Banks refusing almost one in five SME loan applications, says survey

While demand for credit among smaller and medium-sized businesses remains low, almost one in five loan applications are still being declined by the banks, a new survey commissioned by the Department of Finance shows. The survey also shows an increase in loan refusals among the non-pillar banks.

Despite “improvements in turnover performance” among medium-sized businesses, the survey of some 1,500 SMEs noted that credit demand in the sector remains low, with just 40 per cent of SMEs having requested at least one type of bank finance from October 2012 to March 2013. This compares with 39 per cent in September 2012 and 38 per cent a year ago.

About one in five (19 per cent) loan applications from SMEs are now being turned down, unchanged from September 2012, although the rate has fallen from 23 per cent a year ago. The survey indicated that a growing proportion of applications are now being approved fully, rather than being only approved for a certain proportion of the request.

While the decline rate of the pillar banks, AIB and Bank of Ireland, is unchanged from last September at 18 per cent, the report pointed to an increase in the decline rate for non-pillar banks, from 21 per cent in September, to 24 per cent.

The study did show a “significant improvement” in the perception that banks are lending, with almost half of respondents (47 per cent) asserting that they believed this to be true, up from 39 per cent last September. However, most of those SMEs believe that lending is restricted to a small number of SMEs in certain sectors, while a “significant minority”, or 6 per cent, haven’t applied for credit because they believe the banks aren’t lending.

Of those SMEs who have had their loan application declined, more than three-quarters (77 per cent), said they did not agree with the reaoson provided, while 21 per cent said the bank did not provide them with any reason for the refusal.

As such, the report recommends that in order to encourage demand in the future, banks should focus on ensuring that the reasons for decline are clearly understood by the applicant.

Of the reasons given for a refusal, more than half of SMEs who were declined credit were turned down for a bank-led reason, such as a change in lending policy (33 per cent, up from 28 per cent in September) and because the bank was no longer willing to lend to that sector (20 per cent up from 14 per cent in September). Other company specific reasons given included inadequate repayment capacity (23 per cent of those whose application was turned down).

The report also pointed to an increase in the conditions attached to loan approvals, with 70 per cent of SMEs having at least one criteria or condition attached to their approval. These conditions included personal guarantees (up to 50 per cent from in 41 per cent in September); specific security (up to 26 per cent from 21 per cent); and a facility fee (up to 26 per cent from 20 per cent).

Application times also remain an issue, with the average time taken by a bank to issue a decision on a loan put at 21 days, longer than the recommended 15 days.

A “small concern” identified in the report was that awareness of the Credit Review Office has decreased.