denied credit.