Central Bank director Fiona Muldoon has warned that half of the €50bn loans to SMEs are in some form of distress.
The Central Bank has given Irish banks until the end of June to put in place potential solutions for these SMEs to deal with their non-performing loans.
Ms Muldoon said that it is not clear yet whether the banks have enough capital to cover the losses across their mortgage arrears and SME loanbooks. Stress tests will be conducted this year on the banks to gauge the overall level of losses.
Transmitting credit to the SME sector is essential for an economic recovery. However, an Irish Central Bank report released last July found that SMEs in this country faced some of the most challenging conditions across the eurozone in accessing credit.
The banks rejected this report and blamed the low level of lending on lack of demand because of high debt levels. Many Irish SMEs borrowed heavily against property assets during the boom years.
In a speech made in Dublin yesterday, executive board member of the ECB Benoit Coeure acknowledged the importance of SMEs to the eurozone economy. Moreover, there remained huge constraints on banks lending to SMEs across the region because of losses lurking in the sector combined with capital shortfalls in the banking system, he added.
He said that the ECB is looking at a number of new initiatives that would boost lending to SMEs. These included Government guarantees for bank lending and putting in place guarantees for venture capital funds.
Mr Coeure said institutions such as the European Investment Bank (EIB) could also be used to channel funding to the SME.
The Irish Examiner has learned that one of the proposals the ECB is looking at is extending credit lines to the EIB to facilitate lending to SMEs. However, senior EIB executives are understood to be opposed to this proposal on the basis that SME lending is more high risk, which would threaten its AAA credit rating.
In his speech Mr Coeure said that because of new capital requirements for banks, SME lending would become more expensive. However, “EU co-legislators have agreed on a specific discount factor for exposure to SMEs, for loans up to €1.5m. This measure is expected to reduce capital requirements for SMEs by about 25%.”
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