€8.6bn in SME loans in 90-day arrears

Up to €8.6bn in loans — one in every four held by the covered banks to small and medium businesses — are in arrears over 90 days.

The highest default rates are found among construction companies, hotels, restaurants, and SMEs with exposure to the domestic economy, according to the latest Central Bank data.

Companies with the biggest loans tend to be in the most trouble, with a default rate of 48%. Bank of Ireland, AIB and Permanent TSB have roughly 300,000 SME loans between them, with an average balance of €71,101.

Overall, 26% are considered to be in default, which accounts for 41% of the total value of the of loans outstanding. The Government has set targets for all three banks to put in place solutions for the majority of distressed SME loans by the end of this year.

The SME sector has been flagged as a huge problem for the Government.

In a speech last March, UCD economist Morgan Kelly said the level of SME debt in the system was a ticking time bomb that could put the economy back in crisis mode.

He argued that banks would start foreclosing on businesses following the ECB stress tests later this year, which would trigger widespread company failures and herald a surge in unemployment.

However, the situation among the covered banks is much worse than the wider economy. According to another recent report by the Central Bank, one-third of all SMEs are carrying no debt, while 84% of all SMEs have a debt-to-turnover ratio of less than 30%.

Furthermore, the covered banks have bad debt provisions of 60% of their impaired SME loans.

But the Central Bank report shows Irish SMEs still face some of the most challenging conditions of all EU member states.

Gross new lending to SMEs has remained static at €350m to €750m over the period between 2010 and the end of last year. The number of SMEs applying for credit has decreased from 40% to 35% between 2011 and 2014.

Most credit applications are for working capital or overdraft facilities rather than funding expansion.

The loan rejection rate has fallen from 30% to 20% in the last six months, but the Central Bank found the level of SMEs that did not apply for a loan because of the expectation they would be refused is at the same level as Greece and well above the EU average.

The cost of credit is also well above what core EU member states are paying.

The recovery of the economy hinges on the health of the SME sector, as it creates the vast bulk of employment. The Central Bank report found that new SME lending is becoming increasingly concentrated among the two pillar banks.

“Recent research has identified that increased credit market concentration is detrimental to firms’ access to credit,” it said.