IRISH BANKS reject more business loan applications than any other state in the euro zone except Greece, with small and medium businesses in Ireland twice as likely to have a loan application turned down as the average across the bloc.

The new figures are contained in a study published this morning by the Central Bank of Ireland.

While some teetering businesses which seek credit have little chance of repaying loans – and thus have to be refused them – the new study says that “high rejection rates in Ireland cannot be explained by the quality of the pool of potential borrowers”.

More than one in four businesses seeking a loan or an overdraft were rejected in the six months to March.

That is more than double the euro average and compares with one in 28 in Germany.

A related finding that will raise hackles in the business community is that, within the euro zone, Ireland has the second-highest share of “discouraged business borrowers” (companies that do not apply for a loan despite requiring credit, for fear of rejection).

Proportionately, the number of discouraged borrowers is double the euro area average.

The Irish Bankers’ Federation has consistently rejected claims by business organisations that banks are refusing to lend to viable businesses.

The federation has attributed drastically reduced new loan issuance to weak demand from small and medium-sized enterprises (SMEs).

Today’s report finds that this claim is dubious.

As measured by businesses’ reported need for bank financing, credit demand in Ireland lies marginally above the euro area average, according to the study.

The research also finds that Irish SMEs have suffered changes in terms and conditions of bank credit – such as interest rates, collateral requirements and sizes of loans – that are among the harshest in the euro area.

The findings are likely to lead to greater criticism of the banks and raise pressure on the Government and the financial regulator to accelerate the restructuring of the banking system.

The report states that a decline in credit of the kind currently being experienced “arguably requires more immediate action, given the potentially serious impact on economic growth”.

“International literature has found that credit-constrained firms are more likely to close down or shed employment, less likely to invest in technology, spend on marketing, or enter export or import markets,” the study says.

The report, Irish SME Credit Supply and Demand: Comparisons across Surveys and Countries, was authored by Central Bank economists Sarah Holton and Fergal McCann.

Previously published figures cited in today’s report show gross new lending to SMEs amounted to just €407 million in the first three months of 2012.

This represents a decrease of almost one-third on the previous quarter and a 42 per cent fall on the same period in 2011.

By March 2012, the total volume of credit outstanding to companies outside the property and financial sectors had fallen by one-third in three years, from €60 billion to €40 billion.

One of the few positives in the report is the finding that credit conditions for SMEs were slightly less bad in the most recent survey period (the six months to March 2012) than in the previous period (the six months to September 2011).

However, even this comes with a qualifier. “Ireland remains in a very unfavourable position relative to the euro area average,” the study states.

The report compares survey responses on Irish SME credit supply and demand in different surveys and in different euro area countries.

The survey data used in the study comes from the European Commission and European Central Bank Survey of Access to Finance of Small and Medium Enterprises and the Mazars SME lending demand survey, commissioned by the Department of Finance.