Bank lending continues to contract

Bank lending into the economy continues to decline, again raising concerns about how the recovery will be sustained.

Central Bank figures published yesterday showed that both mortgage and business loans contracted in the 12 months to January.

The amount of mortgage loans fell at an annual rate of 2.5% as home owners paid down €1.9bn more than they borrowed in new loans.

Repayments also outpaced the amount of new consumer loans by households.

The same pattern was broadly repeated for business loans.

Lending to so-called non-financial corporations fell by an annual 6.8%.

Businesses repaid overdrafts and short-term loans, though drew down more than they repaid for loans of one to five years.

The Central Bank said that for the last seven months, banks held more deposits from Irish households than they advanced in loans — a return to the pattern of funding for institutions in the late 1990s.

Forecasts for continuing strong economic growth this year are based on a significant shift to consumer spending.

“Whatever about the deposit figures, the lending data remain a cause for concern,” said Alan McQuaid, chief economist at Merrion Capital.

“Households and businesses may still want to pay down out-standing debt, but the cost of funding remains too high, particularly compared with the eurozone average.

"Credit will need to flow at a much stronger level than currently if the economy is to grow to potential in the long-run.”

The importance of SMEs to the economy has long been highlighted because the firms employ many thousands of people.

However, Irish businesses are paying much higher costs for their loans than their counterparts across the eurozone, despite ECB rates being at rock-bottom levels for some time.

Last week, the European Commission, in its Country Report on Ireland, said that although SMEs were seeing improved levels of business, some were still struggling to tap funds.

The report laid part of the blame on the banking “duopoly” for SME loans here.

“In November 2015, the average small corporate loan interest rate for new business in Ireland was substantially higher than the euro area average, at 6.6% vs 3.2%,” said the commission.

“The Central Bank of Ireland also reports that the average cost of funding depends largely on the economic sector.

“Perhaps surprisingly, only 1% of SMEs identify the cost of borrowing as the main impediment to seeking bank loans.”