DESPITE THE recapitalisation support and deposit guarantees provided by the State to Irish banks, they continued to tighten credit standards on loans to businesses in the second quarter of the year.

This trend is expected to continue into the months ahead, albeit at a slower pace.

According to the latest bank lending survey published by the European Central Bank (ECB), businesses faced higher loan margins, more restrictive collateral requirements and reduced loan covenants in the second quarter.

“The reported tightening of credit standards was stronger on loans to large enterprises compared with loans made to small and medium (SME) sized enterprises,” the Irish Central Bank commented yesterday.

The tightening of loan standards to businesses was attributed to the fact that access to wholesale markets remained challenging for banks. Other contributing factors included balance sheet constraints and heightened risk perception.

Demand for business loans contracted during the second quarter, particularly amongst large companies. This was due to reduced financing needs resulting from lower levels of fixed investment and subdued merger and acquisition activity.

Individuals also encountered a clampdown on credit, the survey found, mainly due to a perceived reduction in consumer creditworthiness.

“The tightening of credit standards was stronger on loans for house purchase compared with loans borrowed for consumer credit and other lending,” the Central Bank said.

Individuals taking out mortgages faced higher margins on riskier loans, as well as more restrictive loan-to-value ratios.

Demand for mortgages fell, which was attributed to “less favourable housing market prospects and declining consumer confidence”.

The ECB report also showed that euro zone demand for home loans has turned positive for the first time since early 2006, while businesses are seeing a “turning point” in the increasingly tough conditions imposed on bank loans.

Consumers became markedly less pessimistic about housing market prospects in the second quarter of this year, and the pace at which credit standards were tightened on mortgages fell again, the ECB’s latest bank lending survey showed yesterday.

Meanwhile, credit standards for companies were tightened at a much slower pace than in the previous three quarters, said the closely watched report.

Additional reporting: Copyright The Financial Times Limited 2009