We are in recovery and have been for some time. Asset prices are on the up yet when it comes to relationships with the owners and managers of small to medium sized businesses (SMEs), our lending institutions appear to be stuck in the dark, recent past.
Last week, employers group ISME accused the pillar banks of engaging in “extortionate behaviour” after it emerged that member firms were being asked to sign undated letters of resignation as collateral for business loans.
The report was widely picked up — serving to remind people of the harsh treatment meted out to struggling entrepreneurs during the financial crisis.
Certainly, the Irish pillar banks are currently at risk of giving old Silas Marner a run for his money. Risk aversion remains the order of the day.
But, could the banks end up either accidentally strangling, holding back, or alienating clients who could otherwise prove to be very nice earners over the long run?
Are they succumbing to short-termist behaviour, and - in the process - passing up real opportunities? Relationships are frayed. As ISME’s new CEO, Neil McDonnell put it, with irony, “if banks regard their commercial borrowers as so dubious... should they be lending to them at all.”
The European Central Bank has, since 2012, turned on all the taps when it comes to the provision of cheap money yet the cost of credit for Irish SMEs, a major source of jobs and economic activity, remains excessive by European standards.
James Carroll and Fergus McCann of the Irish Central Bank have estimated that Irish borrowers are still paying a considerable premium, with the interest rates on loans up to €250,000 in value varying from 5.8% in Ireland to 2.2% in Austria.
While there have been real improvements when it comes to loan availability, the cost of the loans remains stubbornly high. According to the Central Bank, perceptions among Irish SMEs of bank willingness to provide credit have improved by 19% in the past three years.
The money taps are being opened. Rejection rates have dropped significantly, down from 15.3% in September 2015 to just 8.3% last March. The rejection rate is now in line with that across the EU.
Significantly, at least up until the damaging UK referendum result in June, Irish SMEs were showing a greater willingness to commit to longer-term investment projects rather than merely seeking finance to cover cash flow needs.
The fixed investment rate for SME loan applications had reached 45% by mid-year, matching the EU average.
Clearly, however, the long drawn out Brexit plan threatens to overturn this apple cart as investment projects are put on hold in an environment of acute uncertainty.
But strangely, according to the Central Bank, more SMEs have been reporting an increase as opposed to a decrease in lending interest rates. This appears counter-intuitive, if not downright bizarre, in a recovering economy where risks of insolvency are reduced and where the value of property, useful as collateral for loans, is rising.
Business owners can well ask for how long they should be asked to subsidise the post-crash rebuilding of our banks’ capital bases. The authorities have been taking steps to reduce firm dependence on the three clearing banks.
Included in this effort are the Strategic Banking Corporation of Ireland, or SBCI, a development bank backed by the German bank, KfW, the European Investment Bank (EIB) and the Irish Strategic Investment Fund (ISIF), into which assets from the National Pensions Reserve Fund have been transferred.
Last month, the SBCI launched a new farm loan scheme under which €150m is being made available at a low cost rate of 2.95%
The Corporation acts as an intermediary coaxing mainstream banks into participation.
Established in early 2015, the SBCI had faciliated 8,600 loans by July last. Its core aim is to ensure that, in future, businesses will have access to longer term “patient” funding.
It owes its existence to the fact that since the sale of the ICC and ACC, the country has lacked a State development bank that can provide longer term funding and backing for enterprises not on the radar of the mainstream commercial banks.
According to Patricia Callan, CEO of the Small Firms Association, the cost and availability of bank lending is no longer the prime issue for members, but with a 2% interest rate differential between Ireland and the EU average, it is still a huge matter for around one fifth of them. A big problem remains the small number of key traditional bank players.
She agrees that “too many codicils” are attached to loans. “Some business owners are required to produce collateral even for a credit card.”
She believes that banks are now being kept straight as a result of the work of the Credit Review Office, albeit more could use its services. As a result, the banks have introduced a robust internal appeals mechanism.
A key development is the emergence of around 80 alternative financial providers, many in the financial technology space.
The opening of a new Dublin office by the European Investment Bank can only be a good thing as the EIB plays a key role in organising finance — not just for infrastructure projects but also for smaller firms.
ISME’s Neil McDonnell welcomes the emergence of intermediaries, in areas such as car financing, but cautions that their services do not come cheap.
Many are filling the role once played by local bank managers, which raises the obvious question: “why not recreate the local branch manager, a person with real knowledge of the local community?”
Perhaps, such individuals are, in reality, figures of ancient myth.
Why not try and recreate them nevertheless?
Perhaps our bureaucratic banks need to be shoved and incentivised in the direction of supporting SMEs which are traditionally sources of local jobs growth and innovation.
As challenges across the economy grow, we will be glad if we somehow manage to find new sources of dynamism in the years ahead.
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