We need to investigate why our banks aren’t lending to customers

More reasons emerged this week to suggest that the best banking inquiry would not be one examining what happened in the run-up to Sept 2008, but instead one into what has happened at the Irish banks since and continues to happen.

We need to investigate why our banks aren’t lending to customers

The first inquiry is unlikely to tell us anything we don’t know already. We know most of what went wrong, why and who was responsible. We don’t need to spend a fortune to tell us more of what has been revealed in previous inquiries or in a myriad of books. If the Government proceeds with an inquiry, as it has promised but mysteriously has not implemented, it is likely to be with the intention of conducting a political show trial.

Instead, we would be better off with a public examination or a published investigation into the actions of the banks as they sought to deal with their self- inflicted crisis. We need to know how they have given out business and personal loans since, how they have dealt with those who were in loan arrears.

There have been too many stories of banks removing overdraft facilities, causing such difficulty at times that businesses have failed as a result of that action. There are stories of bank strictly enforcing the small print of the terms and conditions of loans because the equity or security offered by a borrower, particularly if a property is no longer valued as it was once; this can mean that borrowers who are making repayments are told that they have to repay loans in full immediately, which is impossible.

Having once been too brash and cocky in what they advanced in loans these banks have now become uber-conservative in their lending policies.

They deny this. They say that they are eager to lend, because this is how they make profits and rebuild their capital. They say that they are not allowed to lend under Central Bank guidelines when they fear repayment capacity will not be what has been promised. They claim that a large degree of loan applications still pass muster, but what they don’t tell you is that they often don’t process the loans up the line, meaning that rejections happen before they can become part of the official statistics.

One of the main lenders in Ireland is Ulster Bank. It is owned by Royal Bank of Scotland, itself now a bank in the ownership of the British government because of its own disastrous expansion. We learnt a lot about RBS in the last week that gives rise to serious concerns as to how Ulster Bank is operating in this market and how its competitors might be doing the same.

Two major reports into RBS were published. One by Sir Andrew Large concluded that RBS has rejected too many good lending opportunities, it being too concerned about protecting its remain capital to take any risks. “After five years of contraction, officers in charge of lending have become more risk averse than they need to be. This has resulted in some lending not being made,” Large said.

The bank’s chief executive responded that “we have over-corrected for the reckless lending practices that broke this bank five years ago. In many cases the pendulum of risk aversion has swung too hard to one side.”

Most worryingly, Large focused on a tendency for the bank to sell services to customers at a price that was excessive. The reasoning was that lending to small business does not provide large profit margins – typically just 3% to 7% — and the banks try to make up profits by large additional charges. Wonder what might be happening in Ireland? The second report was by Lawrence Tomlinson, an advisor to British business minister Vince Cable. He alleged RBS has been tipping viable businesses into default so that its Global Restructuring Group could seize the assets and later sell them.

He suggested that some SMEs that borrow from RBS are deemed by the bank to be “distressed”, even when they are viable, because the bank can then place them in its restructuring division, demand hundreds of thousands of pounds in fees and, when they fail, seize their assets.

Tomlinson complained of last minute demands for information and money, seemingly arbitrary changes to loan documentation, and a process where there was a deliberate lack of straightforward communication, leaving companies unaware of where they stood and what they had to do until it was too late. He accused the bank of putting firms into its special GRG unit for minor setbacks which were “so insignificant, given the otherwise positive performance of the business, that the reaction of the bank can only be considered as utterly disproportionate at best and manipulative and conspiring at worst”.

The response from RBS was that it had only put the firms into GRG because it did not consider them viable. But last week The Sunday Times reported comments from a former “senior RBS insider” who alleged that, as the recession hit, staff were tasked with scouring the loan book for businesses that had breached minor lending covenants so the bank could pull the deal and put them into GRG.

“There is a wealth of evidence which suggests that RBS has forced healthy, vibrant businesses into financial trouble and then seized their assets to benefit its own vast property empire,” Tomlinson concluded. He called this “heavy-handed, profiteering and abhorrent”. Tomlinson said that the “balance of power has tipped too far in favour of banks” and called for a proper system of redress for customers, along with full investigation of past abuses against small and medium-sized businesses.

How confident can we be that such things do not happen at our banks in Ireland? We do have a Credit Review Office in Ireland, which can intervene when customers complain that they have been denied credit unfairly. John Trethowan, its head, wants the threshold at which SMEs can appeal a bank’s decision to refuse them finance be increased to €3m from the current €500,000.

The most recent published report of the CRO suggests that since 2010 AIB and Bank of Ireland have approved €18.5m in credit they had rejected initially, following CRO review of customer applications. This is welcome, given that it helped to protect or create 1,521 jobs according to the CRO, but it is a pittance.

Trethowan has said response times by banks and lenders to credit applications were still an issue that needed to be addressed. He said that bank lending “remains tight” with AIB and Bank of Ireland willing to give money to low and medium risk borrowers while often ignoring higher risk but “bankable propositions”.

He warned that we have too few banks and that many SMEs are having problems refinancing loans when their original banks are withdrawing from the Irish market or scaling back their operations. Bank of Ireland and AIB are required by the State to sanction €4bn in lending to SMEs this year, but he said that only one-third of the sanctions in the first quarter were new lending with the balance effectively a refinancing of existing debt. Of the new lending, 24% was farm related.

Clearly, we have major problems and this is what needs to be investigated, not our history. If the banks do not lend there will not be sustained economic recovery.

* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.

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