SME loan arrears - Ominous figures for the economy

Amid the recent positive news of rising house prices and the economy picking up, there are some very disturbing indications about which everybody should be conscious.

Up to €8.6bn in bank loans to small and medium business are currently in arrears for over 90 days, according to the latest information available from the Central Bank.

Bank of Ireland, Allied Irish Banks, and Permanent TSB, the covered banks, have around 300,000 SME loans between them, with an average balance of over €71,000. A quarter of those are already considered in default, which accounts for 41% of the €8.6bn in outstanding loans.

What is even more ominous is that the highest default rates are found among construction companies, hotels, restaurants, and SME’s with exposure to the domestic economy. These are inevitably among the largest employers in the private sector, so this could have enormous consequences not only for the economy but also for Irish society as a whole.

Further compounding the problems, the companies with the largest loans tend to be in the most trouble financially, with a default rate of 48%. The Government set targets for all three banks to have solutions put in place for the majority of distressed SME loans by the end of the year. It is one thing to set targets, but they must be realistic.

In a speech last March, UCD economist Morgan Kelly characterised SME debt as a ticking time bomb that could cause a further crisis in the economy. He predicted that banks would begin foreclosing on businesses following the European Central Bank’s stress tests later this year, and this could trigger widespread company failures and lead to a surge in unemployment.

Around one-third of the SMEs are carrying no debt and the vast majority of the others have a debt-to-turnover ratio of less than 30%, but this should not lead to any complacency, because the whole sector faces some of the most challenging conditions in any of the EU member states.

While the loan rejection rate has fallen from 30% to 20% in the past six months, there is little solace in that figure, because it is apparently explained by the reluctance of many SMEs to apply for a loan, because they believe the application would be refused. The rate of refusal in this country is similar to Greece, which is well above the EU refusal rate.

Gross lending to the SMEs remained at between €350m and €750m from 2010 to the end of 2013. The number of SMEs applying for bank credit decreased by some 5% between 2011 and 2014.

Most of the credit being sought has been for working capital or overdraft facilities, rather than for funding expansion. The cost of credit in Ireland is well above what core EU member states are paying, and SMEs, therefore, appear to be reluctant to expand. Expansion is the key to reducing unemployment.