Banks must start lending to SMEs again
While the banks say they are open for business, with regard to lending, Dan White says the reality of the situation tells a different tale entirely
12 June 2014 | 0
Plans by the government to establish a new Strategic Banking Corporation, which will lend up to €500m to the small and medium enterprises (SME) sector, are long overdue. With bank lending to SMEs down by almost €10bn over the past four years, the legacy banks are no longer able to meet the financing needs of the SMEs.
On 22 May, just a day before the local and European elections, the government unveiled its plans for a new Strategic Banking Corporation of Ireland. The SBCI will be part-funded by the European Investment Bank and the German development bank KfW.
While cynics might dismiss the timing of the announcement as a pre-election stunt by a government terrified at the prospect of the retribution about to be inflicted upon it by voters, there can be no doubt but that something must be done to increase the flow of credit to the SMEs.
SMEs are very much the beating heart of the Irish economy. The most recent figures from the CSO show that in 2011 SMEs (which it defines as companies employing less than 250 people) accounted for 99.8% of all businesses, employed 66.8% of all those working for businesses and were responsible for 50% of the total sales and 46% of the gross value added by all Irish businesses.
Add it all up and SMEs employ 839,000 people, almost half of all those with jobs in this country, and contribute more than €41bn of gross value added to the economy.
Important SMEs not nurtured
Given the key strategic importance of SMEs to the Irish economy as a whole, one would have thought that they would be nurtured. Someone obviously forgot to tell the banks. While the banks have cut back savagely on all lending since the Celtic Tiger bubble burst in 2008, SMEs have been particularly badly hit.
At the end of the first quarter of 2010, when the Central Bank first started collecting detailed statistics on lending to SMEs, total bank lending to SMEs excluding property and financial companies, stood at EUR*34bn. By the first quarter of 2014 this had fallen to just €24.6bn, a decline of 28% in the space of just four years.
Banks claim to be open for business
The Central Bank figures make a nonsense of the banks’ claims to be open for business. When it comes to the SMEs the banks just aren’t interested. While the banks would no doubt argue that, with up to 50% of their legacy SME lending impaired in one way or another they have more than enough exposure to the SME sector as it is, the reality is that even good SMEs with what would under normal circumstances be considered “bankable” projects are finding it impossible to get new bank loans.
Instead the banks have engaged in the charade of “lend and pretend” where existing unsecured SME lending such as overdrafts are being repackaged as secured term loans. This allows the banks to claim that they are meeting government business lending targets but no new money is actually changing hands.
A survey of over 1,000 owner-managed businesses by SME lobby group ISME found that 52% of them had had credit applications rejected by their banks in the three months to the end of May. While the rejection was down slightly on the 54% recorded in the previous three-month period, the survey results demonstrate conclusively that it is difficult going on impossible for many SMEs to access credit.
Even when firms can somehow persuade their banks to lend them money, lenders are putting them through hoops. The approval period on an SME loan application has grown to four weeks while the drawdown period has widened from three to five weeks. In addition 60% of the firms surveyed reported that their banks had imposed increased charges and 20% had been hit with higher interest rates.
Increase in start-ups
Despite the virtual absence of bank lending to SMEs, there has been a sharp increase in the number of new business start-ups over the past year. The number of Irish ICT start-ups jumped 47% in April 2014 compared to the same month last year, according to figures compiled by business intelligence company Vision-net.
In May US venture capital firm Lightstone Ventures announced plans to establish a €125m fund to invest in Irish life sciences start-ups. The government is to contribute €30m to the new fund.
All well and good but the outlook for the vast majority of SMEs who are not in the “hot” hi-tech or life sciences sectors is much less positive. The reality for most SMEs outside such desirable sectors is that bank finance is their only source of finance. That means with the banks effectively not lending they are being starved of finance for investment and working capital.
As working capital has been drained from SMEs they are waiting longer to be paid by their customers and they in turn are taking longer to pay their suppliers. The latest ISME figures show that companies are waiting an average of 60 days to be paid by their customers, twice as long as the 30-day legal time limit by which firms are supposed to pay their suppliers.
Financial tap turned off
A 2013 Central Bank paper found that Irish SMEs were far more dependent on bank financing than their counterparts in most other European countries. This meant that when the banks effectively went bust almost six years ago, the financial tap was cut off for most SMEs leaving them to their own devices.
“The indigenous private sector (99% of which are SMEs) is, and has been, disproportionately exposed to potential weaknesses in the banking sector, relative to other European countries,” concluded the Central Bank.
The unwillingness of the banks to lend to the SMEs poses the biggest single threat to the tentative economic recovery we are currently experiencing. If the recovery is to gain traction then SMEs will need access to the finance which they need to grow. For the vast majority of SMEs that means bank lending. Unless the banks start lending to SMEs once again the economic recovery could be over almost before it began.