Credit review expects banks to meet lending targets

THE HEAD of the Credit Review Office expects Bank of Ireland and Allied Irish Banks to lend “in or around” their €3 billion target to small businesses this year after being encouraged to lend more.

Publishing the sixth quarterly report of his office, John Trethowan said the banks had been “trying to up their game” over the last few months after he found that it would be difficult for them to meet their target for 2011.

The banks had identified new business lines to lend to, he said, and the earlier estimate had been affected by the slow demand for credit during the summer months.

The office published its sixth quarterly review after the first independent survey of credit demand among SMEs showed that 30 per cent of firms were being refused bank credit, excluding cases where a decision was pending.

The survey of 1,506 firms by accountancy firm Mazars, commissioned by the Department of Finance, found 36 per cent requested credit from April to September. Bank of Ireland and AIB refused credit in 23 per cent of cases over the six months, while approval was given in 54 per cent.

Decisions were still pending in 23 per cent of applications.

Mr Trethowan said the survey showed SMEs were operating in a “highly challenging environment” given that just 43 per cent of the companies were making a profit.

He criticised the banks for not offering better solutions to companies seeking credit when lenders were being “much more creative” in helping customers in difficulty by restructuring loans.

The banks were “very strictly” adhering to credit policy on new lending, he said. Banks were doing “a poor job” explaining how they priced loans based on their higher cost of funding.

The office is working with Bank of Ireland, AIB and Ulster Bank, which altogether account for 75 per cent of SME lending, on a standard application form to help firms secure loans.

Mr Trethowan said there would be a greater demand for credit in 2012 and into the longer term as customers at Bank of Scotland (Ireland) and what was formerly Anglo Irish Bank would look to be “re-banked” with new banks as they were run down over time.

According to the credit demand survey, 80 per cent of firms that did not seek new credit did not require it or had sufficient reserves, while 7 per cent believed the banks were not lending.

Mr Trethowan said new credit demand was mostly for restructured loans such as converting an overdraft to a term loan. This lending should not be discounted, he said, as if it was not available, businesses “would be in shatters”.

Minister for Finance Michael Noonan said the survey would bring further clarity to the pattern of SME lending and would be “a valuable resource in informing policy decisions”.

The Small Firms Association said the fact banks were declining 30 per cent of credit applications from SMEs showed lenders were “too risk adverse”.

Mr Trethowan said he had overturned 41 out of 131 credit refusals by Bank of Ireland and Allied Irish Banks since April 2010. His office upheld the banks’ decision in a further 36 cases and more work was required by the borrower or bank or if the customer withdrew applications in another 18 cases. Work was still being carried out in a further 36 cases. In the 41 overturned cases, the banks provided credit of €3.5 million where Mr Trethowan estimated that 417 full-time and 21 part-time jobs were protected.