Banks still squeezing credit to small and medium businesses

Banks are continuing to squeeze lending to small- and medium-sized enterprises, figures published today by the Economic and Social Research Institute (ESRI) show.

A report published with the institute's Quarterly Economic Commentary shows that one in nine such businesses were either refused a loan because the banks are rationing credit or did not apply in the first place as they believed they would be rejected.

Its commentary says that overall bank lending to small- and medium-sized enterprises (SMEs), which account for the bulk of the businesses and employment in the Republic, fell by 2.8 per cent last year.

“Core lending”, that is, to sectors outside financial services, construction and property, was down 5 per cent in the last three months of 2012, the ESRI’s figures show.

'Continuing decline'
Although the organisation acknowledges that the rate at which lending fell last year slowed relative to 2011, it warns that the "picture remains one of continuing decline in SME lending activity".

A research note by ESRI staff Conor O'Toole, Petra Gerlach-Kirsten and Brian O'Connell points out that firms with fewer than 250 workers are the "backbone of the economy", accounting for 99 per cent of active businesses and 70 per cent of employment. The note, Measuring Credit Constraints for Irish SMEs , argues that determining what factors hinder or support these firms is critical to a sustained recovery and job creation.

It estimates 39 per cent of SMEs applied for credit between April and September 2012. One fifth – representing 9 per cent of all firms operating in the Republic – were rejected.

Of those, the authors believe that the banks rejected close to half the applicants, about 4 per cent of all firms, because they have a policy of not lending to particular sectors, rather than on the merits of the individual applications.

'Credit rationing'
Mr O'Connor says that this practice is known as "credit rationing", and adds that sectors such as hotels and restaurants, construction, property and small businesses with no export markets, appear to be suffering most as a result of this policy.

The research note argues that if the individual application is worthwhile, it should be granted, albeit at a higher interest rate than normal if it believes there is an extra risk associated with it.