SMEs face obstacles accessing credit

The Irish small-to-medium enterprise (SME) sector faces a tougher challenge accessing credit than any other eurozone country with the exception of Greece, according to a report released by the Irish Central Bank.

The survey found that Irish SMEs have the second highest rejection rate from banks for loan applications and overdrafts in the eurozone, apart from Greece, although demand for credit is above the region’s average. Moreover, Ireland has the second highest level of “discouraged borrowers”, which means firms that do not apply for a loan even though they need credit.

The results will make grim reading for the Government. Economic recovery remains hamstrung by the sclerotic state of the domestic economy. And without access to credit, prospects of a return to growth among domestic firms appears remote.

More worryingly, the report found that problems accessing credit were mainly caused by banks not lending. The Central Bank notes that supply side constraints such as a broken credit transmission mechanism is much more damaging for an economy than lack of demand for credit among the SME sector.

“Comparing the net percentages in demand in the recent period, with March-September 2011, we see the underlying demand for both loans and overdrafts in Ireland appears to have risen between September 2011 and March 2012. The net percentage increase for bank loans has risen from 8% to 11%, while for overdrafts it has risen from 18% to 25%.”

However, the rejection rate in Ireland of 24% of loan applications is the second highest in the eurozone after Greece. The average rejection rate across the region is 12%. “Along with refusal rates for new loans, the terms and conditions associated with bank financing are also of enormous importance.” The survey found Irish companies had to pay higher interest rates on bank loans than other eurozone countries. Moreover, Irish SMEs also had more stringent loan collateral requirements.

“The share of ‘discouraged’ Irish SMEs who do not apply for credit due to the belief that they will be rejected is the second highest in the euro area, suggesting steps must be taken to improve perceptions of lending institutions among borrowers.”

The Central Bank’s findings were based on the results of two surveys. The first survey is a joint initiative by the European Central Bank and the European Commission, which surveyed 485 Irish SMEs between Sep 2011 and Mar 2012. The second survey was conducted by the consultancy firm Mazaars and commissioned by the Department of Finance.

It surveyed 1505 small-to-medium Irish firms between Oct 2011 and Mar 2012.