Loan costs for Irish SMEs may have worsened

Irish banks continue to charge Irish small firms the highest interest rates in the eurozone, with a new Central Bank report suggesting the problem may have gotten worse for many SMEs, despite wholesale funding of banks resting at rock-bottom rates.

The duopoly of the Irish banking system since the two main general Irish lenders were bailed out at huge expense during the financial crisis has long been called out by business groups.

But the latest report on SMEs — which the Central Bank publishes twice a year — reveals most Irish small and medium-sized firms saw little change in their interest charged for their new loans from the previous survey, while “significantly more” firms across the eurozone as a whole reported the cost of their loans had fallen.

That means the gap between the costs of borrowing for Irish SMEs — which were already the highest by far in the eurozone — is showing little sign of closing.

For many firms, that adds hidden costs and pressures here at a time when businesses face increased competition from British rivals following the Brexit-driven drop in the value of sterling against the euro.

At 5%, interest rates on loans of up to €250,000 — which is used as a standard for borrowings by SMEs — has fallen by one percentage point here but “remain significantly” higher than the eurozone average, by as much as 2.2 percentage points, the report showed.

Though the costs of loans for SMEs here was the lowest since 2011, the cost of euribor in the early part of the year was below zero.

“The premium paid on small versus large loans also remains substantially higher in Ireland,” the report said. The costs of loans of more than €1m tapped by larger firms were three percentage points lower, and 1.6 percentage points lower for firms seeking loans of between €250,000 and €1m.

Linda Barry, acting director, at the Small Firms’ Association, said while its own surveys showed only a minority of firms identified the costs of credit as a burning issue, expensive loans nonetheless played into a sense of the ill-feeling SMEs had towards banks.

She said borrowers were still discouraged from applying for loans in the first place in the belief requests would be turned down, and since the crash, most decisions over credit have been centralised and taken far away from local branches.

High costs of credit were “curbing” SMEs and holding back the potential of the economy, she said, citing SFA findings that while 72% of small firms were planning to invest in their businesses, only 8% would be using bank loans to fund their expansion plans.

The report showed applications for bank loans and overdrafts by Irish SMEs were “considerably lower” compared with the eurozone as a whole.

The report also revealed a wealth of information about Irish SMEs. New lending has increased by almost a third in the year to €3.6bn, driven by manufacturing and firms involved in wholesale and retailing, but only three lenders accounted for 82% of all the new loans.

Lending overall to SMEs has shrunk again, to €16.6bn, by early 2017, down sharply by 8.2% from a year earlier.

Construction firms and hotels and restaurants had the highest default rates.

By region, SMEs in the West and Mid-West had the highest default rates. SMEs in the South-West were the least likely to default.


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